December is a busy month for churches.
You’re planning Christmas services, tracking year-end giving, finishing the budget, and trying to give your staff a breather. In the middle of all of that, there’s one important item that’s easy to overlook:
Setting your pastor’s housing allowance for next year.
The minister’s housing allowance is one of the biggest tax benefits available to pastors. Handled properly, it can save them a lot of money. Handled poorly, it can create headaches, back taxes, and amended returns later.
This article will walk you through understanding and implementing the minister’s housing allowance.
You can access our free housing allowance calculator here!
What is the minister’s housing allowance?
In short, a minister’s housing allowance is a portion of a qualifying minister’s compensation that is designated in advance by the church and can be excluded from federal income tax if certain rules are met. IRS Pub 517
The pastor still pays Social Security/Medicare on it, but it can reduce their income tax bill at the end of the year in a very meaningful way.
Think of it like this:
- The church decides, “Out of your total pay, this much is set aside for housing.”
- The pastor uses that money for things like rent, mortgage, utilities, and other home costs.
- At tax time, the pastor may be able to leave part or all of that amount off their taxable income (for federal income taxes).
You’re not giving them extra money. You’re simply labeling part of their pay in a way that the IRS allows for ministers.
Who can receive a housing allowance?
Not everyone on staff qualifies.
Generally, the IRS states a person needs to:
- Be ordained, licensed, or commissioned by the church or denomination
- Be doing ministry work (preaching, leading worship, administering ordinances, pastoral care, etc.)
So:
- Yes: Lead Pastor, Associate Pastor, Worship Pastor, etc. (if commissioned/ordained and doing ministerial duties)
- Usually no: Bookkeeper, office administrator, custodial staff, etc.
This is an area where it’s wise to double-check status and documentation.
How much can be treated as housing allowance?
Here’s the part that can be confusing, so we’ll keep it simple.
The IRS has a “lesser of” rule. A pastor can only exclude up to the smallest of these three amounts:
- The amount the church officially designates as housing allowance
- The amount the pastor actually spends on housing during the year
- The fair rental value of the home (furnished), plus utilities
In other words, the church can’t just pick any number and make it all tax-free. The pastor has to have real housing expenses to support it. See examples from Legal Clarity
Typical housing expenses that count include:
- Rent or mortgage payments
- Property taxes
- Home insurance
- Utilities (electricity, gas, water, trash)
- Repairs and maintenance
- Furnishings and appliances
- HOA dues
The church’s job is to designate the amount.
The pastor’s job is to keep records and make sure they only exclude what the rules allow.
The deadline that really matters: before the year starts
This is why we’re talking about this in December:
The housing allowance must be approved and documented before the income is paid. It cannot be done retroactively. Clergy Financial
That means:
- If you want a housing allowance in place for the upcoming year, it needs to be approved and recorded before the first paycheck of the year (ideally at year end).
- If you remember in March, you can only apply it going forward from that point—not to January and February.
No matter how good your intentions are, you can’t go back and “decide” that part of a salary you already paid was for housing. The IRS simply doesn’t allow that.
A simple year-end game plan for your board
Here’s a straightforward way to handle this each year.
Step 1: Make a list of ministers on staff
- Write down everyone who is ordained, licensed, or commissioned and doing ministry work.
- These are the people who may be eligible for a housing allowance.
Step 2: Ask each minister to estimate next year’s housing costs
Have them list what they expect to pay in the coming year for:
- Mortgage or rent
- Utilities
- Property taxes & insurance
- Repairs and maintenance
- Furniture and appliances
- HOA dues, if any
They don’t have to be perfect, but they should be realistic.
Step 3: The board approves the housing allowance
At a board or finance committee meeting at year-end:
- Review the pastor’s estimate (you don’t need to see every bill, just the overall number).
- Decide how much of the pastor’s total pay will be designated as housing allowance for the coming year.
- Put it in writing in the minutes or in a written compensation agreement.
Example (you can adapt this with your wording / attorney / CPA input):
“For the calendar year 20XX, of Pastor Smith’s total cash compensation, $30,000 is designated as housing allowance, to be excluded from gross income for federal income tax purposes to the extent allowed by law.”
Step 4: Update payroll and notify the pastor
- Make sure your payroll provider knows how much of the pastor’s compensation is housing allowance.
- The pastor should receive something in writing confirming their total salary and the amount designated for housing.
How this shows up on the W-2
From the church’s side:
- The housing allowance amount is not included in Box 1 (wages) on the pastor’s Form W-2.
- The housing allowance is listed separately in Box 14 with a label like “Housing Allowance” or “Parsonage.”
From the pastor’s side:
- For federal income tax, they may be able to exclude the housing allowance (up to those limits we talked about).
- For Social Security and Medicare, they usually still pay self-employment tax on both salary and housing allowance.
This is one of those areas where it’s really helpful to have a payroll setup that understands church ministers, not just generic employees.
Important Note: the Pastor or Minister needs to review their W-4 at least every year or salary change. Although social security and medicare isn’t taken out of their payroll wages, They are still responsible for Self Employment tax at the end of the year for their full salary portion (including housing allowance designation).
They can self elect to have additional federal income tax withheld from their pay to help offset the Self Employed tax they will owe at the end of the year.
Common mistakes I see churches make
Here are issues I run into often when working with churches:
- No written approval
The pastor and board “know” there’s a housing allowance but nothing is in writing. If the IRS ever asks, that’s a problem. - Approving it late and trying to make it retroactive
Approving a housing allowance in October doesn’t magically fix the earlier months. - Assuming the full allowance is automatically tax-free
If the pastor has $20,000 of real housing costs and you designate $30,000, that extra $10,000 is still taxable. - Treating it like it’s exempt from Social Security
Housing allowance helps with income tax, not with Social Security/Medicare. Most ministers still pay SE tax on it. - Never reviewing it
Housing costs change. Some churches use the same number for 5–10 years. It’s wise to revisit the allowance annually to make sure it still matches reality.
How Overflow Accounting can help churches with housing allowances
Most pastors didn’t go to seminary to become tax experts. Most board members didn’t sign up to decode IRS rules either. Understanding and implementing the minister’s housing allowance can be confusing
That’s where we come in.
At Overflow Accounting, we work specifically with churches and faith-based organizations. When it comes to housing allowance, we can help you:
- Confirm who on your staff qualifies as a minister
- Review or draft your housing allowance wording for the board
- Make sure your payroll and W-2s handle housing allowance correctly
- Build a simple year-end checklist so you’re not scrambling every December or year-end
Our goal is to take this off your worry list so your pastors and leaders can focus on ministry, not tax forms.
Here’s a free Housing Allowance Calculator you can use estimate your designation as well as a board ready template to use for approval. Housing Allowance Calculator
A practical next step for your church
If you do nothing else after reading this, do this one thing:
Add “Approve housing allowance for pastors for [Next Year]” to your next board or finance meeting agenda.
Once you’ve done that:
- If you’d like help with the wording
- If you’re not sure you’ve handled housing allowance correctly in the past
- Or if you just want a church-specific set of eyes on your situation
We’d be glad to walk through it with you.
You don’t have to become an expert in minister tax rules. You just need a guide who already lives in that world and understands how churches think about ministry, stewardship, and caring for their pastors.
