Deducting housing allowance when the church is unable to pay a salary of any kind

[HHAcademy]

I was ordained this year as a clergy member with a new, very small church and we are trying to determine how to set up taxes. The church is unable to set aside any of its budget for clergy salaries, but would like me to benefit from the housing allowance as my compensation in lieu of a salary. I work a secular job as a regular employee for my income, but I would like to be able to benefit from the housing allowance from the church if possible as I'm giving a significant portion of my time in providing clergy services. Does the church have to actually PAY the housing allowance, or is the amount stated in writing by the board of the church to be used by me as a deduction on my total income taxes (income which will all be from my secular job)? I'm confused about how this is treated by the IRS - is the housing allowance a deduction from my taxable income or is it only allowed to be taken out of actual money that has been paid to me by the church (nothing for the forseeable future)?

[Anonymous_]

@Mike9241 

[rjs]

The church has to pay the housing allowance. Basically the housing allowance is the portion of your pay from the church that is designated as being for housing. If they don't pay you anything, you have no housing allowance.

[Opus 17]

Sorry, no. There is no special deduction for housing expenses for ministers for money that they earn outside of the ministry job or expenses paid with funds from outside the ministry job.

To be considered tax free for income tax purposes (a housing allowance is always subject to self-employment tax) it must be paid by the church to the pastor in cash, or in-kind, such as in the form of a parsonage provided to the pastor rent free.  (Additionally, the housing allowance must be designated as a housing allowance in advance and in writing.)

[Robertgoldmckay]

I am a religious volunteer at the county jail. My supervisor is a full time Chaplain at the jail. Her w2 from the county has the same amounts on lines 1,3, and 5. There is no amount indicated anywhere on the w2 as housing allowance. Are you aware of a way she could deduct her house payments and utilities on her taxes? Thx.

[Opus 17]

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@Robertgoldmckay wrote:
I am a religious volunteer at the county jail. My supervisor is a full time Chaplain at the jail. Her w2 from the county has the same amounts on lines 1,3, and 5. There is no amount indicated anywhere on the w2 as housing allowance. Are you aware of a way she could deduct her house payments and utilities on her taxes? Thx.

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The housing allowance must be declared in advance and in writing by the employer.  If the chaplain has a letter from the employer that they have designated a portion of her salary as a housing allowance but they have failed to issue a correct W-2, the first step would be to ask for a corrected W-2.  If they refuse, she can attempt to file using a "substitute W-2" with the numbers that should have been used. This would be an audit risk and she would need to back up her position with proof of the housing allowance and an explanation of her adjustments.

If she does not have a written notice that the employer has designated part of her salary as a non-taxable housing allowance, there is no other way for clergy to pay less tax on the value of their housing. 

https://www.irs.gov/forms-pubs/about-publication-517

[Noah18]

If someone is a licensed/ordained clergy and works for a ministry non-profit in a clergy-related role (but they do not work for a church), can they receive a housing allowance as long as their employer gives them a letter that they have designated a portion of their salary as a housing allowance? (like the jail chaplain example being discussed)

[PatriciaV]

Yes, as long as the organization treats the individual as an employee and the housing allowance is officially designated as such before payment is made.

See IRS Tax Topic 417 for what is considered and employee and the rules for the housing allowance.

@Noah18 

[Noah18]

Thanks @PatriciaV , I appreciate it!

[Opus 17]

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@Noah18 wrote:

If someone is a licensed/ordained clergy and works for a ministry non-profit in a clergy-related role (but they do not work for a church), can they receive a housing allowance as long as their employer gives them a letter that they have designated a portion of their salary as a housing allowance? (like the jail chaplain example being discussed)

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Maybe.  Generally, you must be performing ministerial services.  See publication 517.  It's not clear what you mean by a "ministry non-profit". 

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Ministerial Services

Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Income you receive for performing ministerial services is subject to SE tax unless you have an exemption, as explained later. Even if you have an exemption, only the income you receive for performing ministerial services is exempt. The exemption doesn't apply to any other income.

The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers.

Ministers

Most services you perform as a minister, priest, rabbi, etc., are ministerial services. These services include:

• Performing sacerdotal functions;

• Conducting religious worship; and

• Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination.

You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities.

A religious organization is under the authority of a religious body that is a church or denomination if it’s organized for, and dedicated to, carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.

Services for nonreligious organizations.

Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Assigned or designated services qualify even if they don't involve performing sacerdotal functions or conducting religious worship.

If your services aren't assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship.