Minister Housing Allowance:
What Your Church Must Do Every Year
The IRS has an entire department dedicated to minister tax compliance, and housing allowance is the number one item they audit. Here is the annual process every church needs to follow.
Did you know the IRS has a specific department focused entirely on minister tax compliance? And the primary item they audit is the minister's housing allowance. According to IRS Topic 417, in order for a minister to exclude the housing allowance from income, the employing organization must officially designate it as such before paying it out. That means every year, before the first paycheck of the new year, your church needs to formally approve housing allowances for every qualifying minister on staff.
The housing allowance must be officially designated by the church BEFORE it is paid. A retroactive designation is not valid. Missing this step can disqualify the entire exclusion for that year.
The Annual Housing Allowance Process
ChurchBiz guides clients through this every year. Here is the standard four-step process churches need to follow each December and January:
Minister submits housing allowance request
Each minister estimates their housing expenses for the coming year and communicates their desired allowance amount. ChurchBiz provides worksheets for both homeowners and renters to help calculate a reasonable figure.
ChurchBiz prepares the board motion document
Once all requested amounts are received, ChurchBiz creates a formal board motion document listing the designated housing allowance for each minister in the church.
Board member signs the motion
A qualified church representative, board member, or elder must sign and date the board motion document, officially authorizing the designations.
Return signed document before year end
The signed form must be returned to ChurchBiz no later than December 27th so payroll can be updated before the new year begins. Unsigned forms mean the existing allowance carries forward — which may not reflect the minister's actual housing costs.
What Qualifies as a Housing Expense?
The IRS allows ministers to exclude the lesser of three amounts: the designated allowance, the actual amount spent on housing, or the fair rental value of the home. Qualifying expenses include rent or mortgage payments, utilities, furnishings, repairs, and maintenance. The key word is "actually used" — ministers can only exclude what they actually spend on housing, not simply the designated amount.
Housing allowance is excluded from Federal Income Tax but is still included in the SECA self-employment tax calculation. See our post on minister taxes for the full picture on how SECA works.
Let Us Handle Your
Minister Payroll
ChurchBiz manages housing allowance designations, SECA compliance, W-2s, and all minister payroll for churches nationwide. We make sure the process is done right, on time, every year.