What the Housing Allowance Is

Section 107 of the Internal Revenue Code allows a minister to exclude from federal gross income the portion of their compensation designated as a housing allowance, to the extent it is used to pay housing expenses. This exclusion applies to federal income tax only, not to self-employment tax.

In plain language: if your church designates part of your salary as a housing allowance, and you actually spend that amount on housing, you do not pay federal income tax on it. For a pastor in the 22% tax bracket with a $20,000 housing allowance, that is $4,400 per year in tax savings.

Who Qualifies

To claim the housing allowance, you must be a “minister of the gospel” as defined by the IRS. This generally includes:

• Ordained, licensed, or commissioned ministers
• Ministers who perform sacerdotal functions (preaching, administering ordinances, conducting worship)
• Ministers who are employed by a church or religious organization in the exercise of their ministry

Bi-vocational pastors who are ordained and serve a church generally qualify, even if their church income is part-time. Consult a tax professional to confirm your specific situation.

How to Designate the Housing Allowance

The housing allowance must be formally designated by the church before the year begins. This is the most commonly missed requirement. A housing allowance that is not designated in advance cannot be claimed retroactively.

The designation process:

1. The church board or governing body passes a resolution designating a specific dollar amount or percentage of the pastor’s compensation as housing allowance
2. The resolution is recorded in the church’s official minutes
3. The designation is made before January 1 of the year it applies to (or before the pastor begins employment if mid-year)
4. The designation is renewed annually

What Qualifies as Housing Expenses

The IRS allows a broad range of housing expenses to count toward the housing allowance:

• Rent or mortgage payments (principal and interest)
• Property taxes
• Homeowner’s or renter’s insurance
• Utilities (electricity, gas, water, trash)
• Home repairs and maintenance
• Furniture and appliances
• Lawn care and landscaping
• Home improvements
• Down payment on a home

What does not qualify: food, clothing, personal items, or expenses unrelated to the home.

The Self-Employment Tax Issue

Ministers are treated as self-employed for Social Security and Medicare purposes, even if they receive a W-2 from the church. This means they pay both the employee and employer portions of Social Security and Medicare tax (15.3% combined) on their ministerial income, including the housing allowance.

Some churches provide a Social Security offset as part of the pastor’s compensation package. This is a taxable payment that helps the pastor cover the self-employment tax burden. If your church does not provide this, factor the self-employment tax into your financial planning.

Common Mistakes

• Not designating the allowance in advance. The most common and most costly mistake. The designation must happen before the year begins.
• Designating too little. If you spend more on housing than you designated, you cannot exclude the excess. Designate generously.
• Not keeping records. Keep receipts and records of all housing expenses. If you are audited, you will need to prove that you spent the designated amount on qualifying housing expenses.
• Claiming the allowance without qualifying. Not every church worker qualifies. Confirm your status with a tax professional.