Ministers’ Compensation and Housing Allowance

A frequently misunderstood portion of tax law centers around the a minister’s income and his parsonage/housing allowance. Generally speaking a minister’s parsonage or rental allowance is excluded from his gross income when calculating his taxable income for income tax purposes. However, the parsonage allowance is not deductible when determining a pastors self-employment taxes that are due and payable.

If you are a Minister and you receive part of your salary (for ministerial services) an amount officially designated (before payment is made) monies officially/specifically designated as a rental/housing allowance, you can exclude from your gross income the amount that is used to provide/rent a home. This exclusion is limited to the lesser of the fair market value of the home of the amount specifically designated in advance as a rental/housing allowance or the actual amount used to provide a home and cannot exceed what is reasonable pay for your services.

If housing is provided by your congregation as pay for your ministerial services, the exclusion cannot be more than what would be reasonable pay for your services. This essentially would dictate that your parsonage allowance cannot exceed the amount of your wages as detailed on line 7 of your Form 1040.

If a minister owns their own home and receives a housing allowance as part of their pay, the exclusion cannot be more than the smaller of:
-The actual cost to provide a home.
-The amount officially designated (in advance) as a rental or housing allowance.
-The fair market rental value of the home.
-Amount of what would be deemed reasonable pay for ministerial services.
-Allowance cannot exceed the amount of wages on line 7 of Form 1040/W-2 wages.

Although a minister can exclude the parsonage/housing allowance for income tax purposes, it is not a deduction when determining self-employment taxes.

The above example would reflect what the IRS would refer to as a common law employee. Even if a minister were to be able to qualify as a common law/statutory employee and to pay their own FICA/Medicaid taxes or Self-Employment taxes, it is this author’s opinion that it would be better for the minister if the church treated them as an employee and withheld all applicable FICA/Medicaid Taxes on their Gross Wages and any parsonage allowance.

John Dillard is a Christian Speaker/Author and Certified Public Accountant (All Rights Reserved). To See how he takes Christ along with him to work visit http://www.hiscpa.com/  (An Atlanta CPA firm) and for his latest book Overcoming Life’s 9/11’s: Job’s Journey and to learn about his ministry visit http://www.john-dillard.com/

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