Is it time for a Housing Allowance adjustment?

Having passed the midpoint of 2022, making adjustments to your taxable income may be in order now. Ministers have a tremendous benefit available to them in the form of nontaxable housing allowance. Although the amount of housing allowance is subject to 15.3% SECA contributions (a self-employed person’s equivalent of both sides of the FICA equation), the amount of compensation received as housing allowance is not subject to income tax . . . and this can have multiple benefits beyond just the income tax aspect.

Housing allowance can always be increased or decreased throughout the year, but the changes are never retroactive . . . the changes only affect future payments . . . because housing allowance is always "prospective" and never "retroactive," you cannot wait until December to realize you were eligible for a higher amount of housing allowance. Many churches and pastors misunderstand the adjustability of housing allowance, and don't allow or won't make any changes once the amount is decided.

Some churches inadvertently tell their pastors how much housing allowance they will be given. This is entirely inappropriate because the decision is always that of the minister, not the church. Depending on a minister’s circumstances and expenses, it may be possible to receive up to 100% of their compensation as housing allowance. The law permits the allowance as “the lesser of actual expenses or the fair rental value” of the minister’s home (furnished with utilities paid). Several additional factors need to be reviewed to determine the actual amount of allowance available.

With the high cost of housing in California – renting or buying – many pastors are eligible to receive all of their compensation as housing allowance – especially those who are bivocational and have to work at one or more jobs outside the church to provide for their families. And now that we are experiencing inflation at a 40-year high, minimizing taxable income could help put food on the table or put gas in the tank. Increased utility bills, increased maintenance and repair expenses, or increased mortgage payments or rent can all justify a midyear increase in housing allowance.

Minimizing taxable income can also help a family qualify for Medi-Cal or increased premium tax credits used to pay some of the cost of health insurance through the CoveredCalifornia health benefits exchange . . . and possibly qualify for enhanced “Silver plan” benefits. Housing allowance is not reportable as income in the CoveredCalifornia application.

There are some ministers who are leading churches while also receiving Social Security Retirement benefits. Persons who have higher incomes can see 50% to as much as 85% of their Social Security benefit taxed as income. Housing allowance for “retired” pastors may reduce the possibility or amount of income tax on Social Security Retirement benefits for both the pastor and his wife.

The main IRS requirement for ministers to receive housing allowance is the church’s need to adopt a resolution every year in advance which permits the payment of housing allowance as a portion of a minister’s compensation. This is best done prior to January 1, or as soon after January 1 as possible.

Depending on a church's governance, the resolution may be adopted by the Board of Directors or the members of the church in a regular or special Business Meeting. Adding a specific “housing allowance” line item to the budget under the pastor’s compensation can also suffice if a budget is formally adopted by the Board or church members. Either way, there should be a mention of the vote to adopt the resolution in the minutes of the meeting in which it was passed. A new resolution might have to be adopted in mid-year when the original resolution specified a certain amount of housing allowance rather than a more generic statement such as, “The church will provide housing allowance as a nontaxable benefit to the pastor in an amount to be determined from time to time by the pastor.”

Ministers have a unique position in the Internal Revenue Code – they are "employees for income tax purposes" but "self-employed for Social Security and Medicare purposes" – and no taxes are withheld from the minister's pay. Occasionally, churches make the mistake of withholding FICA – Social Security and Medicare contributions – from a minister’s pay, and then pay the employer’s share of FICA to the IRS. Doing this says to the IRS, "Our minister is not a minister for tax purposes,” and it absolutely prohibits the minister from receiving any amount of nontaxable housing allowance. On the other side of the coin, when a church tries to “help” its minister by paying half of his SECA contributions, it must report those payments as taxable income – which further increases the minister’s income tax liability and SECA payments.

For more information about the minister’s housing allowance, including a worksheet to help pastors calculate how much allowance they are entitled to receive, give us a call at 909.618.4841 or send an email to max@churchandministrycompliance.org