Clergy housing allowance: how it works and what the church has to do

A housing allowance is the part of a minister’s pay that his church sets aside for housing before it pays him. The IRS lets him leave that amount out of his income when he figures his income tax, up to three limits. He still pays Social Security and Medicare tax on it. The church’s part is to name the amount in advance, in writing, and to fill out his W-2 correctly.

The rules below come from IRS Publication 517 for 2025 returns and from the IRS’s 2026 instructions for employers. They are a summary, and a church should have an accountant who works with ministers check its own case.

Who can receive one

Publication 517 applies the housing exclusion to a “duly ordained, commissioned, or licensed minister” who is paid for ministerial services. A church secretary, a custodian or a musician who is not a minister cannot exclude a housing allowance from income.

The three limits

A minister who owns or rents his home may exclude the smallest of three amounts, in the publication’s words:

The amount also cannot be more than reasonable pay for his work.

Here is an example. A church pays its pastor $60,000 for the year and designates $24,000 of it as a housing allowance. He spends $21,500 on his home, and the home would rent furnished, with utilities, for $26,000. The smallest of the three amounts is $21,500, so he excludes $21,500 from income. The other $2,500 of the allowance is taxable, and he is the one who reports it. The church leaves the whole $24,000 out of box 1 of his W-2, and he adds the $2,500 on line 1h of Form 1040, his income tax return, with the words “Excess allowance.”

A minister who lives in a parsonage, a home the church owns, excludes the fair rental value of that home with its utilities.

The same example, laid out as the church’s December worksheet. The three limits sit side by side, and the smallest one decides.

Housing allowance for the year

• Amount the church designated in advance: $24,000
• Amount actually spent on the home: $21,500
• Fair rental value, furnished, with utilities: $26,000
• Excluded from income tax: $21,500 (the smallest)
• Excess, taxable and reported by the pastor: $2,500

The church designates it before it pays

Publication 517 says, “The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. It must designate a definite amount. It can’t determine the amount of the housing allowance at a later date.” If no amount is designated, the publication says the minister “must include your total salary in your income.”

So the elders, the deacons or the congregation, whichever body sets pay in your church, should vote on a dollar figure every December for the year ahead and record it in the minutes. Ask the pastor for his estimate of the three amounts first, so the figure is close to what he will spend. If his housing costs change during the year, the body can vote a new amount, and it applies only to pay from that day forward.

Two tax systems for one paycheck

The IRS treats a minister as an employee for income tax and as self-employed for Social Security and Medicare tax.

SE tax is self-employment tax, the way a self-employed person pays into Social Security and Medicare. Its combined rate is 15.3%, and Schedule SE, the form that figures it, applies the rate to 92.35% of his earnings after business deductions. The housing exclusion “applies only for income tax purposes. It doesn’t apply for SE tax purposes,” so for the pastor in the example the whole $60,000 goes into that calculation, housing allowance included. For income tax he counts $38,500, the $36,000 on his W-2 plus the $2,500 excess.

A church does not have to withhold income tax from a minister’s pay. Publication 517 says his salary “isn’t subject to federal income tax withholding,” and that he and the church “can enter into a voluntary withholding agreement.” Without one, he may have to pay estimated tax during the year. A pastor can ask the church to withhold enough income tax to cover both taxes, which spares him from making estimated payments during the year.

The pastor’s W-2

For the pastor in the example, the form carries these figures.

• Box 1, wages: $36,000
• Box 2, federal income tax withheld: $0, unless he signed a voluntary withholding agreement
• Boxes 3 and 5: blank
• Box 14a, housing allowance: $24,000, if the church chooses to show it

Box 14 changed for 2026. The 2026 instructions say “Box 14 has been split into box 14a and box 14b,” and that a church “may include a minister’s parsonage and/or utilities allowance in box 14a.” Forms for 2025 and earlier use a single box 14.

Opting out of Social Security

A minister can ask the IRS to exempt his ministerial earnings from self-employment tax with Form 4361. Publication 517 limits it to a minister who files “for other than economic reasons” and who is “conscientiously opposed to public insurance” on religious grounds. On the form he certifies that he is opposed to accepting, for his work as a minister, “any public insurance that makes payments in the event of death, disability, old age, or retirement” or that pays toward medical care. The form adds that public insurance “includes insurance systems established by the Social Security Act,” which takes in Social Security and Medicare. He has to file by the due date of his tax return, extensions included, for the second year in which he had “at least $400 of net earnings from self-employment, any of which came from ministerial services,” and the publication shows how to figure those earnings. It calls an approved exemption “irrevocable,” so he cannot undo it later. The decision is his, and Publication 517 requires him to tell the body that ordained, commissioned or licensed him that he is opposed to public insurance. If your church ordained or licensed him, your church is that body.

A December checklist for the church

For the books themselves, see church accounting software.