Housing allowances are wonderful benefits to those who qualify. A clergy who is ordained by a religious body (church or denomination) that performs religious and ministerial duties qualifies for this benefit. Each year, the church or ministry is responsible for declaring in advance the amount designated as housing allowance for each eligible clergy member. This should be completed before the new calendar year begins regardless of fiscal year end. For example, if your church has a June 30 fiscal year end, the Board would still determine housing allowances on a calendar year basis to align with the tax year. This declaration by the Board should be documented in the minutes as required by the IRS. Alternatively, the Board could formally delegate authority to an Executive Pastor or Director of Operations to manage the process and simply provide a report back to the Board. This delegation of authority should be documented in the minutes and in a policy.
This housing allowance amount is then reported on Form W-2 in Box 14 with the notation, “Housing Allowance.” The housing allowance should not be included in Box 1 with the wages. It is the sole responsibility of the clergy, not the church or ministry, to properly split the salary and allowable housing allowance on their tax return. Any housing allowance received in excess of the allowable amount is reported as “excess housing allowance” on line 1 of the 1040 with salary and wages and taxed as if it were not housing allowance. The clergy cannot claim more than the actual housing expenses or more than the fair market rental value of the housing regardless of what amount the church or ministry has designated as housing allowance and reported on the W-2.