Last revised: July 2019
The Ministerial Housing Allowance enables ministers to exclude some of their salary from certain taxes. For most active and retired ministers, it is their most important tax benefit.
UU ministers who are fellowshipped and/or ordained are treated as ministers for tax purposes, making them eligible for the housing allowance exclusion. This exclusion applies to federal income taxes and state income taxes in most states. There is no housing allowance exclusion for Social Security/Medicare tax, however; the amount received as housing allowance must be included by the minister on Schedule SE (Self-Employment Tax).
- It is excluded from federal income taxes, as well as from state income taxes in most states. (We are aware that it is not excluded from state income taxes in Pennsylvania.)
- The amount of the housing allowance is taxable for self-employment tax purposes (15.3%), so the amount received as housing allowance must be included by the minister on Schedule SE (Self-Employment Tax).
- Your regional compensation consultant
- An accountant familiar with ministerial tax provisions
- IRS Publication 517 (PDF)
- The Church and Clergy Tax Guide, by Richard Hammar, published annually by the Church Law and Tax Store
- What is Required of the Congregation?
- Federal law requires the housing allowance be set in advance by one’s Governing Board. The governing board of the congregation/organization needs to adopt an annual motion specifying the amount of the minister's housing allowance, either in December or in the month preceding the start of a new fiscal year. (As a safeguard, it is prudent to include a sentence in the motion saying that this amount will continue indefinitely until changed. This doesn’t negate the need for an annual board motion.)
- Who Is Eligible?
- According to the IRS, the housing allowance exclusion is available to "ordained, commissioned, or licensed ministers of a church with respect to services performed in the exercise of ministry."
- In 2018, the UUA received an opinion from an attorney with expertise on church regulatory issues that either fellowshipping or ordination satisfies this "ordained, commissioned, or licensed" requirement within the UUA. In other words, a minister who has entered preliminary fellowship may begin taking the housing allowance prior to ordination (and should be treated as a minister for other tax purposes).
- The IRS provisions state that "Services performed by a minister in the exercise of his or her [their] ministry include the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct, and maintenance of religious organizations...under the authority of a religious body constituting a church or church denomination."
- Under the same provisions, retired ministers may also claim a housing allowance exclusion for that portion of income received from a denominationally sponsored qualified retirement plan (such as the UU Organizations Retirement Plan) or from a Rabbi Trust established by a religious organization.
- How Much Can Be Claimed?
- Our Housing Allowance Calculation Form (PDF) is available to help ministers who own or rent a home determine an appropriate amount to claim.
- The housing allowance is limited to theleast of the following:
- The amount actually spent to provide a residence
- For ministers who live in a church-owned parsonage, actual expenses include a fair rental value of the parsonage, plus amounts paid for utilities, repairs, maintenance, and furnishings. Utilities and other expenses should be listed in the church budget.
- For ministers who rent a home, actual expenses include rent paid, utilities, and furnishings.
- For ministers who own their home, actual expenses include down payment, mortgage payments, legal fees, property taxes, fire and liability insurance, utilities, repairs and improvements, and furnishings. Like other taxpayers, ministers who own their homes are able to deduct the mortgage interest and tax payments if they itemize their deductions.
- The fair market rental value, including ancillary expenses described above
The fair market rental value of a residence can often be estimated by a professional real estate agent or broker in the community. Alternatively, review local ads for rental prices of comparable housing units that are fully furnished.
- The amount designated in advance as housing allowance
As noted above, the amount of the minister's housing allowance must be designated by the governing board of the congregation in advance. This is usually referenced in the employment agreement or in minutes of a Board resolution. The designation may be adjusted over time as appropriate, but only with regard to subsequent payments.
While it is acceptable for congregations to provide "evergreen" (until further notice) language, we strongly recommend that the housing allowance be formally reconsidered and re-designated each year (calendar or program year).
In simple terms, the minister cannot claim more than any one of the following: the amount that has been designated, the fair rental value, or the actual expenses of providing a residence as described above
- The amount actually spent to provide a residence
- What if More Is Designated Than Can Be Claimed?
- If excess housing allowance is paid to a minister (i.e., more than either the fair rental value or actual expenses), the overage must be reported as additional salary on the minister's W-2 form and is subject to federal and state income tax (as well as self-employment tax). An employer-congregation is not financially liable if a minister inaccurately reports the costs upon which the allowance is based.
- Is There a Limit to the Percentage of Salary That Can Be Designated as Housing Allowance?
- If justified, a minister can take 100% of their pay as housing. However, keep in mind these constraints:
- How Should This Income Be Reported?
- It is not required that the amount of the housing allowance be shown on the W-2 form, although it can be listed in Box 14, which is for employee informational purposes only. We recommend that the treasurer indicate the amount of the housing allowance paid in the prior year in a memo to the minister.
- How Does the Housing Allowance Figure Into Other Calculations?
- The housing allowance applies to income taxes only.
- Benefits calculations (retirement plan contributions and LTD/Life premiums) are based on total Salary + Housing.
- How Should the Congregation Make the Payment?
- The important thing is to keep it separate for tax and accounting purposes. For a clear paper trail, you may want to pay it in a separate monthly check, making it easier to remember that these dollars are not to be confused with cash salary.
- Where Is Additional Guidance Available?
The staff of the UUA Office of Church Staff Finances are are not certified tax or legal professionals. While we understand the above information to be correct, we encourage congregations to seek the services of their own experts in dealing with individual circumstances and unusual cases.