Do You Have A Housing Allowance Set Up For Your Pastor?
A housing allowance is basically payments made by the church to the minister for the minister's estimated housing expenses.
It is a great tax benefit for ministers. Sadly, a lot of ministers or church board members do not know anything about it, especially in smaller churches.
It is very beneficial for ministers to designate part of their compensation package as a housing allowance because it is exempt from federal income tax...BUT NOT from the minister's self-employment tax!
I am going to give you a very brief outline on setting one up. If you plan on setting one up for your minister, please do your homework and find out all the facts before you issue that first check.
In order to qualify for the exclusion of a housing allowance from federal income tax, three very important conditions must be satisfied:
Your minister must meet the IRS' 5-test definition of a minister.
It must be board approved before it was paid (A housing allowance is NEVER retroactive)
The minister actually spent the allowance on eligible housing expenses during the year
Your church must determine the HA amount before it is paid. A completed worksheet should be included in the church's minutes. Make sure it is completely filled out by your qualifying minister before your church board meeting.
The predetermined amount should be included in a board approved resolution and properly documented in the church records. Most of the time, it is reviewed and adjusted at the beginning of each new budget year.
Your church does not have anything to do with the second condition. The minister has the responsibility of tracking actual housing expenses and determining the fair rental value of the housing.
Very important... the church does not have any responsibility in making sure that the minister spends all of his housing allowance on housing expenses.
Instead it is the minister's responsibility to report any excess funds as taxable income. The church should never know, and has no right to know, what the minister does with his housing allowance.
The funds may be used for any expense relating to renting a home, purchasing a home, and maintaining a home.
Some of the eligible expenses are:
Mortgage payments/rent
Utilities
Mortgage interest and insurance
Home insurance
Property tax
Many more home related expenses (research!)
If minister lives in a church provide parsonage, the minister is not subject to income taxes on the use of the parsonage.
However, the fair rental value of the parsonage is added when figuring his self-employment tax. (The minister is responsible for determining the fair rental value of the parsonage.)
The church is not required to report the minister's housing allowance to the IRS.
However many churches choose to report it in Box 14 of the minister's W-2 as a courtesy to the minister.
Or, churches can just include the amount of the housing allowance amount in a separate letter to the minister. (This separate letter should not be sent to the IRS and will not be included or attached to the minister's personal tax return.)
In conclusion, a housing allowance is a very nice benefit for ministers who do not get very many tax breaks. So...do your research, make sure it is properly set up, and know what eligible expenses you can include and what you absolutely cannot include before you issue that first housing allowance check.
It is a great tax benefit for ministers. Sadly, a lot of ministers or church board members do not know anything about it, especially in smaller churches.
It is very beneficial for ministers to designate part of their compensation package as a housing allowance because it is exempt from federal income tax...BUT NOT from the minister's self-employment tax!
I am going to give you a very brief outline on setting one up. If you plan on setting one up for your minister, please do your homework and find out all the facts before you issue that first check.
In order to qualify for the exclusion of a housing allowance from federal income tax, three very important conditions must be satisfied:
Your minister must meet the IRS' 5-test definition of a minister.
It must be board approved before it was paid (A housing allowance is NEVER retroactive)
The minister actually spent the allowance on eligible housing expenses during the year
Your church must determine the HA amount before it is paid. A completed worksheet should be included in the church's minutes. Make sure it is completely filled out by your qualifying minister before your church board meeting.
The predetermined amount should be included in a board approved resolution and properly documented in the church records. Most of the time, it is reviewed and adjusted at the beginning of each new budget year.
Your church does not have anything to do with the second condition. The minister has the responsibility of tracking actual housing expenses and determining the fair rental value of the housing.
Very important... the church does not have any responsibility in making sure that the minister spends all of his housing allowance on housing expenses.
Instead it is the minister's responsibility to report any excess funds as taxable income. The church should never know, and has no right to know, what the minister does with his housing allowance.
The funds may be used for any expense relating to renting a home, purchasing a home, and maintaining a home.
Some of the eligible expenses are:
Mortgage payments/rent
Utilities
Mortgage interest and insurance
Home insurance
Property tax
Many more home related expenses (research!)
If minister lives in a church provide parsonage, the minister is not subject to income taxes on the use of the parsonage.
However, the fair rental value of the parsonage is added when figuring his self-employment tax. (The minister is responsible for determining the fair rental value of the parsonage.)
The church is not required to report the minister's housing allowance to the IRS.
However many churches choose to report it in Box 14 of the minister's W-2 as a courtesy to the minister.
Or, churches can just include the amount of the housing allowance amount in a separate letter to the minister. (This separate letter should not be sent to the IRS and will not be included or attached to the minister's personal tax return.)
In conclusion, a housing allowance is a very nice benefit for ministers who do not get very many tax breaks. So...do your research, make sure it is properly set up, and know what eligible expenses you can include and what you absolutely cannot include before you issue that first housing allowance check.
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