This is an excerpt from my book, The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance: 

Pastor Housing Allowance Responsibilities

Pastor, when it comes to the housing allowance, you’re the man (or woman). If you want the tax savings that the clergy housing allowance provides, it’s on you. It’s not the church’s responsibility, it’s yours. You are the one who has to calculate your anticipated expenses for the year, submit them to your church, and make sure they approve it in time.

Also, it’s your job to track your expenses throughout the year to substantiate the housing allowance that you claim. Unlike an accountable reimbursement plan where you have to submit receipts to the church, hang onto your receipts. If you get audited by the IRS, you are the one that will have to answer to them, not your church. 

Church Housing Allowance Responsibilities

The church or denomination is responsible for officially designating the housing allowance before paying it. Until the official designation has been made, all payments count as taxable income. To make it official, the church must put it in writing as a part of an employment contract, in the church’s budget, in meeting minutes, in a church resolution, or “in any other appropriate instrument evidencing such official action.” (Treasury Regulation § 1.107-1(b)) The designation must simply identify a payment as a housing allowance as opposed to salary or other remuneration (pay).

Once the church has made the official designation, their only responsibility is to pay the housing allowance and record it properly. The allowance should be paid along with the minister’s regular wages, but the amount is not included with wages on Form W-2. In fact, the church does not report the housing allowance to the IRS at all. If it’s on the W-2 as wages, it’s taxable, so make sure your church does it right. That’s why you need to be extra nice to whoever does your church’s payroll. If you get on their bad side, it could cost you big time.

At the end of the year, the church needs to let the pastor know the total housing allowance for the year and it is the pastor’s responsibility to report that to the IRS on Schedule SE. If the pastor is exempt from self-employment taxes, then the housing allowance is never reported to the IRS at all. Isn’t that nice?

How To Report The Housing Allowance 

To inform the pastor of the housing allowance amount, the church may include it in an official letter or show it on Form W-2 in box 14. Box 14 is an informational box only, so employers have some flexibility in how they use it. The church can report the pastor’s housing allowance by writing something like “Housing: 20,000” in that box. The housing allowance should never be included with wages in Box 1. (If it is, have your church fix it and send you an amended Form W-2.)

Breakdown Of Responsibilities

Here is a breakdown of how the housing allowance works:

1. Pastor calculates anticipated housing expenses for the coming year.
2. Pastor requests housing allowance from the church.
3. Church makes an official housing allowance designation.
4. Church pays pastor housing allowance.
5. Pastor tracks housing expenses throughout the year.
6. Church informs pastor at the end of the year of how much was paid in housing allowance.
7. Pastor files tax return, reporting housing allowance on Schedule SE (unless you have opted out, which is discussed later) and including excess housing allowance as taxable income on Form 1040.

This process should be repeated annually. If you have pretty steady housing expenses, you can request the church to designate your housing allowance in an open-ended manner. An example would be, “First Church designates a housing allowance of $25,000 a year for Pastor John. This designation shall be effective for the current year and all subsequent years unless otherwise provided.” That way, you don’t have to go through the process of requesting the housing allowance every year. Instead, you can skip steps 1-3 and only go back to them when your housing expenses change. Steps 4-7 must still be followed every single year, though. 

Even if you use open-ended wording, you should still calculate your housing allowance on a regular basis. Housing costs creep up gradually and if you’re not careful, you’ll end up paying taxes on a significant portion of your income unnecessarily. You can find sample housing allowance designations, worksheets to help you calculate your housing expenses, and an online calculator at pastorswallet.com/free-resources. 

If you want to learn more about the clergy housing allowance, pick up a copy of The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance on Amazon today!