Designating All Salary as Housing Allowance?

Designating all salary as housing allowance? Is it legal? It is advisable?

This is hot topic of discussion on this website and other church accounting sites. It can be a perplexing and frustrating issue for many church administrators because of the vast interpretation of the law regarding housing allowances.

So I am going to break down this heated discussion and then let you do your own research and come to your own conclusion with the facts of this debate.

Designating All Salary as Housing Allowance

But first let me give you a little background of what promoted me to write about designating all salary as housing allowance even though it always stirs up so much debate…

Last month, I wrote an article on payroll issues titled: How to Properly Manage Payroll.

I received a lot of comments and questions over that article, but surprisingly many of them were not over the issues I covered in that article, but over a quote from a CPA, Bill O’Connell:

“Most bi-vocational (or poorly paid) clergy should not be receiving salary – only housing allowance.  Thus some churches may be able to stop running payroll all together – at least until they pay more than the pastors housing allowance.”

I received several inquires asking me to elaborate on his comment and if his comment would apply to their church such as this one from Tina:

“We are a very small church and are only able to pay our Pastor $500 a month.  Can we designate all of his salary as housing allowance?”

I replied back that from my research on the topic, this would be permissible and even advisable.

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My research:

Section 107 of the Internal Revenue Code states that:

“In the case of a minister of the gospel, gross income does not include (1)the rental value of a home furnished to him as part of his compensation; or
(2)the rental allowance paid to him as a part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities."

The tax code doesn’t spell out exactly how much of a qualifying minister’s salary can be designated as a housing allowance; however, there are some guidelines to go by.

1.) A minister can only claim the lesser of the following as a housing allowance exclusion:

  • The amount actually spent on eligible housing expenses.
  • The fair market rental value plus furnishings and utilities.
  • The amount officially designated in advance as housing allowance.

See more on the taxability and tax exemptions of a housing allowance.

So designating all salary as housing allowance that is more than the lesser of the amounts stated above would be counter-productive.

2.) Your church must designate an definite amount.

IRS Pub 517: "The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. It cannot determine the amount of the housing allowance at a later date. If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income."

Important! Always include a cap on compensation! In your annual compensation contract with your minister, include a specific dollar amount that all compensation including love offerings will not exceed.

3.) Look up and study past Tax Court cases regarding housing allowances such as Holmes v. Commissioner, T.C. Summary Opinion 1010-42. In that particular case, the Tax Court ruled that the pastor’s housing allowance was not subject to income taxation even though the amount was over 95% of his total church compensation.

The pastor was able to prove that the $13,000 he received annually as his housing allowance did not even cover all of his eligible housing expenses, so the court upheld his housing allowance exclusion.

Personal observation: I believe that in order for a church to designated all salary as housing allowance, their qualifying minister should be bi-vocational and/or have other sources of income such as spousal income to pay other expenses.

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Designating All Salary as Housing Allowance Debate Rages on:

Even CPAs and tax professionals can’t agree on whether it is legal or not to designate all salary as a housing allowance.

Someone posted this comment on this site a couple of years ago and it sparked quite a debate:

"I attended a tax seminar last year on church income, taxes, payroll etc. Housing Allowance was a major topic and they said that only up to 1/2 of your total salary could be for housing allowance and that it was against the law to count your entire salary as housing allowance..."

My reply:

I went to a church tax conference that said the same thing. I figured the guy was a CPA and should know what he was talking about, so when I wrote an article (many years ago:) regarding housing allowances, I mentioned that you couldn't designate more than half of a minister's salary for a housing allowance.

Had a reader tell me I was wrong and ... I was.

I then thoroughly researched it and that man at the conference was wrong.

You can designate 100% of a minister's salary for a housing allowance!

There is no law that says you cannot and experts in church tax law such as Richard Hammar J.D., LL.M., CPA...states in his book Church & Clergy Tax Guide, "No limit has been placed on the amount of a minister's compensation that can be designated by a church as a housing allowance (assuming that the amount is reasonable)."

This man knows the IRS tax code forward and backwards. But even with my high respect for the man...I don't take what one man says as the absolute right answer...I did my own research and he is right...there is nothing in the IRS code that puts a limit on the amount.

After posting my comment I received this reply from another poster:

"I have been practicing accounting as a CPA for 11 years. I highly recommend ALL ministers consult with a LICENSED professional when seeking tax advice.

See IRS Publication 517 as well as Minister & Compensation Housing Allowance Q&A on the IRS's website:

If you are a minister and receive as part of your salary (for services as a minister) an amount officially designated as a rental allowance, you can exclude from gross income the amount that is used to provide or rent a home.

The exclusion is limited to the lesser of the 1) fair market rental value of the home (including furnishing, utilities, garage, etc.) 2) the amount officially designated (in advance of payment) as a rental or housing allowance, or the actual amount used to provide a home, and 3) CANNOT EXCEED WHAT IS REASONABLE PAY FOR YOUR SERVICES.

Therefore you could NOT designate 100% of your salary to housing allowance."

My reply to him:

I respectively disagree.

