What expense category is Clergy Housing Allowance?

For churches and other religious organizations, providing a housing allowance is a unique and significant way to compensate their ministers. This allowance, also known as a parsonage or rental allowance, is a valuable tax benefit for clergy, but it comes with very specific and complex rules for both the organization and the minister.

From the church's perspective, the housing allowance is a form of compensation and a deductible expense. However, church administrators and treasurers need to understand how to properly designate, account for, and report this allowance to ensure full compliance with IRS regulations. This guide will clarify how to categorize the clergy housing allowance and the critical tax rules you must follow.

Clergy Housing Allowance Category

For the church or religious organization, the clergy housing allowance is a salary and wages expense.

While it has a special tax status for the minister, from the employer's perspective, it is part of the total compensation package paid to an employee for their services. It should be included with other salary and wage expenses in the organization's financial records.

Important Considerations While Classifying a Clergy Housing Allowance

To ensure the allowance qualifies for its special tax treatment, the church must follow several strict IRS rules outlined in IRS Publication 517.

Official Designation in Advance

This is the most critical rule for the employer. The housing allowance must be officially designated as such by the church or other qualified organization in advance of payment. This is typically done in an employment contract, meeting minutes, a budget, or another official document. You cannot designate an amount as a housing allowance retroactively.

What the Allowance Covers

The allowance is for expenses used to provide a home. This includes costs such as:

• Rent or mortgage payments.
• The cost of utilities (gas, electricity, water, trash service).
• Repairs and maintenance.
• The cost of furnishings.

Distinction from a Parsonage

It is important to distinguish between a housing allowance and a parsonage.

• Housing Allowance: An amount of money provided to a minister to cover their housing costs.
• Parsonage: A home owned or rented by the church that is provided for the minister's use. The fair rental value of the parsonage is generally excludable from the minister's income.

Tax Implications of the Clergy Housing Allowance

The tax implications are twofold, affecting both the church as the employer and the minister as the recipient.

For the Church (Employer)

The total amount of the designated housing allowance paid to a minister is a deductible wages expense, just like their regular salary.

For the Minister (Recipient)

The tax treatment for the minister is more complex:

• Income Tax: The minister can exclude the housing allowance from their gross income for income tax purposes, but only up to a certain limit. Publication 517 states the amount excluded cannot be more than the smallest of these three amounts:
  
  1. The amount officially designated as a housing allowance.
  2. The minister's actual housing expenses for the year.
  3. The fair rental value of the home (including furnishings, utilities, etc.).
• Self-Employment Tax (SECA): This is a crucial point. The housing allowance is not excludable from income for self-employment tax purposes. The minister must include the allowance as part of their net earnings from self-employment when calculating their SECA tax on Schedule SE (Form 1040).

How Fyle Can Automate Expense Tracking for a Clergy Housing Allowance

Fyle helps a religious organization manage and document its compensation expenses, including the critical designation of a housing allowance.

• Centralize Designation Documents: Attach the official board minutes or employment contract designating the housing allowance to the minister's record in Fyle.
• Track Payments: Capture each payroll run that includes the housing allowance payment for a complete and unalterable payment history.
• Automate Your Accounting: Sync the categorized expense, including the allowance, directly to the correct GL account in QuickBooks, Xero, or NetSuite.
• For the Minister's Records: A minister can use Fyle to track their actual expenses (utility bills, repair receipts) to easily substantiate the amount they can legally exclude from their income tax.