Blog_PostBanner_AskKenQ: I’ve sat at Church Council meetings where there have been references to our pastor having a housing allowance. We have a parsonage, which is a nice house, and I believe our church also pays for utilities and repairs. This talk has gone on long enough that now I’m embarrassed to ask: do we pay the pastor a housing allowance on top of providing the parsonage? Does the pastor have to pay tax on this as a benefit? Do pastors who don’t live in parsonages get paid more?

A: The whole parsonage allowance situation can be a bit confusing. Let me try to explain by first providing an answer to a question you didn’t ask:

Clergy are considered self-employed by the government for tax purposes — like someone who has their own business, say a plumber or house painter. That part alone is hard to understand. In that status, they pay all the social security (FICA) and Medicare taxes themselves (more than 15% of their income), as opposed to most employees who pay only half and their employers pay half.

As something of an offset to that, clergy do not have to pay federal income tax on the value of a parsonage in the church to which they are appointed. They do, however, have to include the value of the parsonage when determining the income on which their social security taxes are paid.

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The tax code also provides that a pastor, living in a church-owned parsonage, may ask the church to set aside a portion of their salary as a housing allowance for expenses that that are incurred while living in that house (this should be discussed with SPRC and set by the Charge Conference). These expenses could include things as essential to work as internet, snow removal and lawn care, cost of furniture provided by pastor; or as incidental as light bulbs and cleaning products (Sorry, maid service cannot be included). It does not include things paid for by the church, of course.

Here’s how, in this case, it might work: Main Street UMC has a parsonage, and a full time pastor (Pastor Grace) whose salary is $50,000 a year. Main Street sets a parsonage allowance of $5,000 for Pastor Grace. This does not cost the church any more, and they still give her the same amount for salary; but when it comes to tax time the $5,000 shows up on her W2 form as a parsonage allowance and it reduces here reported salary by that much for income tax purposes. If Pastor Grace did not spend the full $5,000 on covered expense, she is responsible to report the unused balance as income when she files her taxes. She must also include the portion of housing allowance (the full or reduced amount) when calculating self-employment income.

So here is a different scenario: Westside UMC doesn’t have a parsonage. Pastor Joy lives in her own home in a nearby community. When the Bishop appoints her to Westside, the church pays her a salary of $50,000 plus a housing allowance of $20,000 per year. So logically Pastor Joy would pay income tax on the full $50K salary and her self-employment taxes on both salary and housing, right?

The IRS says that a housing allowance shall be the lesser of 1) the amount set by the church, 2) actual costs or 3) the fair rental value of the clergy’s house, including utilities and furnishings. In the community where Pastor Joy lives, the fair market rental value of a house like hers in $3,000/month, but her actual costs are $2,500/month. Since the IRS allows the lesser of these three, that would be the housing allowance. However, if the church agrees to designate another $10,000 of her salary as housing allowance (not costing the church any more) Pastor Joy can legally exclude $30,000 (equal to actual costs) from income tax, with only $40K being reported as salary. Pastors and congregations should check with their conference treasurer’s office (or other equivalent judicatory body for those who are not United Methodist) to see if there are any policies in place that provide guidance or restrictions.

Congregations and pastors alike need to be aware that as you move through your career in ministry, the absence of an opportunity to build the equity that comes from home ownership can be an awesome burden when facing the prospect of retirement from ministry without housing.

As a young pastor, the fact that I was able to start my family in a lovely home directly across from the church was a blessing I greatly appreciate to this day. Congregations and pastors alike need to be aware that as you move through your career in ministry, the absence of an opportunity to build the equity that comes from home ownership can be an awesome burden when facing the prospect of retirement from ministry without housing. With a few exceptions, owning a home is like having a savings account, building value and stability. Hopefully congregations who love their pastors will look at all the blessings and the burdens of the parsonage system.

As a young pastor, the fact that I was able to start my family in a lovely home directly across from the church was a blessing I greatly appreciate to this day. Congregations and pastors alike need to be aware that as you move through your career in ministry, the absence of an opportunity to build the equity that comes from home ownership can be an awesome burden when facing the prospect of retirement from ministry without housing. With a few exceptions, owning a home is like having a savings account, building value and stability. Hopefully congregations who love their pastors will look at all the blessings and the burdens of the parsonage system.