Minister Housing Allowance: What Your Church Must Do Every Year

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.

IRS requirement. 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 how it works each fall.

1. Your church sends the worksheet to each minister

In early November, we email your church contact a link to our housing allowance worksheet. There are two versions, one for ministers who own their home and one for ministers who rent. Your church contact forwards the right link to each qualifying minister.

2. Each minister completes and signs the worksheet by December 1

The worksheet walks the minister through estimated housing costs for the coming year and turns them into a housing allowance request. The minister signs the request electronically, and the completed worksheet comes straight to your Client Service Representative.

3. ChurchBiz prepares the board motion

Your CSR fills in the board motion with your church's name, the year, and each minister's name and requested annual amount. We then send it to two of your board members to sign electronically through our client portal.

4. Two board members sign by December 15

Your board members review the motion, enter the date it was adopted, and sign. The signed motion is stored in your client portal, and your CSR updates payroll based on your payroll schedule so the new amount is in place before the first paycheck of the year.

If nothing has changed. Our board motion keeps a designation in force until it is updated. If a minister's amount is staying the same, they do not need to submit a new worksheet. A new motion is only needed when an amount changes or a new minister is added.

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.

Want a rough number before you start the worksheet? Try our Minister Housing Calculator.

Important reminder. 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.