I apologize for a such a long answer to a simple sounding question, but from the way you asked the question, I think I need to give you a mini-education on proper reporting of pastor wage income. For more information, see this website. The subscription is worth the price, and if you belong to a national denomination, the denomination may already have a membership.
https://www.ecfa.org/
You may also want to contact your national office, local district, or diocese, and ask if they have a training program for church finance people, or if there is an experienced church treasurer they can put you in contact with.
Parsonage
If the pastor lives in housing provided by the church, such as a home or apartment owned or paid for by the church, that is referred to as a parsonage. The value of living in a parsonage is not subject to income tax, but is subject to self-employment tax. The pastor must report the value of the parsonage on their tax return and pay self-employment tax. The fair market value of the parsonage is what an unrelated person would pay to rent the same or similar house in the same or similar neighborhood. The value of the parsonage would also include utilities, property taxes, or maintenance if the church pays for those things. The value of the parsonage is not reported on the pastor's W-2. Instead, the church should issue a letter or memo to the pastor that indicates the fair market value of the parsonage and any extra costs, so that the pastor can use this information when preparing their tax return.
Housing allowance
The church is also allowed to pay the pastor a cash housing allowance, as long as it is designated in advance and in writing as a housing allowance. If the pastor does not live in a parsonage, they can use the housing allowance to pay the expenses for their own home. Even if the pastor lives in a parsonage, the church can also pay a housing allowance to cover any additional living expenses the pastor might have. This can even include food, furniture, and other household furnishings. However, the housing allowance can’t be more than fair compensation for the pastor's services. The housing allowance may be changed at any time by making a new designation, but it can only be designated in advance, the change can’t be retroactive. If the housing allowance is less than the pastor's qualified housing expenses, the pastor does not get an additional tax break for their housing expenses. If the housing allowance is more than the pastor's qualified housing expenses, the difference is added back to the pastor's taxable income. The pastor does this on their own tax return, and the pastor is required to keep accurate records of their qualified housing costs. The church does not keep these records. The church does not enter the housing allowance on a W-2, but reports it on the same kind of memo or letter that reports the value of a parsonage. The housing allowance is excluded from income tax, but is subject to self-employment tax.
Wages
The church can also pay cash/money wages to the pastor. Wages must be reported on a W-2. (Note that even though pastors are considered “self-employed“ for certain limited income tax purposes, they are usually considered common law employees, and must receive a W-2 for their wages.) The church is not required to withhold federal income tax, state income tax, or Social Security and Medicare tax. The W-2 should only include the wages in box 1, and maybe box 16 if you live in a state with a state income tax. Boxes 2-6 should be blank. The pastor will report their wages on their tax return and pay income tax and self-employment tax. If the church issues a W-2, the church must have a federal EIN, must file a quarterly form 941 or annual form 944 to report the wages, must file similar state forms, and must file a W-3 along with the W-2.
In summary, the church can provide tax-free housing, or can pay a housing allowance that is not subject to income tax, but is subject to self-employment tax. The church can also pay wages that are subject to both income tax and self-employment tax. The pastor takes care of these tax obligations, and should probably be setting aside some of their income each week to cover the taxes so they don’t get a big bill at the end of the year.
Critical issue
It is critical that a housing allowance must be designated as such in advance and in writing, by whatever decision-making body the church uses for financial decisions, such as a finance committee, a board of elders or deacons, or even a vote of the entire congregation (depending on the rules of the specific church). If the payment is not designated in advance as a housing allowance, then it must be considered taxable wages, and reported on a W-2. If you failed to designate the payment as a housing allowance in writing, the payment can be designated as such at any time, and that will be effective going forward, but previous payments must still be considered wages.
Example
First Community Church hires Pastor Jane on July 1 as a part-time pastor for free room and board only. The church provides Pastor Jane with a parsonage with a fair rental value of $1000 per month. The church also pays $200 a month for utilities and a lawn service. The church provides Pastor Jane with an additional $50 per week for living expenses, but the church fails to designate this payment as a housing allowance in writing. On December 1, the church corrects the mistake and the board of deacons votes to make the $50 per week payment a designated housing allowance, and this is recorded in the written minutes of the meeting. At the end of the year, the church issues Pastor Jane a letter stating that her qualified housing allowance and parsonage allowance for the year were $7400 ($1000/month for the parsonage for 6 months plus $200/month for 6 months for utilities and maintenance plus $200 qualified housing allowance paid in December). The church also issues a W-2 indicating the pastor Jane received $1100 of wages in box 1 (the $50/week payments that were not properly designated).
All of this can be summarized to say that in your situation, if you have been providing free housing to the pastor, this is not taxable, and is not reported on a W-2, but you should give the pastor a letter indicating the value of the free housing. If you have been making cash payments to the pastor, these must be considered wages and reported on a W-2, unless they were designated in advance and in writing as a housing allowance. If you have been making cash payments without a designation, you can go to the board or finance committee and vote to make it a housing allowance going forward, but previous payments are W-2 wages.
