by SST Partner, Rebecca DaVee
One of the financial benefits of being a minister is that a portion of your compensation (i.e., pay) may be considered not-taxable for federal income tax purposes. A minister (ordained, licensed, or commissioned) may receive an allowance for their personal residence while serving a church or religious institution. The minister should be active in the sacerdotal functions of the organization.
Housing or parsonage allowance should be approved by the board of directors prior to payment. The allowances are reported under Box 14 of the minister’s W-2, or can be reported separate through formal communication between the church and the minister/employee. Rarely are these allowances reported on Form 1099, but in certain circumstances this could be allowed. It’s important to understand that a minister is considered an employee of the church and therefore most allowances are reported on the employee’s W-2.
Remember the housing allowance reported by the minister should be the lowest of the following 3 items:
- Actual housing and related costs incurred by the minister
- Fair market rental value of the home (fully furnished) or
- Amount designated/approved by the church’s board.
When the actual housing paid to the minister exceeds the lowest item above is when taxable income (federal) is recognized and reported by the minister on Form 1040.
Remember – a minister’s housing allowance is not exempt from self-employment taxes unless the minister has filed a Form 4361 and received the IRS’ approval for exemption. For more information check out this IRS resource or give us a call at 972.392.1143.