What Is a Parsonage Allowance?

Minister greeting churchgoers
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DEFINITION

A parsonage allowance is a housing payment provided to a minister, which can then be excluded from the minister’s gross income.

Definition and Examples of Parsonage Allowances

A parsonage allowance is a direct payment or in-kind contribution a minister receives for housing purposes, which may be eligible for exclusion from the minister’s gross income so they do not have to pay income taxes on that amount. However, a parsonage allowance can’t be excluded for self-employment tax purposes—the taxes that go toward Social Security and Medicare, which ministers also have to pay.

While words including “minister” and “church” are often used by the IRS when referring to a parsonage allowance, these should be considered generic terms that apply across all religions.

  • Alternate names: housing allowance, rental allowance

For example, a minister might receive a $50,000 salary plus $10,000 that can be used for housing. In that case, the $10,000 housing allowance is not a taxable benefit, assuming certain conditions are met, such as the amount not making the pay for the minister’s services unreasonably high. Assuming the parsonage allowance meets IRS requirements, the minister would only have to pay income taxes based on the $50,000 salary rather than $60,000 ($50,000 regular pay + $10,000 housing allowance).

How a Parsonage Allowance Works

A parsonage allowance works by providing an income-tax benefit to religious leaders, as they can exclude this housing payment from their gross incomes. This amount needs to be designated for housing in advance of the payment to a minister, rather than providing a lump-sum salary and later determining how much counts toward housing.

Also, a parsonage allowance only counts for the year in which it is received, as opposed to being able to use past years’ allowances for future years’ expenses while still gaining this tax benefit.

By being able to exclude the parsonage allowance from gross income, a minister can save more money on income taxes than if they were to receive that same amount as part of their regular salary. However, in some circumstances, the full amount provided for housing can’t be excluded. Instead, a minister must exclude what equates to the lesser of three types, which the IRS states as follows:

  • The official amount designated in advance as a housing allowance
  • The amount used to provide or rent a home
  • The fair market rental value of the home (including furnishings, utilities, garage, etc.)

So, suppose a minister receives a $20,000 annual housing allowance. However, if they only end up actually using $15,000 for housing, they would have to exclude that lesser amount ($15,000) instead of the full $20,000.

That said, it’s worth noting that housing expenses aren’t just limited to things such as mortgage payments or rent. Other costs such as mortgage interest or utilities could also count, so it’s important to know what housing costs count, then add up the full amount. Also, a minister would still be eligible for real-estate-related income tax deductions, such as for mortgage interest, even if the parsonage allowance is used to pay for that.

And while a parsonage allowance can be excluded from income taxes, the same can’t be said for self-employment taxes. Similarly, if a congregation provides a minister with housing as an in-kind contribution rather than via a monetary payment for housing purposes, then the fair market rental value can only be excluded from income taxes. However, the fair market value would have to be added to the minister’s base pay for self-employment tax purposes. Ministers who are employees of a religious organization are still generally subject to self-employment tax.

Key Takeaways

  • A parsonage allowance, also known as a housing allowance, is an amount that a congregation provides to a minister for housing, which the minister can typically then exclude for income tax purposes.
  • Parsonage allowances can’t be excluded for self-employment tax purposes.
  • These allowances do not apply to a particular religion, even though words used by the IRS, such as “minister” and “church,” might indicate otherwise.
  • Parsonage allowances can take the form of direct payments or in-kind contributions, the latter of which would be based on fair market rental value.

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