Pastors may receive money from their church for housing. But when it comes to the housing allowance a.k.a. rental allowance a.k.a. parsonage allowance, what are they?
As I mentioned in my article on the Deason Rule, individuals, such as pastors, receive compensation for basic living expenses. If you receive money from the church for house rent, it is called a rental allowance. If the church pays for your house (based on its fair market value), it’s a housing allowance. And if the church provides a home for you, that is considered a parsonage. Read on for more detail on the housing allowance for pastors and how to record it for tax purposes.
As mentioned in Business Dictionary, this is the definition of the housing allowance: “Housing allowance amounts are not taxable on your income tax but are subject to taxation under self-employment laws. Allowances for the members of the military and other job positions are determined based on several factors including the cost of living, geographic location, scale of pay, and dependency/marital status.”
Do you owe taxes on a housing allowance?
Before going further into housing allowances, it’s important to note the difference between income tax and self-employment tax. (After all, this blog series is predicated on explaining these concepts to the naïve 18-year-old version of me). Everyone has to pay social security and Medicare, which when combined totals 15.3%. For a traditional job, where you’re an employee of a company, your employer would pay half of that 15.3%. You would pay the other half (known as FICA taxes). However, if you’re a self-employed business owner, you have to pay the full 15.3% (known as SECA taxes). The caveat for the self-employed is they can deduct half of the self-employment tax as a business expense.
Essentially, most ministers can have dual tax status. Circling back to the definition above, housing allowances are not taxable as part of your income. However, they can be subject to taxation under self-employment laws. Also, your housing allowance is not calculated into your gross income (the total amount of money you’re making before deductions are made) for income tax purposes. But it can be included for self-employment tax purposes.
How much can you receive for your housing allowance?
As a pastor, if you receive an amount officially designated as a housing allowance as part of your salary, and the amount isn’t more than reasonable pay for your services, you can exclude from your gross income the lesser of the following amounts (per the housing allowance IRS regulations):
- the amount officially designated (in advance of payment) as a housing allowance
- the amount actually used to provide or rent a home
- the fair market rental value of the home (including furnishings, utilities, garage, etc.)
So if you’re receiving $5,000 in a housing allowance, and the fair market rental value of the home dips to $4,000, you can only exclude $4,000 from your gross income. In this situation, that extra $1,000 has to be included as part of your wages on line 7 of your Form 1040, U.S. Individual Income Tax Return.
If your congregation furnishes housing as pay for your services (a parsonage), instead of receiving a cash amount in your salary as a housing allowance, you may exclude the fair market rental value of that housing from income. But you must include the fair market rental value of the housing in net earnings from self-employment for self-employment tax purposes.
If your church uses a payroll software, make sure they correctly withhold your housing allowance when running payroll.
I hope this article answered at least some of your questions regarding housing allowances. If not, feel free to leave a comment below or contact us. We’d love to help!
In my next article, I’ll go into greater detail about whether ministers are self-employed.