I am not a LICENSED professional; however, I am an accountant that knows how to research and find answers. I have researched your references stated in your comment. Nowhere in those references or in the IRS tax code does it state that a church cannot designate a minister's compensation as 100% housing allowance.

I think what we both can agree on is that a housing allowance cannot exceed what is reasonable, but most of the readers of this site are administrators of small churches. Many have ministers that have secular jobs because the church cannot pay them very much.

Now if a minister did not have another job or other sources of income to pay his "other" expenses, I could see where the IRS would question a 100% housing allowance.

So the "designating all salary as housing allowance" debate rages on:)

The CPA I work for at Wisdom Over Wealth stated that "in certain circumstances designating all salary as housing allowance is not only acceptable but encouraged" such as with the reader I talked about in the beginning of this article.

If your church is not able to compensate your minister more than $500 or $1000 a month and the lesser of these three amounts:

  1. Actual expenses
  2. Housing allowance payments
  3. Fair rental value of the home plus utilities

...exceeds that amount, why shouldn’t you designate all salary as housing allowance? It is more tax beneficial to the qualifying minister and more cost effective for the church as they would not have to hire a payroll service to handle the minister’s compensation.

So I’ll end this commentary on this note. Research, research, research!

Don’t take my word for it, don’t take that church conference presenter's word for it, and even though it is advisable to seek the advice of a licensed professional such as a CPA…don’t take their word as the absolute gospel as we are all humans and can make mistakes. It doesn’t help that the IRS doesn’t spell it out in black and white either…but they are known for making simple … complex:)

Reference:
Church and Clergy Tax Guide by Richard Hammar

The Minister’s Housing Allowance by Pension and Benefits USA

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Designating Housing Allowance

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Archive of Readers Housing Allowance Comments

The following comments, tips, and Q/A were provided by FreeChurchAccounting's generous readers:

100% housing allowance 
We have a bi-vocational pastor. He is an established teacher at a pubic school. All of his bi-vocational church salary, $42,000, is deemed a housing allowance. …

Housing allowance with no church salary  
I am an ordained Assembly of God pastor of a very small new church. I do not get paid anything from the church. I teach at the local middle school. Can …

How to report Housing Allowance (only) on a W-3 
If you report 100% of the pastoral donations as housing allowance, how would you fill out a w-3 form if the minister is the only employee with no other …

How much of our remodel expense can be disignate as housing allownace 
My minister husbands annual salary is $30,764. In 2016 we did home improvement/remodel to our kitchen and deck that total $40,000. We took out a home equity …

Salary and housing allowance  
We pay our Pastor 400 weekly and 300 month housing allowance. His housing is more than 300 month. Do we show wages the amount paid and housing allowance …

Sale of a Personal Residence 
If a minister purchased their home with a housing allowance, do they still get to benefit from the exclusion from income related to gains on the sale of …

1099-misc income as housing allowance? 
Our church gives us help with our rent, but issued a form 1099-misc for this income. My husband is a licensed lay minister in the church. Can we still …

housing 
My salary is 15,000 a year. I know my housing allowance is going to be more than that. My mortgage alone is about 18,000. I guess my question is can I …

Reporting 100% Housing Allowence 
I asked this somewhere else- but now I realize that may have been the wrong spot. I receive 100% of compensation as HA as it does not cover my reasonable …

What form should a church give a minister to use in filing taxes; where all income is designated as Housing Allowance? 
I pastor a small rural church. What form should I receive from the church to file taxes with; when all income is designated as Housing Allowance?

Housing Allowance: Church vs. Minister 
Is there any legal reason the church cannot designate the salary as 100% housing allowance, so long as the minister, when paying the SE and income taxes …

what about a W-2? 
So, if I have a bi-vocational pastor who we only paid $500/month, all of which we designated as housing, do I issue him a W-2 with the $6000 listed in …

Spending Large Savings to Build 
My husband and I have saved a significant amount of money to build a garage apartment. When we choose to begin the process it will exceed the amount of …

Housing Allowance Amendment 
Can a housing allowance be amended during the year? For instance, the pastor runs into a major repair that was not anticipated when the housing allowance …

Is this the same as what is known as a "rabbi account"? 
We have a church in the area that pays the pastor using what they call a "rabbi account". On a monthly basis the church puts a certain amount of funds …

What are the IRS reporting requirements? 
I've been a treasurer/bookkeeper for a number of very small churches and in several of them I have let the pastor (church voted on it) choose to designate …

Questions About Housing Allowance 
We have questions about how to handle housing allowance. My wife and I are ministers being paid by a 501c3 and we have income from other sources than …

W-2 Pastor 
I live in Georgia and was told by a person that does church payroll, that if a pastor has a housing allowance that a W-2 is not necessary but to write …

Re: Designating All Salary as Housing Allowance Debate Rages on: 
When you designate all salary as housing allowance, how will W2 look like as there is no wages and taxes (assuming that there is no withholding) - all …

Who is considered a "Minister" 
How does the IRS define who can receive the housing allowance. "What is the definition of a a Minister" according to the IRS. I worked at a church as …

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The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.

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