THE PASTOR'S HOUSE
The Invaluable Housing Allowance^TM
FAQ's

An amount of church provided income designated as a federal tax exempt housing allowance as per the IRC (Internal Revenue Code), Section 107.

Section 107 of the IRC states that a minister may designate a portion or all of their ministry income as a federal income housing allowance to the extent he/she can absorb the income within the allowable housing expenses. 

The pastoring clergy determines (via a worksheet) the amount of money needed to cover their allowable expenses as housing allowance each year. This amount is submitted to their church employer, who then classifies that amount as housing and if any compensation remains, that amount would be classified as salary.

The housing allowance should be set up before the beginning of the year OR as soon as a pastor is engaged to serve a church as pastor/employee.

The housing allowance is an annual designation and should be reviewed and updated before the beginning of each year.  The housing allowance should be annually dated UNLESS the church and pastor agree upon a percentage which would be set in the resolution.

The main expenses that are usually included in the housing allowance are as listed below.  Please note some expenses may differ if the pastor lives in a rented property. follows: i.e. Instead of a mortgage and property taxes, there would be rent expense.

The main housing expenses that are included in the annual housing allowance are as follows:

• Mortgage or rent expense (includes cost of buying the home such as down payments, and other closing costs.) etc.
• Property taxes and water
• Basic repairs and maintenance (Not home improvements that increase value of property.)
• Gas and electric utilities (heat, electric, non-business telephone, cable TV, garbage removal, etc.)
• Property insurance
• Lawn and garden maintenance
• Furniture, appliances, vacuum sweeper, Teat
• Decorator items (curtains, rugs, pictures, etc.)
• Miscellaneous items (lawn mowing, cleaning supplies, brooms, light bulbs, etc.)

The housing allowance does not include food or maid)

No, you are not required to submit your estimated annual housing allowance detail to the church administrator.  Just submit the total estimated amounts and keep the detail for the annual reconciliation at income tax time. Because if there is any unused housing allowance, it becomes subject to federal income tax.  Bear in mind that the entire housing allowance is subject to self-employment tax.

The simple answer is yes, but please be advised that if the husband and wife live in the same property, that the aggregate of the housing expenses cannot exceed the total actual expenses for that property.  Both cannot claim the same expenses.  The annual housing reconciliation at income tax time cannot exceed the total actual for the same property.  It would make sense for them to decide which person would most benefit by claiming the housing allowance.  A tax preparer proficient in clergy income taxes could assist with this decision.

Generally, if there is a problem with your social security number, the SSA will mail you a letter.  They will only contact you if you have requested a call or have ongoing business with them.  But they will NEVER do the following:

• Threaten you with arrest or legal action.
• Suspend your Social Security number 
• Demand immediate payment from you.
• Require payment by cash, gift card, pre-paid debit card, internet currency, or wire transfer.
• Ask for gift card numbers over the phone or to wire or mail cash.
• Ask for personal details or banking information to give you a cost-of-living adjustment (COLA)

To learn more about fraud prevention and reporting, go to Protect Yourself from Social Security Scams and Scam Alert:  https://www.ssa.gov/scam/

The church board determines the total amount of the Pastors compensation, but the Pastor should determine how much of the cash compensation should be classified as housing. The Pastor should submit an amount to the church based on a pre-prepared list of estimated housing expenses and submit this amount to the church.  The list may (or may not be shared) with the church officers. The Pastor can sign the list (or not), because the annual reconciliation rest with the pastor and is reconciled within his/her annual income tax return. Caution:  Church boards should not “arbitrarily” “assign” an amount because if the amount is “short” the pastor ends up paying taxes on income that would otherwise be tax exempt.  This step in the housing allowance planning is vital.

Yes, the housing allowance should be signed by a church officer.  This gives validity to the allowance and assurance that the resolution results will be included in the church compensation planning for the pastor. 

