Normally a qualified minister’s housing allowance is not considered income and is one of the few items that is excluded from gross income for income tax purposes. This means the housing allowance for ministers is normally not reported on the W-2.
Your church should have a specific policy on how the housing allowance is calculated and how it will be paid. Many ministers don’t understand the tax implications of being self-employed. It’s recommended that a minister meet with a CPA who can advise them on what to expect their personal tax liability for the year, so they can plan accordingly. It’s not uncommon for a minister to be shocked at their tax bill come April 15th.
However, the annual housing allowance is still considered taxable for Self-Employment Contributions Act (SECA rates for 2012). The tax owed will be calculated on any income in excess of the housing expenses allowed by the IRS. The IRS states the monies received for housing allowance must be used in the year they are received.
Housing Allowance – Housing Expense (as allowed by the IRS) =
Taxable Amount x SECA tax rate
In many instances this will result in a zero tax liability for the minister. Below are two examples.
Scenario 1 results in zero self-employment tax for the housing allowance.
Scenario 2 results in a self employment tax of $368.54 which is the responsibility of the minister.
The housing allowance for the minister should be in a written arrangement. Some churches provide clergy with a worksheet and create an allowance based on actual expenses. Other churches provide a flat monthly rate based on location. Whichever way your church decides to assign the housing allowance, it should be consistent and in writing. There are also important tax implications in the way the housing allowance is accounted for and the topic should be researched.
Some helpful resources dealing with minister’s compensation, housing allowances, and parsonages are:
Minister’s Tax & Financial Guide by Dan Busby and John Van Drunen (both CPAs)
2012 Church & Clergy Tax Guide by Richard Hammar
Basic Church Accounting by Vickey Boatright
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