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This 2022 webinar is designed to provided educational material for Luther Seminary related to Clergy Tax Law, and should not be viewed as legal or tax advice. If legal, tax, or other expert assistance is required for any other year, seek the services of a clergy tax professional.

Advance permission must be obtained from the copyright holder. Contact information is listed below:

Clergy Financial Resources (Mark and Josh Friesen)�11214 86th Avenue N.�Maple Grove, MN 55369��Tel: 763.425.8778�Fax: 1.888.876.5101��E-Mail: cfr@clergyfinancial.com�Web Site: www.clergyfinancial.com

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Housing 101

Minister - Defined by the IRS
Who Qualifies for Housing Allowance?
Types of Housing
Designating Housing/Parsonage Allowance
Eligible Housing Expenses
Non-qualifying Housing Expenses

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Ministers - Defined by the IRS

When a church hires an employee, one of the initial decisions that must be made is whether to treat the worker as clergy, non-clergy employee or contractor. This decision may seem insignificant, but it has huge implications when it comes to payroll.
Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes.

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Ministers - Defined by the IRS

It is important for the employing organization to decide whether or not clergy qualify for the special tax treatments. The special tax treatments follow:

Exclusion for federal and state income tax purposes of the housing allowance and the fair rental value of a congregation-owned parsonage provided rent-free to clergy.
4361 Exemption of clergy from self-employment tax, under very limited circumstances.
Exemption of clergy compensation from mandatory income tax withholding.
Eligibility for a optional withholding arrangement between the minister-employee and a congregation.
Potential double deduction of mortgage interest and real estate taxes as itemized deductions and excluded as housing expenses for housing allowance purposes.

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Who Qualifies for Housing Allowance?

Ordained, Commissioned or Licensed Ministers and serving as a minister in the church
Retired Ministers
Chaplains
Ordained Administrators and Teachers at Seminaries

NOTE: Students and Interns not eligible for housing allowance

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Type of Housing

Housing Allowance (own or rent a home)
Parsonage Allowance (church owned home)

Fair rental value of parsonage is tax free for federal and social security taxes, but subject to self-employment tax
Furnishings/Appurtenance allowance - % of income to cover expenses you will incur to furnish and maintain the parsonage
Utilities allowance (Often the church will pay for this outright)

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Designating a Housing Allowance

The allowance must be officially designated in advance by the church.
Stated in writing, preferably by resolution of the governing body and/or in an employment contract.
Recorded in the church budget and payroll records.
Spend during a calendar year. (According to Reg. 1.107-1(b) the amount designated must also be a specific dollar amount or a specific percentage of salary.)

Designate 125% of anticipated expenses
Can only be designated or modified prospectively, not retroactively
Safety Net Phrase “Until modified or revoked”

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Housing Allowance (Owned)

Designating Housing Allowance
Fair Rental Value Limitation: 12 - 15% of the value of your home
Tax liability

Non-taxable federal and state
Subject to self-employment tax

Generally, any expense to provide or maintain the home can be used to justify the housing exclusion. Regulations do specifically state that expenses for groceries, paper products, personal toiletries, personal clothing, and maid service cannot be used. You may legitimately include the following:

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Housing Allowance (Rent)

Designating Housing Allowance - generally lower for renters than for home owners
No Fair Rental Value Limitation
Tax liability

Non-taxable federal and state
Subject to self-employment tax

Qualifying Expenses

Rent
Utilities
Furnishing
Furniture

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Parsonage

Parsonage (church owned home)

Fair rental value (25% to 30% of defined compensation)
Utilities paid by the church

Designating Parsonage Allowance

Parsonage/Furnishing allowance
Utilities allowance
No Fair Rental Value Limitation

Tax liability

Non-taxable federal and state
Subject to self-employment tax

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Eligible Housing Expenses

Mortgage Payment/Rent
Down Payment
Homeowner Association Dues
Real Estate Taxes
Home/Renter Insurance
Utilities
Maintenance/Repairs
Remodeling
Furniture
Supplies to Maintain Home

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HELOC Payment for Home Expenses (Home Equity Loan)
Furnishings
Appliances
Home Electronics
Decor
Lawn Equipment
Lawn Care Service
Home Buying/Selling Costs

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Non-Qualifying Housing Expenses

Food
Clothing
Personal Care
Gifts
Cell Phone
Housekeeper/Maid
HELOC Payment for non-housing related items (car, tuition etc.)

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IRS Limitations

IRS Publication 517 provides a definition of how much housing allowance can be excluded for ministers: “If you own your home and you receive as part of your pay a housing or rental allowance, you may exclude from gross income the smallest of the following:

The amount of actually expense to provide a home,
The amount officially designated as a housing allowance, or
The fair rental value of the home, including furnishings, utilities, garage, etc.

Example:�The Church designates $20,000 of William’s salary as a housing allowance. William’s actual housing expenses for the year total $17,000. The fair market rental value of the home (including furnishings and utilities) totals $14,000.

Even though the Church designated $20,000 as a Housing Allowance, only $14,000 of William’s compensation is considered nontaxable when calculating income tax.

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Clergy Financial Resources Contact Info

For Luther Seminary, we provide a complimentary review of your first call compensation package.
Sign up here for your free consultation.

This service is not designed for tax consulting. If tax consulting is needed, our Pro Advisor I Tax Support is available for $95.00 for a 30-minute session.
Clergy Financial Fax: 888-876-5101
Clergy Financial Telephone: 763-425-8778��