Absolutely not! The only part of the pastor’s compensation that should be included in the quarterly 941 is the portion of the pastor’s salary that “voluntary” federal income tax was held against.  Further, it is recommended that the church engage the assistance of a professional experienced with the preparation of church payroll and clergy taxation, to calculate the estimated federal withholding liability for the pastor.  That estimated amount would then be reported with the church 941 as federal income tax withheld in Box 3.  VIP Note!! No part of the pastor’s compensation should be included in the wages subject to social security and Medicare on Form 941 in Box 5. 

Good question. You may recalculate your estimated housing expenses for the current year at any time and if the new estimated amount is LESS than originally estimated, you don’t have to do anything, because the unused amount becomes taxable income anyway.

However, if the new estimated amount of the current year housing allowance is GREATER than originally estimated, then it might be a good idea to recalculate the pastor’s compensation distribution so less of the compensation would be classified as taxable income and more as tax exempt income. 

Professional recommendation:  That every pastor has a relationship with a tax professional proficient with clergy tax and compensation planning.  The savings and protection far outweigh the cost.

A great question. The answer is absolutely yes. This entry signals and directs the income tax preparer that this amount should/must be included in the self-employment tax calculation when the annual tax return is prepared. 

The total of the housing allowance provided by the church for the current year should be reported in Box 14 of IRS Form W2.  This entry signals to the tax preparer that a calculation should be made for the self-employment tax on the annual income tax return.  Another important reason is that if the clergy needs to present a copy of his/her Form W2 for income verification, it is clear that the total income includes the housing allowance. An even more important reason is that the income tax preparer be reminded to include this amount in the preparation of the annual Form 1040SE, which is how the pastor’s social security account with the SSA is funded and updated for retirement.

If your estimated (allowable) housing expenses exceed the amount designated by the church, there is no way to retroactively adjust it for the current year. However, for the incoming year, if the additional expense was a recurring annual expense, then you should increase the estimated housing allowance.  Going forward, If the additional expense was a one time occurrence, then leave the housing allowance as is.

Professional Comment: The housing allowance consideration should be an annual part of tax planning because of the significant potential tax savings.

At the end of the year, reconciliation between the projected housing allowance expenses and the actual housing allowance expenses should be made.  This reconciliation result should be a part of the documents gathered for income tax preparation. If there is an unused amount of the housing allowance it becomes taxable income for federal tax reporting. Refer to interim-year year housing considerations above.  The tax-exempt amount of the housing allowance is the actual amount used, not the projected amount of the resolution. The annual reconciliation must take place.

Several results could take place, none of which are positive.

• Your income tax return would be under reported.  If your return was ever audited, the non-reporting of this income could be classified as income tax evasion.
• 2. Your self-employment income (reported to the SSA) would be underfunded, thereby reducing your social security retirement benefits.
• Your income tax return would be incorrect and incomplete.

This answer is complicated.  It is a catch 22. The clergy tax payer should know, but in reality they depend upon the tax preparer.  The tax preparer should know since he/she is preparing the clergy returns, but the end result is the clergy tax client has the responsibility to affirm that the return is correct when they review and sign the return.  The best protection is to utilize the services of a seasoned and professional tax preparer proficient in the preparation of clergy returns.  Do not be afraid to query the tax preparer’s knowledge of clergy tax regulations.

The responsibility begins with the clergy tax payer. I would strongly recommend that clergy become proactive in their own situation.  Read at least the basic regulations on clergy income tax and financial planning.

• The Pastor’s House, The Invaluable Housing Allowance by Janet V. Kennedy-Jacobs.  It is an easy read and a good place to start. 
• IRS Pub 517-Social Security & Other Information for Members of the Clergy
• The Pastor’s Wallet, by Amy Artiga
• Talk to a financial planner familiar with clergy compensation
• Church Law & Tax Guide by Richard Hammer. An annual publication,
• Clergy Tax & Compensation Planning-From the Paycheck to the Tax Return by J. V. Kennedy-Jacobs
• Google clergy retirement planning

Each of the foregoing resources will offer information.It depends on how deep you want to go.