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Basics of Ministerial Housing Allowance

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Who determines a minister's housing allowance and the fair rental value of a parsonage? 

When beginning a new pastoral position there are often many questions that the pastor and the church may have. The most common questions are concerning housing allowance (Who determines the amount of the allowance and how is it designated?) or parsonage fair rental value (How does this determination affect compensation?). This post discusses the unique aspects of each of these pastoral housing methods, and answers some of the common questions.

Housing Allowance 

A housing allowance is a non-taxable benefit that is available only to ministers, and is received as a designated portion of the pastor's salary to pay for housing that he owns or rents himself. Other non-ministerial members of the church staff are not eligible. To establish a housing allowance, the minister must have the amount officially designated by the church's governing body, whether that is the deacon board or the finance committee. The pastor requests the desired allowance amount, which the board officially documents in the church's records. This housing designation must be in writing before any compensation is paid as housing allowance.

The amount designated is subject to a 3-part test under IRS rules. For tax purposes, the exclusion is limited to the lowest of :

  • The amount actually used to provide the home,
  • The amount officially designated as a housing allowance, or
  • The fair rental value of the home plus the actual cost of utilities.
The allowance may be applied toward eligible housing expenses, such as mortgage payments, rent, utilities, property taxes, insurance, and furnishings. Often it is recommended that pastors set their housing allowance at the total estimated housing expenses for the year plus an additional $5,000 to cover any unexpected expenses. While this amount is excluded from federal income tax, it generally remains subject to self-employment tax, unless the pastor has opted out.

Parsonage Fair Rental Value 

A parsonage is rent-free housing that is provided for the pastor by the church as part of his compensation package but is not included on his W-2. When the church provides a parsonage in place of a cash housing allowance, the fair rental value (FRV) must be determined. The FRV is what the home could reasonably rent for in the area, furnished (if furniture is provided) and including the cost of utilities (if paid for by the church). The value of a parsonage for self-employment tax considerations is set at the FRV, which is determined by the pastor and his tax professional. The fair rental value serves two purposes:
  • For the church: It demonstrates that the pastor is being fairly and appropriately compensated.
  • For the pastor: It determines the amount that must be reported as housing-related compensation for self-employment tax purposes.
The church may determine a FRV as part of their compensation package to demonstrate the value of the housing that they are offering the pastor in addition to wages, but, ultimately, FRV is determined by the pastor during the preparation of his personal tax return to determine the amount of self-employment taxes that needs to be reported.






 

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