Compensation & Housing Allowance

Active Ministers of the Gospel, if they are properly credentialed, are privileged to receive a significant portion of their compensation as a ‘Housing Allowance,’ free of federal [and most states] income tax – IF – and that is what is explained in this article.

The unwarranted perspective of the IRS is, that the heads of ministry are over paid; And if audited, it is up to the ministry to prove otherwise. We personally have not met pastors who we thought were over paid, [well maybe one or two], but the IRS insists you follow certain guidelines in how the total compensation package for the Pastor is established. The IRS has established guidelines, and documentation requirements, which must be followed in establishing the total ompensation for the Sr. Pastor. This subject is referred to as “Intermediate Sanctions.”

In essence, the IRS is requiring us to take the Biblical admonition of “Avoiding the very appearance of evil,” to a bit of an extreme. The IRS requires that the ministers compensation be established by ‘others’ who are not related to him by either blood or marriage. Some churches have engaged professionals from outside the church to do this.

There is a way for the local ministry’s Board of Directors to do this, and we carefully explain how to comply with this in great detail in our Church Administration “How To” Manual, in Chapter 10 on page 10 (A-3). We have fully explained what Intermediate Sanctions is all about  in Chapter 9 pages 9-12, in ourChurch Administration ‘How To’ Manual ,

HOUSING ALLOWANCE

The Federal Government has made provision for two segments of the the employed populace of America to receive a substantial portion of their compensation, free of Federal, State and City Income Tax, in the form of a housing allowance. They are the U.S. Armed Forces; and ministers who are functioning as either licensed, commissioned or ordained.

The housing allowance is not exempt from social security tax, unless the minister has filed the IRS Form 4361 in a timely manner. To learn more about exempting from Social Security, read this On-Line Article:Should The Minister Exempt

WHO QUALIFIES FOR A TAX EXEMPT HOUSING ALLOWANCE?

The housing allowance is not limited to the senior minister. It is available to any  Ordained, Licensed or Commissioned minister, who fulfills the legal criteria of ministry. Specifically, his credentials must give him the authority to Marry and Bury; There are additional guidelines regarding “the exercise of his ministry.”

The IRS has ruled that even a minister who holds an administrative position or teaches in a parochial school, which is under the authority of a church or church denomination, may qualify for housing allowance under Section 107. [Rev. Rul. 62-171, 1962-2 C.B.39].

Services performed in the exercise of a ministry include: (1) ministration of sacerdotal functions, (2) conduct of religious worship, and (3) control, conduct and maintenance of religious organizations (including religious boards, societies and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination, and services performed as a minister for an organization that is neither a religious organization nor operated as an integral agency of a religious organization when such services are performed under assignment or designation by a religious body constituting a church,” [Reg. 31.3401(a)(9)-1(b)].

HOW TO OBTAIN THE TAX EXEMPT HOUSING ALLOWANCE

The minister qualifying for a housing allowance should request the Board of Directors to designate a specific portion of his compensation as housing allowance. However, the board could establish a housing allowance even if it is not requested to do so. The Housing Allowance would only be valid subsequent to board action.  If, and as, the ministers housing circumstances change during the year the amount received as a Housing Allowance can be adjusted [increased, or decreased] from time to time, so long as it is done in advance,of the payment rendered, and noted in the church records.

NOTE: The IRS Regulations say the request must be made in advance of receipt of any monies as Housing Allowance. e.g. an adjustment can be made in August effective September 1, in the ministers compensation package, with higher dollar amounts designated for Housing Allowance; This is totally acceptable.

The church should have a personnel file on every minister:  Following is a recommended list of documents that really should be in his file: and, and in order to document the Housing Allowance Agreement the following:

  1. A request for Housing Allowance should be made by the minister to the Board of Directors, or the Board Minutes could reflect that the Board initiated the action. [Either way is acceptable]
  2. A specific dollar amount designated as the Housing Allowance should be mentioned in the Board Minutes, or reference made to the financial details on the Compensation Worksheet in the employee’s file. [We provide a sample of such a worksheet on CHAPTER 10 (A-2)] in “The Church Administration ‘How To’ Manual”
  3. Documentation recommended:
    •  A Contract, or Memorandum of Understanding; [Good idea]
    • Documentation for Housing Allowance; [Required}
    • A signed memorandum of the financial relationship between the minister and the church;  [Good idea, if there's no written contract]
    • A copy of his/her Ordination Certificate; [Good idea]
    • A copy of the IRS approved Form 4361, if he has one. [Good idea - for his sake].
    • An Immigration and Naturalization Service (I.N.S.) I-9 FORM;
    • DD 214   Every person separated from the armed services will have been given this Form, defining the ‘class’ of his dismissal. [eg: Honorable, Dishonorable, Administrative, or Medical Discharge.  Any Awards, Citations or Medals he/she may have earned will also be listed.

