A parsonage allowance can’t be excluded for self-employment tax purposes. That includes the taxes that go toward Social Security and Medicare, which ministers and religious leaders may also have to pay. Because they can exclude the parsonage allowance from gross income, a minister can save more money on income taxes than if they were to receive that same amount as part of their regular salary. Religious leaders might not always be able to exclude their full housing allowance, or the full amount they pay for housing. Instead, they have to exclude the lowest dollar amount of one of the following:
The official amount designated in advance as a housing allowanceThe amount used to provide or rent a homeThe fair market rental value of the home (including furnishings, utilities, garage, etc.)
The IRS allows faith leaders to deduct more than just mortgage payments and rent. You may be able to exclude other costs, like mortgage interest or utilities. Review all of your housing costs and check to see which may be deductible. Ministers and faith leaders are also eligible for real-estate income tax deductions, like the one for mortgage interest, even if the parsonage allowance is used to pay for that. Religious leaders still need to pay self-employment taxes on their self-employment income and parsonage allowance. That holds true even if a congregation provides a minister with housing as an in-kind contribution instead of directly paying them a housing allowance. If the congregation is giving the faith leader housing without charging them for living there, then only the fair market rental value of the housing can be excluded from income taxes. However, the fair market value would have to be added to the minister’s base pay for self-employment tax purposes. Ministers who are employees of a religious organization are still generally subject to self-employment tax.
Example of a Parsonage Allowance
For example, a minister or religious leader might receive a $40,000 salary plus $20,000 that can be used for housing in a given year. In that case, the $20,000 housing allowance is not a taxable benefit, assuming certain conditions are met, such as the amount not making the pay for the minister’s services unreasonably high. Assuming the housing allowance meets IRS requirements, the minister would only have to pay income taxes based on the $40,000 salary rather than $60,000 ($40,000 regular pay + $20,000 housing allowance). The religious leader would have to use the full $20,000 annual housing allowance to fully deducted $20,000 from their taxes, however. If they only actually used $15,000 for housing in a given year, they would have to exclude the lesser amount ($15,000) instead of the full $20,000.
