Are you taking advantage of the allowance?

The beginning of a new year is always primed with new opportunities.  In the midst of work and life the new year frequently acts as a reset for individuals worldwide.  While hopeful and determined individuals frequently set “New Year Resolutions” for themselves, the new year also presents an opportunity to re-assess best practices for businesses.  One practice which Churches may not avail themselves to is the minister’s allowance for qualifying ministers.  Minister’s allowances should be on the forefront of a church’s financial analysis in assessing potential tax benefits for their ministers in the new year.

For those who may not know, a minister’s housing allowance, which is sometimes referred to as a parsonage allowance, is excludable from gross income for income tax purposes but not for self-employment tax purposes.  In fact, the Internal Revenue Code specifically states that “In the case of a minister of the gospel, gross income does not include…” and proceeds to list the basis of specifically enumerated exclusions.  By way of example only, when a minister receives a specifically and officially designated housing allowance as part of their annual salary, they are potentially able to exclude all or part of this amount from their gross income for tax purposes.  The minister’s housing allowance is subject to exceptions and the amount of reductions tend to vary based on the facts and circumstances of the particular minister. 

However, in order to take advantage of the allowance, the church must first consider which employees qualify as a minister for tax purposes.  Although subject to exceptions, an employee is generally a minister when they are commissioned, licensed, or ordained by a church and must perform ministerial duties.  Notably, the credentials must be issued by a church rather than a non-religious organization.

This article is not intended to be an exhaustive list of all of the potential considerations involved with ministers housing allowances and circumstances may change the designation of funds, amount which can be excluded, reporting requirements, and the eligibility of employees as ministers under the tax code.  Churches should consult counsel and their CPA to determine if their ministers qualify for a housing allowance and to seek guidance for implementing such allowances in 2020. 

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