Compensating your minister, pastor, or another religious professional for their housing is a common and accepted practice in many churches for income tax purposes.
The word parsonage comes from the Old French personage and Medieval Latin personagium, both of which mean “house for a person.” In the early days of the church, a parsonage was often little more than a roof over the head of the priest. However, as the church grew in power and wealth, so did the parsonages.
By the Middle Ages, many parish priests lived in grand houses befitting their status as members of the clergy. Today, parsonages are still occasionally provided by churches, though they are more likely to be simple dwellings than grand houses. Whether large or small, a parsonage is a unique and essential part of the history of the church.
In the United States, the IRS allows churches to provide what is called a housing allowance (or parsonage allowance) as a tax-exempt part of their income. Here’s what you need to know about this important benefit.
A parsonage is a dwelling provided by a church for a clergy member, typically as a part of reasonable pay in lieu of a higher salary, for self-employment tax purposes.
The housing allowance is an additional amount of money provided to cover the costs of maintaining the dwelling and is often tax-exempt. Parsonage allowances are not considered part of a clergy member’s salary, and as such, they are not subject to Social Security.
Parsonage allowances can be used to cover a wide variety of expenses, including mortgage or rent payments, utilities, insurance, and repairs. In some cases, the allowance may also be used to cover the costs of furnishings or other household items.
Benefits Of A Parsonage Or Housing Allowance
There are a few key benefits of a housing allowance. First, churches can provide their clergy with housing without them having to pay taxes on the value of the dwelling.
Second, it helps to level the playing field between clergy members who own their homes and those who do not. Owning a home can be a significant financial burden, and the housing allowance helps to offset some of those costs. Finally, the parsonage or housing allowance is often used to attract new clergy members to a church.
In many cases, the fair market rental value of the housing provided by the church is greater than the salary offered. This is especially true in areas with high housing costs. The housing allowance can help make a church’s compensation package more competitive.
Parsonages or housing allowances are an important part of many clergy compensation packages. Understanding how they work can help your church provide its ministers with the best possible support.
What Expenses Can A Housing Allowance Cover?
To enjoy the tax benefits of your parsonage, you’ll need to restrict the use of your parsonage or rental allowance to expenses related to your housing. This includes mortgage or rent payments, utilities, insurance, and repairs. The housing allowance may cover the costs of household items like furniture or appliances. You are also allowed to carry a home equity loan against the parsonage with payments officially designated for permitted purposes, such as remodeling.
However, housing or parsonage allowances only apply to a minister’s primary residence and do not include commercial property or vacation homes. If you have a summer home or an investment property, you will not be able to exclude those expenses from your gross income. But as long as your primary residence is your only home, you can take advantage of the parsonage allowance and save money on your taxes.
Assistance With Your Church Accounting
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This article is not meant to be a substitute for professional services. Always consult a CPA or trusted professional when seeking tax or accounting advice.