What Is A Minister's Housing Allowance & Who Qualifies?
By: Sutton Turner October 19, 2020
It can be difficult to decide which benefits will add the most value to your staff while not overspending on compensation. While standard benefits such as health care and time off are a great motivating factor, churches should also consider adding housing allowances into their minister’s compensation plans. The best part? It’s completely free for churches.
Housing allowances provide ministers with the ability to deduct their housing expenses from their taxable income, and since it’s free for you as a church, adding this benefit is a no-brainer. I sat down with Jeff Robinson from Guidestone to discuss what housing allowances are and how they add significant value to a minister’s compensation package.
What Is A Housing Allowance?
A housing allowance offers ministers the ability to deduct a portion of their gross income that they spend on housing costs from their federal income taxes. Housing allowances can include all big-ticket housing expenses, such as mortgage payments, rent, utilities, home insurance, home improvements, and so much more. Furthermore, this housing allowance can extend into a minister’s retirement plan.
The amount that a minister can utilize for their housing allowance varies depending on their housing circumstances. For example, an executive pastor making $75,000 who lives in a one-bedroom apartment would have a smaller housing allowance than an executive pastor making $75,000 in a four-bedroom home. Housing allowances also vary geographically. If an executive pastor lives in Los Angeles, California and another in Waco, Texas, the pastor in California can expect to have a larger housing allowance due to the difference in the cost-of-living.
Who Qualifies For A Housing Allowance?
In order to be considered for a housing allowance, you must be a minister. While every church defines their ministers differently, here are 5 questions to ask yourself when deciding if you qualify for a housing allowance:
Is the person ordained, licensed, or commissioned?
Does this person conduct religious worship services on a regular basis?
Does this person administer ordinances like the Lord’s supper or baptism?
Does this person have a management position in the church?
Is this person considered to be a religious leader by the church?
It’s important to note that even if you answer no to a question or two you may still be able to qualify for a housing allowance. Be sure to read through the IRS guidelines to see if you qualify.
Housing Allowance Process Breakdown
The process for creating a housing allowance starts when a church is planning for the next budget year and selecting benefits. A minister may ask the budget committee to build in a housing allowance, or the committee may offer this benefit to a minister as they enter into the next year. The minister(s) will then fill out a housing inventory to account for all their housing expenses. Then, the budget committee will provide the minister(s) with a notification of housing allowances. This notification will be used when the minister(s) fill-out their taxes for the following year to ensure that their housing allowance remains untaxed.
While it is possible that a church may update the housing allowance each year, the notification may also indicate that the housing allowance remains in subsequent years unless otherwise noted. Here are a few key things to remember when creating a housing allowance:
All expenses must be considered proactively. You can build in a housing allowance for the time that you were serving the church before the next budget year.
It is important to update your housing allowance as life changes—moving, marriages, home renovations, etc.
A housing allowance does not cost the church anything but needs to be done the right way.
What If We Don't Use All Of Our Housing Allowance?
Since housing allowances must be done proactively, there is a chance that your expenses change and you spend less on housing than you originally assumed you would. In this case, you will only be tax-exempt on the money you do spend on housing. You cannot spend that money on something other than housing and claim it as housing. Keep detailed records of your expenses in case you’re audited. If you are audited, you will pay regular federal taxes on the income you claimed as housing allowances plus a penalty of interest.
Guidestone has been serving churches to help them with their financial future for over 100 years. Guidestone provides financial planning for churches and ministers, including retirement plans. Reach out to them today as you plan for 2021.
At Vanderbloemen, we are passionate about helping you make wise and sustainable compensation decisions—and we know it’s not the easiest or most thrilling part of the job. We’d love to chat with you if you have any questions about our compensation resources or are looking for your next hire.