Five Things to Remember About Clergy Housing Allowances
Clergy know that they are entitled to a housing allowance for the costs of maintaining a residence. This allowance is not included as taxable income on pastors’ W-2s. However, there are rules for determining, documenting and reporting a housing allowance that need to be followed.
1. Clergy need to determine the cost of maintaining a residence for the upcoming calendar year, or for the remainder of the year if a call commences during a year. The housing allowance amount is the lesser of:
- Amounts actually paid for housing and related expenses.
- The fair rental value of the home.
- The amount actually designated by the congregation as the housing allowance from salary or separately designated by the congregation and paid.
2. The clergy housing allowance amount must be requested in writing and approved by official action by the employer. In a congregation, the housing allowance is generally approved by the congregation council or the finance committee. A record of the action to approve should be in writing and should be done for existing clergy before the end of the prior tax year.
3. The housing allowance is not subject to federal income tax, but it is subject to self-employment tax. On the W-2, it is not reported in Box 1. It is typically reported as an information item in Box 14.
4. A housing allowance operates prospectively; in other words, it is declared ahead of when the expenditures are made. It can be modified if significant expenses not anticipated earlier are identified, but the allowance must always be changed ahead of the expenditures.
5. Clergy need to maintain records of their costs, including receipts, in order to document the housing expenses in the event of an IRS audit.
Clergy should consult with an experienced tax preparer or legal advisor as needed to resolve any questions pertaining to their individual housing allowance.
For more information on this topic, visit the Portico Benefit Services Website
Administration Matters November 2012