Our Housing Allowance Worksheet also works for when the church furnishes the minister a "Parsonage or 'Manse," and allows for the many additional items the minister can receive free of state and federal tax.

HOUSING ALLOWANCE - Rules Revised in 2002

The court abolished the annual "Rental value" test, [Warren VS Commissioner, 114 T. C. 23 (2000)]. The IRS appealed, and inferred a question of its constitutionality. A Bill was quickly drafted and passed in both houses, with the president signing it into law on May 24, 2002. So – the Housing Allowance criteria is back to exactly the way it had been. ie: The lowest [or the lesser] of the following:

  1. The amount officially designated as a rental allowance [in the records, in advance].
  2. The amount actually used to provide a home;
  3. The fair market rental value of the home, including garage, furnishings, and utilities

There was one positive thing that came out of that confusing ‘contest of wills.’ Prior to this ruling, a minister could not receive 100% of his compensation as Housing Allowance. It is now acceptable for the “part time” minister to receive only a Housing Allowance, subject to the above rules and conditions.

WHAT CAN BE INCLUDED IN THE HOUSING ALLOWANCE?

There are a great number of things that can be included in this category, in addition to the rent or mortgage payment, free of all state and federal income taxes. We have included a Worksheet in Chapter 10 (A.1) in our ‘‘How To’ Manual , that will explain what those things are. It will really help you to maximize your “take home,” and minimize your taxable income

FINAL THOUGHTS:

  1. Ministerial Expenses: It is always best if the church clarify [document] just what expenses will be paid directly, or reimbursed by the church. That way, these type of expenses are not to be considered as “Benefits,” as they are directly related to “Getting the job done.” By doing it in this manner, you minimize reporting of taxable income, and eliminate the SECA tax expense to the minister on those “Ministerial related expenses.” This is all clearly explained in our ‘How To’ Manual.
      NOTE: The Cell Phone, if furnished by the church, is still being scrutinized by the IRS. For more up-to-date information, see our Cell Phone Use Policy
  2. Salary: is that which is paid after exhausting all of the above. Obviously, we want to minimize salary, and maximize the above. Salary is all that has to be reported on the W-2. It is not required to report the Housing Allowance or any of the above.
  3. Withholding: The pastor is not subject to withholding {FICA] as is other non ministry employees. Rather, he is a “Self employed” person, and pays his own taxes. He is supposed to file a 1040ES, and pay an estimate of what he believes he will owe. Unless he has filed the Form 4361 [in a timely manner] exempting from the Social Security system, [Read more on this at  Should The Minister Exempt?]  he pays 100% of his own Social Security taxes on the SECA basis.  Other than in the state of Oregon, Unemployment tax is not an issue. Again – this is all explained in our ‘How To’ Manual
  4. Stipend: I hear this phrase mentioned from time to time, usually in the context that, if they call the amount paid the minister a ‘Stipend,’ then  somehow that allows funds to be paid without consideration of any income tax owed. Is it not obvious, that if he is “Paid,” [regardless of what it is called] that he has earned it? And if he has earned it, taxes are to be paid! By whom? By the minister; not the church

NOTE: The Dictionary definition of “Stipend:” stipend [sty-pend] Noun – a regular salary or allowance, esp. that paid to a member of the clergy [Latin stipendium tax] stipendiary adj Collins Essential English Dictionary 2nd Edition 2006 © HarperCollins Publishers 2004, 2006

To show how to adopt the compensation package in the Minutes, we have included sample Resolutions in our SAMPLES Manual.

Our Offer To You – If you write and request it – we will send you our newly revised “Housing Allowance Request Form” at no cost to you. This is the best Form ‘out there,’ and it will give you the opportunity to absolutely maximize your Housing Allowance.

Finally – The IRS has announced new criteria for doing audits on ministers. What I believe this means is that they will be far more diligent in reviewing the eligibility of those who avail themselves of tax exemption privileges, to be sure the minister is in fact eligible.

If this discourse is of interest to you, please see Chapter 10 in our ‘How To’ Manual for more specific information. There are Worksheets and Forms at the end of the chapter to enable you to maximize Housing Allowance, and minimize personal income taxes. A CD is included with the purchase of this manual, containing the Worksheets, Forms and many Policies. This Manual, endorsed by three CPA’s, an EA and two attorneys, was updated again in January, 2011, for the12th time, since its original publication in 1991.

The above information is provided as a service to the Body of Christ by ADMINISTRATIVE ASSISTANCE.

Copyright © 2003 [Revised in 2010] by Administrative Assistance

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