Should Ministers Report Their Housing Allowance?

Written by Founder Raul Rivera on Mar 22, 2018 in IRS Compliance

One of the most common questions we receive from pastors, church treasurers, ministry CFOs, and church administrators this time of year has to do with the minister’s housing allowance.

The question I am referring to is, "Should ministers report their housing allowance on their tax return to get a deduction?”

To much of one’s surprise, our typical response is, "You don't." 

The reason is that the housing allowance is an income exclusion for federal income tax purposes.

According to section 107 of the Internal Revenue Code, the housing allowance is a portion of income that a minister is allowed to exclude from income taxes.

The amount a minister is allowed to exclude from income taxes is equal to the lesser of the following:

  1. The actual cost of your home;
  2. The fair rental value of your home for the year, or;
  3. The amount designated as a housing allowance.

Let me give you an example.

Church ABC paid Minister John $50,000.00 last year. His total qualifying home expenses were $20,000.00. Of the $50,000.00 of compensation that he received from the church, he is allowed to exclude from his tax return $20,000.00.

This means that on his tax return he reports only $30,000.00 of gross income. The $20,000.00 of housing allowance does not get reported on his tax return.  

Does the housing allowance get reported anywhere?

After the church correctly calculates the housing allowance, it should report it on box 14 of the minister’s Form W-2.

There are two main reasons why reporting your housing allowance on Form W-2 is important.

  1. While the housing allowance does not get reported on the tax return to give you a deduction, if you have not applied for self-employment tax exemption, the housing allowance will need to be reported on Schedule SE (Form 1040) so that self-employment taxes of 15.3% can be paid on the housing allowance. I will explain later.
  2. For the purposes of purchasing a home, reporting the housing allowance on box 14 of Form W-2 will be considered earned income for banking purposes, which better positions you when a bank is considering approving you for a mortgage or any other type of loan.

Now that the housing allowance has been reported on box 14 of Form W-2, reporting it on the tax return depends on the status of the pastor in regards to self-employment tax.

If the minister has applied to the IRS for self-employment tax exemption, then he/she will not have to report the housing allowance on the tax return at all.

However, if the minister has not applied or been approved for self-employment tax exemption, he/she will have to report the housing allowance on Schedule SE (Form 1040).

One thing to know is that the minister is able to prepare an adjustments worksheet and deduct unreimbursed business expenses against the housing allowance. Sound confusing?

(Related reading: "3 Things Every Minister Should Know About Housing Allowance")

Maximize Your Housing Allowance Benefit Today!

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Why the confusion surrounding housing allowance?

The confusion has to do more with the way a church perceives the housing allowance.

The housing allowance provision has been around since 1921 and has been amended three times to accommodate the number of ministers that either rent or own their own homes.

These three amendments have not been well understood by many pastors, leaders, CPAs, and tax professionals, resulting in many ministers either missing out on what the tax code has to offer (by paying more in taxes than they ought) or flat out getting into very serious tax trouble.

Let's look at some of the mistakes that churches make when it comes to approving housing allowance.

  1. The church and board agree that the pastor shall receive a housing allowance, but they never record it in board meeting minutes using the proper language. This mistake alone is big enough that it can completely nullify the entire housing allowance amount.
  2. The church approves a specific amount as housing allowance. The church often either pays too much or too little.

Let me better explain with an example.

Church ABC decides to pay Pastor Bob a salary of $20,000.00 and an additional housing allowance of $20,000.00. In a perfect world, he would only pay taxes on $20,000.00, but he is required to do an annual report to ensure that he can substantiate qualifying housing allowance expenses of at least $20,000.00.

Therefore, if he can only document $15,000.00 in qualifying housing allowance expenses, the remaining $5,000.00 has to be reported as regular income on his tax return. That could throw out of balance the quarterly Form 941 returns if the church did not allot for this last minute change.

On the flip side, if Pastor Bob is able to document qualifying housing allowance expenses that are greater than $20,000.00, he would not be able to benefit from the additional qualifying expenses because his church set a limit on his ability to take advantage of those expenses by officially stating it would pay a housing allowance of $20,000.00.

The pastor never fills out a housing allowance statement that substantiates the qualifying expenses.

Many churches simply fill out box 14 of the Form W-2 based on the number they set at the beginning of the year without ever verifying it.

Are you maximizing your housing allowance benefit?

We make every effort to educate church leaders on the importance of properly reporting the housing allowance because one mistake can lead to serious discrepancies in annual reporting.

Yet, it seems that on a countrywide basis the number of churches that improperly report it has increased.

If you want to know for sure that you are properly documenting the housing allowance, please call us at 877-494-4655. We will be happy to help you.

You can also attend one of our conferences. We cover the housing allowance in detail.

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Raul Rivera

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