Church employees who are compensated as Ministers as defined by the IRS are able to claim a ministerial housing allowance. Some churches give a flat amount. Other churches just ask the pastor to claim their monthly rent or mortgage. But there is a right and wrong way to determine your housing allowance number.
A Few Helpful Guidelines:*
- Housing allowance should be declared in advance of the upcoming calendar year and approved by your governing board (or the governing board should deputize a staff member to approve these). This should be done annually and noted in minutes somewhere to combat an audit, should one occur of the church or the employee.
- You may not retroactively claim housing allowance. Therefore, if you take a job mid-year, you can only claim a number that is, at maximum, your salary for the remaining calendar year.
- If you claim a number that turns out to be higher than you can justify at the end of the year, you should take the necessary steps to correct your W-2 / annual claim to avoid penalties during an audit. You may NOT increase your housing allowance declaration after the calendar year ends and can only increase your housing allowance during the year pertinent to future compensation.
- Housing allowance is subtracted from your income that the federal government taxes you on. You may still be subject to state income taxes and federal taxes and should always consult a tax professional on matters such as these.
- If you are paid as a minister, you have "dual status" as self-employed (like a realtor, for instance), even though you'll still receive a W-2 from your company. This dual status means YOU are responsible for paying 100% of your employment tax (Social Security, etc.) on the non-housing allowance part of your income.
- If you are eligible to be paid as a minister, it is your religious right to file an IRS form 4361 with the Social Security office to opt out of social security if you so desire. This should be done with great care and consultation with a tax professional so you fully understand what you are doing. This is considered irrevocable for your ministerial income for the remainder of your life.
How To Maximize Your Benefit:
Housing allowance is determined by adding together your annual expenses for living, as outlined in our FREE downloadable Excel spreadsheet, OR the fair market value of the residence you live in, fully furnished. You must claim whichever number is lower. Some churches see this guidance as a cap for housing allowance because of the fair market rental value for a home in your geographical area. Still, they do not often consider the residence's furnishings. Therefore, if you were to rent every fixture and appliance in your home from a Rent-A-Center-type place, the total fair market rental value of your home, fully furnished, would likely be significantly more than what you can reasonably claim as housing allowance. Therefore, use our calculator to see how much you can actually claim!*
Be sure to talk to somebody who is really, really smart and has lots of credentials behind their name before you make any crazy decisions. Trust us! :) If you're purchasing a house and making a substantial down payment or doing major capital upgrades like installing a pool or solar, you should consult a tax professional to see how much of those dollars should be calculated into your annual housing allowance. A general rule of thumb is that something like a pool is considered a permanent upgrade while buying an above-ground hot tub is not eligible for housing allowance because you can move it. If the hot tub were indoors, like a couch, for instance, you could technically count it towards your housing allowances as furnishing of the residence.
What questions do you have after reading this? I'd love to hear from you!