What is a parsonage allowance and how do we use it?

The housing allowance, sometimes called the parsonage allowance, is a great tax break for pastors and church leaders. It helps churches meet their pastors' housing needs in a way that saves them a lot of money on federal income taxes. But to fully comprehend and use this exception, you need to know how to follow complicated IRS guidelines and best practices for church governance. For church leaders, administrators, and board members, knowing how to use the parsonage allowance is important for keeping your ministry safe and getting the most out of the benefits for your pastoral staff.

What is an allowance for a parsonage?

A parsonage allowance is a part of a pastor's pay that is set aside for housing costs and is not subject to federal income tax. It helps pastors lower their taxable income while still following IRS rules.

What the Parsonage Allowance Covers

• Payments for rent or a mortgage
• Utilities including water, gas, and power
• Taxes and insurance on property
• Furniture, repairs, and upkeep

Legal and IRS Rules for Parsonage Allowance

• Church leaders officially approved the allowance before the start of the tax year.
• Written allowance in the pastor's pay agreement.
• Use of allowance for housing costs that meet the requirements.
• The allowance is limited to the smaller of the specified amount, the actual costs, or the fair rental value.

How to Use the Parsonage Allowance in Your Church

1. Find out how much the pastor's housing costs.
2. Find out the right amount for the allowance.
3. Make a formal decision at the board meeting.
4. Include a document allowance in the pastor's contract.
5. Give the pastor written notice.
6. Keep track of your spending with receipts.
7. Check for updates once a year.

Questions that come up a lot

Parsonages owned by the church are not an allowance, but taxable revenue. Each year, an allowance should be set aside, and any modifications made in the middle of the year should be noted. You have to pay taxes on any unused allowance amounts. Housing allowance is subject to self-employment tax. Different churches can set aside different amounts of money.

Tier 3: THE PASTOR SUPPORT PLAN—How We Help

• Audits of executive pay every three months
• Email support from an expert with priority
• Wealth and tax planning for pastors
• Help with governance and paperwork

Why It's Important to Get It Right

Follow best procedures and talk to specialists to avoid IRS audits, fines, and unexpected costs.

Useful Advice for Churches

Make plans, teach leaders, keep records, review them every year, and get expert support when you need it.

Disclaimer of Legal Responsibility

This blog article is for information only and should not be taken as legal advice. If you need personalized legal advice, talk to a professional lawyer.

Internal Links

• Pastoral Compensation Legal Strategy
• Church Legal Audit and Compliance Report
• Pastor Support Plan Details

Links Outside

• IRS Parsonage Allowance Guidance: https://www.irs.gov/charities-non-profits/churches/parsonage-housing-allowance
• ECFA Compensation Resources: https://www.ecfa.org/Content/Compensation
• Christianity Today Search for Pastoral Compensation: https://www.christianitytoday.com/search/?q=pastoral+compensation