Calculating Housing Allowance for Clergy

Jan 293 min read

Attention to these details will yield tax savings for the clergy without any increased expense to the congregations they serve.

Church-provided housing for clergy in the form of either a parsonage or a cash housing allowance has unique status in the federal income tax code and Social Security regulations. If planned and coordinated in advance clergy can minimize their income tax liability while preserving their participation in the Social Security system. Compensation classified as housing is not subject to personal income tax but is subject to Self-Employment Tax on the clergy’s personal tax return. In all cases the amounts related to housing must be stated by the church in advance of the tax year (or when first called) in the clergy’s call to serve the church, an annual budget resolution, or a separate resolution of the governing church board.

When the church provides housing

If the church owns the parsonage and pays all expenses related to it then the Fair Rental Value, (including, for example, furnishings, maintenance, utilities, and insurance) is the amount that clergy must include in a personal federal income tax return for calculation of the Self-Employment Tax. There might also be a cash “housing maintenance allowance” paid to the clergy to cover incidental repairs or services not funded by the church, and this allowance is also subject to Self-Employment Tax.

When clergy own or rent their own home

When the church provides a cash housing allowance there is significant opportunity, with careful planning, to minimize the amount of compensation subject to federal income tax. Up to 100% of church compensation can be classified as housing allowance. For example, part-time or retired clergy who have other sources of income might have housing expenses exceeding their church compensation. Also, actual housing expenses of two income families might exceed the clergy compensation of one family member.

The Fair Rental Value is the upper limit on the allowable housing expenses

The FRV is defined as rent of a furnished home plus utilities – everything that a tenant would have to pay to live there. This limit is unlikely to be a factor because a quick survey of rental listings for comparable furnished homes would reveal rental rates that usually exceed actual owner expenses by a large margin.

When negotiating a housing allowance it is best to overestimate the amount to request

Because actual expenses are certain to vary from any estimate made at the beginning of a year clergy are able to make an adjustment on their personal tax return. Any amount of the housing allowance greater than the actual expenses is simply added to W-2 wages on the clergy’s tax return and taxed as regular income. If the requested housing allowance is lower than the actual expenses the opportunity to exclude the excess from income tax is lost.

Three more things that may be helpful

Any housing allowance resolution should state that it is in effect until changed in order to avoid a situation where an annual resolution expires unnoticed.
The housing allowance can be changed mid-year by the church if unforeseen expenses occur. The change must apply prospectively and cannot be applied retroactively.
Lastly, any unreimbursed clergy business expenses can be deducted from the wages and housing allowance when calculating the Self-Employment Tax on Schedule SE in a personal tax return.