03 May 4 Explanations That Make The Ministerial Housing Allowance Easier To Understand
While Internal Revenue Code is definitely not the most exciting topic, Section 107 is good to know as it does offer some benefit to ministers. This is where the minister’s housing allowance is addressed. Here it is:
“In the case of a minister of the gospel, gross income does not include —(1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as a part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”
The ministerial housing allowance holds a lot of history, and since its initial writing has been expounded on several times to offer clarification- including Publication 517 from the IRS. It’s very informative literature, and if you are looking for something more in depth (or are looking for something to help with the insomnia), I definitely recommend Publication 517.
Whether you have been taking advantage of a housing allowance for years, you are about to embark on your first housing allowance adventure, or you just need some help explaining it to someone else, here are some helpful highlights of the housing allowance.
1. You must be eligible for a Ministerial Housing Allowance.
Being on staff at a church does not automatically make you eligible for a housing allowance. To be considered a “minister of the Gospel,” specific criteria must be met. A minister for tax purposes should:
- Be ordained, licensed, or commissioned
- Be able to conduct weddings, funerals, baptisms, and communion
- Have a level of authority in the functions and promotion of the organization
2. You the minister, not the church or organization, is responsible.
This is two-fold. The minister is responsible for designating the portion of their income towards housing in advance. This should be done before the start of the calendar year for the upcoming twelve months and should be officially approved by the church in some manner. The minister is also responsible for maintaining the records that prove the legitimacy of the portion of their income that was designated for housing allowance.
3. You’re probably paying some federal taxes.
Just to reiterate, a minister can exclude an amount from federal income taxes that is the lowest of the following options:
- A church designated housing allowance
- Actual housing expenses (mortgage/ rent, utilities, taxes, repairs, etc.)
- The fair rental value of the residence (furnished plus utilities)
Whatever amount of income remains, after that amount has been excluded, is subject to federal income taxation. It is possible for a minister to have their entire wages excluded as part of the housing allowance, but they must be able to prove the validity of that exclusion (see above).
4. You are definitely (*) paying all Social Security and Medicare taxes.
Ministers have a convoluted employment status. While, yes, they are employees of the organization that hired them (and is paying them), for the sake of their taxes, they are self-employed. Usually an employer pays 7.65% of an employee’s wages for Social Security and Medicare and deducts a matching 7.65% from the employee’s wages. In the case of ministers, the minister is responsible for the full 15.3% Social Security and Medicare (called SECA or Self-Employed Contributions Act).
*The only exception to this is for minister’s who have opted out of paying Social Security. This is another complicated process for which you must be eligible. If you’re unsure as to whether or not you have opted out, you haven’t. You would know.
5. You should file and pay your taxes on time.
The church is not withholding any taxes for a minister, unless specifically designated via a W-2. A minister should be pre-paying their estimated taxes quarterly. Taxes can be estimated using form 1040-ES and the prior year’s tax return, and quarterly payments can be made online. Late or underpayments can be subject to penalties.
I know this is a lot of information, but it’s so helpful to make sure you or your team are understanding and are making the most of the housing allowance!
Before making any changes to how you or your organization manage your taxes, please consult with a CPA who is knowledgeable in ministerial taxes.
Original content by the Vanderbloemen. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.