Clergy housing allowance calculator and guide

The clergy housing allowance is one of the most valuable and most misunderstood parts of a minister’s pay. Done right, a portion of your pay is free of federal income tax. Done carelessly, it creates trouble at tax time. This page explains how it works in plain English, with a worked example.

What the clergy housing allowance is

Section 107 of the Internal Revenue Code lets a minister of the gospel exclude from gross income either the rental value of a home the church provides (a parsonage) or a housing allowance the church pays in cash. This is sometimes called the parsonage allowance. The allowance is not extra money. It is part of your compensation that your church designates as housing, and you may exclude it from income tax as long as you spend it on housing and stay within the limits below.

The exclusion is for ministers who are performing ministerial services as employees of a church or, in some cases, in other roles. The IRS looks at the facts: whether you’re ordained, commissioned or licensed, and whether your duties include things like conducting worship, administering sacraments and running the church’s religious work. IRS Publication 517 explains who qualifies.

The three-way limit

The amount you may exclude from income tax each year is the least of these three:

1. The amount officially designated as a housing allowance by your church, in advance.
2. The amount you actually spent providing a home during the year.
3. The fair rental value of the home, furnished, plus the cost of utilities.

If the church designated more than the least of those amounts, the excess is taxable income and is included in your wages. That’s the number the calculator shows as the “taxable excess.”

A worked example

Suppose Pastor Rivera owns a home. This is an illustration, not real data.

The least of the three is $26,500, so Pastor Rivera can exclude $26,500 from income tax. The other $3,500 of the designation ($30,000 minus $26,500) is taxable. If the church had designated $24,000 instead, the least of the three would be $24,000, there would be no taxable excess, and the extra $2,500 spent on housing could not be excluded.

That second point is why many churches designate generously. A designation higher than your likely expenses costs the church nothing, because it’s only a label on pay the church is already giving you. But designating far above what you’ll actually spend or what the home would rent for creates taxable excess.

What counts as housing expense

The usual items that count toward actual housing expenses:

• Rent, or mortgage payments (principal and interest) and down payment
• Utilities: gas, electricity, water, trash, internet and phone service
• Furniture and appliances, and their replacement
• Repairs, maintenance and improvements
• Homeowner’s or renter’s insurance
• Real estate taxes
• Cleaning supplies, lawn care and similar upkeep

IRS Publication 517 says expenses for food and household servants don’t count. Keep receipts and statements for everything. If you’re ever asked, the records are your proof.

Ministers who own their homes can generally still deduct mortgage interest and real estate taxes on Schedule A as anyone else would, even though the money used to pay them was part of an excluded allowance. Ask your tax professional how that applies to you.

How the church designates the allowance

The designation is the church’s decision, not the pastor’s. It’s made by the church’s governing body in an official action, typically recorded in the minutes, and it should happen before the pay it covers. A designation can’t be applied to past months, so many churches adopt the next year’s designation in the fall.

Sample wording (adapt it to your church’s polity, and have your tax adviser review it):

“Resolved, that of the total compensation paid to Pastor Rivera for the year beginning January 1, an amount of $30,000 is designated as a housing allowance under section 107 of the Internal Revenue Code. This designation may be revised prospectively as the board determines.”

Give the pastor a copy. If the church changes the amount in mid-year, the change applies from that point forward.

Self-employment tax

The housing allowance is excluded from income tax but not from self-employment tax. For Social Security and Medicare purposes, ministers are generally treated as self-employed on their ministry income, even when they’re W-2 employees for income tax. That means the pay you receive for ministry, including the amount you exclude as a housing allowance, is counted when you figure self-employment tax on Schedule SE. A small number of ministers who are conscientiously opposed to public insurance can apply for an exemption, but the window is narrow and the consequences are serious. Read Publication 517 and speak to a tax professional first.

Many churches also increase pay to help cover the minister’s extra share of Social Security and Medicare. See our pastor salary guide for how that fits into a fair package.

Parsonage vs. housing allowance

Some churches provide a parsonage and also designate an allowance for furnishings and utilities. That is fine, as long as the arrangement is written down.

A January–March checklist

1. Find the designation. Get the written designation for the tax year from your church office.
2. Add up the year’s housing costs. Rent or mortgage statements, utility bills, repair invoices, insurance and property tax bills.
3. Estimate the fair rental value. Look at comparable furnished rentals in your area, or ask a local real estate agent. Write down how you got the number.
4. Run the calculator. The least of the three is your exclusion. The rest of the designation is taxable.
5. Bring everything to a tax professional who has prepared returns for clergy.
6. Set next year’s designation. If your costs are higher than the designation, ask the church to raise it going forward.

Common mistakes

• No written designation. Without one, the exclusion is in doubt.
• Designating after the fact. A designation made in December can’t cover January through November.
• Forgetting self-employment tax. The exclusion doesn’t reduce it.
• Counting groceries. Food doesn’t count as housing.
• Using a made-up fair rental value. Keep real comparables.
• Skipping professional help. A tax professional who knows clergy rules is worth the fee.

Sources: IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers (irs.gov/publications/p517); Internal Revenue Code section 107. Rules change, so confirm the current year’s rules before you file. For more on pastors’ pay, see how much pastors make, and for the wider picture, visit resources for pastors.