24 Aug Understanding the Housing Allowance for Ministerial Staff
In the complicated world of ministerial pay, it is important to know that pastors and other ordained employees can receive a certain amount of money in compensation for basic living expenses. This is called a housing allowance, also known as a parsonage allowance or a rental allowance. These earnings are excluded from gross income for income tax purposes, but the exclusion does not apply to self-employment taxes. Also, the tax benefits associated with clergy, including the housing allowance, is only available to ministers.
Who Exactly Qualifies for This Housing Allowance?
In short, only a minister that receives income that is directly related to “services performed in the exercise of ministry” is eligible for a housing allowance. These ministerial services include the following:
- The minister must be conducting religious worship, administering sacraments
- They have to have management responsibility in the church/religious denomination
- They must be considered to be a religious leader by the church/religious denomination
How is Housing Allowance Calculated?
At the end of each year, the minister should recalculate how much they anticipate for housing expenses for the upcoming year, based on reviews of their household financial records as well as additional housing costs for that year. Because of this, it is recommended to estimate higher so that unanticipated housing costs can be deducted as part of each year’s allowance.
Designating The Housing Allowance
Housing allowances should be designated in advance of the services being provided by the minister, and typically in advance of the new calendar year. The payment officially designated as a housing allowance must be used in the year received. Also, the amount of the housing allowance should be approved by the church board (or other leadership of the organization) and it must be in writing. A housing allowance can be amended during the year but the revised amount will only apply prospectively and never retroactively.
Housing Allowance Can Be Factored In for Pension Calculation
Housing is an allowance, and not considered earned income. However, a housing allowance can be used to determine a pension/403b deduction amount, for example, a percentage of income. Keep in mind though that a pension/403b deduction cannot exceed earned income.
Many churches choose to outsource their payroll so that housing allowances for their clergy staff are handled properly. We at Payroll Partners have been serving faith based organizations for 21 years and possess the knowledge and experience to process church payrolls and their tricky allowances correctly. Call us at 1-866-757-8111 to get your church compliant today!
Payroll Partners is committed to helping clients stay informed about payroll and human resource news, developments and current events. This article is intended to provide readers with general information on payroll matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular payroll practice. All efforts have been made to assure the accuracy of the information. Payroll Partners does not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular payroll practice. If you are seeking accounting advice, you are encouraged to consult a certified public accountant.