There are two kinds of ministerial housing allowances here in the US. The parsonage allowance is for those living in church-owned housing. The cash housing (or rental) allowance is for those who provide their own housing.
Today, I want to go deeper into the parsonage allowance. Though parsonages are slowly becoming a thing of the past, many pastors still live in them. For those pastors, it is important to understand the different features of the IRS’s parsonage allowance.
Parsonage Allowance Requirements
First, to take a parsonage allowance you must be ordained, commissioned, or licensed as a minister. A lay leader living in a church property is not eligible to take a parsonage allowance.
Second, the parsonage allowance cannot be more than a reasonable compensation for the minister’s services. For example, a minister working 5 hours a week would not be able to take a $30,000 parsonage allowance. Though I might think pastors deserve $120/hour, I don’t think the IRS would find that “reasonable.”
If you live in a parsonage, you can also take a cash housing allowance for the expenses that you pay out of pocket to provide a home. Your church needs to designate the amount ahead of time and you need to keep good records of your expenses. It is better to overestimate your housing allowance needs, as you can’t increase it retroactively. If you overestimate and don’t use all of your allowance for qualified expenses, the remaining portion is simply included as income on your Form 1040 line 7.
Qualified expenses include utilities, furnishings, repairs, and improvements that you pay for without being reimbursed. Most any expense incurred to maintain a home is eligible except cleaning services and domestic help.
How The Parsonage Allowance Is Taxed
Your parsonage allowance and cash housing allowance are not included in your gross income for federal income tax purposes. You get them income tax-free, at least federally. Different states tax housing allowances differently. You will need to consult a tax professional in your particular state to know how it is handled.
Your parsonage and cash housing allowances are taxable for SECA, however. SECA is the Social Security and Medicare self-employment taxes that all ministers must pay unless they have opted out of Social Security. SECA is 15.3% of your gross income including the parsonage and cash housing allowance.
Since your parsonage probably doesn’t have a price tag hanging on the front door, you will have to consult a real estate professional to calculate the fair market rental value. Your parsonage allowance is that fair rental value plus any utilities and other costs your church pays for you.
Example Of Parsonage Allowance Tax Calculations
For example, let’s say your church pays you $40,000 a year and you have designated $5,000 of that as a cash housing allowance to pay for furniture, light bulbs, etc. You live in a parsonage with a fair market rental value of $12,000 a year and the church pays $3,000 a year in utilities for you.
To figure your gross income for income taxes, you would subtract your cash housing allowance from your pay for a total of $35,000. ($40,000 – $5,000 = $35,000) That’s the income you use to calculate your federal income tax.
For your SECA taxes, you take the $40,000 the church pays you, keep the cash housing allowance in it, and add in your parsonage allowance for a total of $55,000. ($40,000 + $12,000 + $3,000 = $55,000) Your SECA taxes are then 15.3% of $55,000 even though you only actually receive $40,000 in real money.
How The Parsonage Allowance Should Appear On Your W-2
There is a lot of confusion among pastors and church treasurers as to where things go on the IRS Form W-2. Without a housing allowance, it is pretty simple and straightforward. Income is reported in box 1.
However, housing allowances complicate things. For our pastor in the above example, even though he gets paid $40,000 a year, that’s not what it would say in box 1 of his W-2. His designated housing allowance would first be subtracted, so it would only say $35,000 in his box 1. The other $5,000 of his designated housing allowance would reappear in box 14. Or not.
His church could either specify “Housing: 5,000” in box 14 or not report it on the W-2 at all. If it does not appear on the W-2, the church must give him a letter stating what his housing allowance was. The letter would be for informational purposes only and not reported to the IRS or included with the pastor’s tax return.
The church is not required to calculate the fair market rental value of the parsonage. As it is the pastor receiving the tax benefit, it is his or her responsibility to do the calculations. Let me say that again, calculating your parsonage allowance is your responsibility since you are the one benefiting from it. Even if your church says they will do it for you, if they don’t or if they do it incorrectly the IRS will hold you responsible, not them.
Box 16 is for state wages and would be filled out as per the pastor’s state’s laws. Box 3 is for Social Security wages and, regardless of the housing allowance, should be empty. That is because ministers are considered self-employed for Social Security purposes. Their income is not reported for Social Security purposes on form W-2 and churches do not withhold payroll taxes for them. Rather, they calculate their own Social Security and Medicare payments on Schedule SE that is filed with their tax return.
While calculating your parsonage allowance can be complicated and time consuming, the money you save on taxes more than makes up for the inconvenience. One of the greatest financial benefits that pastors have is their housing allowance. It may not be around much longer, so make sure to take advantage of it today!
For more information on pastoral tax issues, see:
Why Don’t Churches Pay Payroll Taxes For Ministers?
Why Do Church Employees Pay Self Employment Taxes?
All The Confusing Ways The IRS Treats A Pastor’s Income
For more information on the housing allowance, see:
3 Responses
Steve Jones
April 5, 2023Hi. I am new to the whole clergy tax thing, and I live in a parsonage, and received a 1099-NEC. I never got a W2, and our church is not 501c3. They refuse to do so. I made $30K and that’s all it says on line 1. There is nothing for any other line. So I have two questions: one, am I even getting the right form? And two, can I not claim housing because I have a 1099? Thank you. Any response is helpful.
Amy
April 9, 2023First of all, your ability to claim a housing allowance is not dependent on how you are paid, so you can claim a housing allowance even if paid by 1099. You received a 1099 instead of a W-2 because your church considers you to be an independent contractor and not an employee. Whether or not that is correct for your particular employment situation, I cannot tell you because I don’t know the details, but you should be able to file your taxes just fine with just the 1099.