One of the challenging components of Clergy Compensation is a portion of clergy income known as the Housing Allowance, which is non-taxed income received to cover the cost of housing. While commonly used as a way to help clergy afford a rental property or a mortgage, even clergy who live in a Parsonage or Manse (a church-owned house) can dedicate a portion of their salary as a Housing Allowance.
- Housing Allowances are received by clergy as non-taxed income and should not be included in Box 1 on the Clergy’s W2.
- Housing Allowances may be provided even if a clergy is living in a church-provided parsonage or manse.
- For some United Methodist Clergy, the Housing Allowance is replaced by a Housing Exclusion. Understanding the two different housing amounts becomes important to properly processing and reporting payroll.
Clergy May Receive Housing Income
The IRS states that any qualifying clergy can exclude a portion of their income, known as a Housing Allowance, from their gross income for performing “ministerial duties.” In order to qualify, the clergy person must be licensed, commissioned, or ordained. The requirement of performing “ministerial duties” means the clergy person must perform core functions in the life of the church like leading worship, administering the sacraments, or leading religious organizations. Other church staff, like facilities or office staff, do not qualify.
How To Determine Your Housing Allowance
While a church can specify any amount of money to provide to their clergy as a housing allowance, clergy are a bit more limited when claiming a housing allowance on their annual tax filing. The IRS requires a clergy person to use the lowest of three numbers for their housing allowance when filing taxes. The three possible numbers are:
- The fair market rental value of their housing (inclusive of utilities);
- The expected amount of money needed to rent or own and maintain their housing for the year; or
- The actual amount spent on housing for the year.
Since a clergy can’t know the actual costs until year end, it is best for clergy to start by determining the lowest of the first two options and set that value as their housing allowance. That number should be taken into consideration by the church when setting the housing allowance for the year. Once the housing allowance has been set, the housing allowance should be paid out in the process payroll as a non-taxed portion of the clergy income.
Though the amount paid out as a housing allowance will be recorded on the W2 as non-taxed income, the clergy may be required to pay taxes on a portion of this amount if their actual housing expenses are not higher than the expected costs or the fair market rental value.
Recording Housing Income on the W2
When completing the W2 at year-end, income for clergy is generally recorded in two boxes. In Box 1, you should report all taxable income for the clergy. This would include the general salary, but may also include additional amounts such as a SECA Benefit, car stipend, or group-term life policy.
The housing allowance does not go in Box 1. Instead, the non-taxed income paid out as a housing allowance is reported in Box 14 as “other” income, and should reported with the text, Housing Allowance. To reiterate the previous point, this number may not be what the clergy ends up using when filing their taxes, but it should be consistent with the amount paid out as a housing allowance throughout the year.
Can A Clergy Receive a Housing Allowance When Living in a Parsonage?
YES! Clergy can claim a housing allowance when living in a parsonage or a manse (a church-owned house). Though their housing costs will most likely be significantly lower without the monthly rental or mortgage payments, there are still housing expenses that can be covered by a housing allowance. Clergy should take into account these lower costs when determining the portion of their income to be received as a housing allowance.
Housing Allowance vs Housing Exclusion
For many clergy, the housing allowance is set in consultation with a Personnel Committee and is reflective of the amount the clergy expects to spend on housing costs. However, for some United Methodist Clergy, the housing allowance is set as part of the compensation package with little or no input from the clergy. When this happens, even if no housing allowance is provided, the United Methodist Church allows clergy to set an alternative number known as a housing exclusion.
In church settings where the pastor is allowed to set a housing exclusion, the exclusion amount replaces the housing allowance as the amount received as non-taxed income for housing expenses. The clergy must still follow the same IRS guidelines as above, where the housing exclusion claimed for tax purposes must be the lowest of the three possible housing numbers.
When processing payroll where a housing exclusion is set, the amount paid out as non-taxed income is determined by the housing exclusion, not the housing allowance. When completing the W2 at the end of the year, the housing exclusion is the amount that shows up in Box 14. To determine the amount that goes in Box 1 as taxable income, you would total all compensation paid (salary, housing allowance, SECA, etc.) and then subtract out the housing exclusion.
