Transparency In Ministry

If a church hires a new minister during the year or if they need to make changes to a minister’s housing allowance, a board resolution is one of the methods used by churches to designate and approve the allowance.

For an example of a board resolution, see SAMPLE

Remember, the allowance should be approved (i.e., properly designated) before any payments are made to the minister.

In the two previous posts we have discussed how the housing allowance should be reported by a minister and taxed. What kind of housing expenses are allowed? In an excerpt from the 2006 Church & Clergy Tax Guide, published by Christianity Today International, the following expenses are allowed in computing the housing allowance:

· down-payment on a home

· interest and principal payments on a mortgage loan to purchase or improve the home

· real estate taxes

· property insurance

· utilities (electricity, gas, water, trash pickup, local telephone charges)

· furnishings and appliances (purchase and repair)

· structural repairs and remodeling

· yard maintenance and improvements

· maintenance items (household cleansers, light bulbs, pest controls, etc)

· homeowners association dues

The actual costs incurred for the above items can be used in calculating any excess compensation that should be taxed. Remember, the amount reported for the housing allowance must be the lowest of one of the following:

1. church designated housing allowance
2. actual housing expenses paid by the pastor and properly supported
3. fair rental value of the home (furnished + utilities)

So if the actual housing expenses paid is the lowest amount, then the difference in what was received and the actual costs paid is included as taxable income.

A calculation of the fair rental value of the home should be made by consulting reliable sources. Estimating the actual costs that will be paid annually and determining the fair rental value will help the minister determine a proper housing allowance.

Ministers may designate a portion of their compensation as a housing allowance. Ministers do not pay federal income taxes on the housing allowances. However each year the minister is responsible for calculating any excess housing benefits and paying and reporting the federal income tax.

What is an excess housing benefit? An excess housing benefit is the difference between the housing allowance received and the amount allowed for reporting purposes. The amount allowed is the lowest of the following three:
1. Church designated housing allowance

2. Actual housing expenses paid by the pastor and properly supported

3. Fair rent value of the home (furnished + utilities)

So to calculate any excess housing benefits the minister should compare the amount received from the church for the housing allowance to the lowest amount allowed and report the difference either on line 7 of Form 1040 or schedule C.

What types of housing costs are allowable? See post 3 of this series.

Once a minister has been hired, it is management’s responsibility to designate a portion of his salary as a housing allowance. This designation should occur before the first paycheck. This designation may be documented in an employment contract, minutes of the church or compensation board or in the annual budget. This designation establishes that a component of the minister’s compensation is considered to be a housing allowance, and therefore not taxable for federal income tax purposes.

The allowance should be designated and approved before being paid to the minister. If the designation is not made on a timely basis, then the allowance is basically forfeited until designated.

Question: How are housing allowances reported to the taxing authorities?

By January 31st churches are required to file the W-2s with their employees. By February 28th the W-2s and W-3s are filed with the Social Security Administration.

The amount of a minister’s taxable compensation is reported in box 1 wages, tips and other compensation on the W2. The housing allowance is not reported on form W-2 or on the form 1099.

As a courtesy to the ministers, the church accountant may provide a letter that communicates the amount of housing allowance paid during the year. It is the minister’s responsibility to report excess housing allowance in Form 1040.

How to report and calculate the excess housing allowance coming up in post 2 of this series.

Housing Allowances…A great tax benefit to Ministers

One of the most important tax benefits available to ministers who own or rent their homes is the housing allowance. For churches who provide a parsonage, the minister may receive a parsonage allowance for designated expenses of the parsonage. These allowances must be designated in advance by the employing church. According to the 2007 Compensation Handbook for Church Staff, co-authored by James F. Cobble and Richard R. Hammar, a housing allowance represents:

1. compensation for ministerial services,

2. used to pay housing expenses, and

3. does not exceed the annual fair rental value of the home (furnished, plus utilities).

Housing related expenses include mortgage payments, utilities, repairs, furnishings, insurance, property taxes, additions and maintenance.

Ministers who own their own home or rent a home or apartment, do not pay federal income taxes on the designated housing allowance. Remember…these allowances must be designated in advance by the church.

However, many churches fail to designate a portion of a minister’s compensation as a housing allowance…and the minister is deprived of an important benefit under the IRS regulations.