At the beginning of December each year we usually receive a multitude of questions concerning housing allowances.  One of the most frequent questions is whether a traveling evangelist is entitled to such a benefit.  The answer is yes if the following criteria is met:

(1) The traveling evangelists maintains a permanent home;

(2) Have local churches in which they conduct religious meetings; and

(3) Declare in advance a portion of their compensation as a housing allowance.

The requirement that each church designate a portion of an evangelist’s compensation as a housing allowance is certainly an inconvenience, but it is well worth it.

Some evangelists have created nonprofit corporations to avoid such an inconvenience.  One of the justifications sometimes given for this procedure is to enable the evangelist to avoid the inconvenience of having each church designate a portion of his or her compensation has a housing or rental allowance—the idea being that the corporation can designate a portion of the evangelist’s annual income as a housing allowance in a single action.

To ensure accountability, analysts recommend that churches issue evangelists and other guest speakers a Form 1099 if the church pays them compensation of $600 or more.  The church should include a housing allowance designation when computing the compensation, but also provide the evangelist or guest speaker with a written housing allowance designation on the church’s stationary to confirm the housing allowance amount.

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Entitlement to a clergy housing allowance is not as straightforward as is often imagined.  Right now, religious nonprofit organizations are under heavy assault by the IRS, so a conservative approach is warranted.

The Internal Revenue Code allows a tax-free housing benefit for a “minister of the gospel” in two situations.  First, the employer can allow the minister to live rent-free in a home (parsonage) owned by the church.  The minister can exclude this benefit from gross income up to the home’s fair rental value.  The value of the parsonage must be clearly distinguished from other compensation, and includes items such as furniture, insurance, utilities, and taxes.  Second, if a parsonage is not provided to the minister, a nontaxable housing allowance can be provided so that the minister can rent or buy a home.  This is the option used most frequently.  It provides ministers with the freedom to choose their preferred type of housing.  The allowance covers items such as mortgage payments (principal and interest), insurance, repairs, utilities, and other expenses to keep the home in working order.

Although the term “minister” is not defined in the Internal Revenue Code, the IRS and courts have specified five factors that should be used to identify a minister.  The factors include:

• Performing sacerdotal functions (i.e. weddings and funerals, etc.);
• Conducting worship services;
• Controlling or maintaining the organization;
• Considered a spirtual leader; and
• Ordained, licensed, or commissioned.

Only the last factor is required in all cases: the individual must be ordained, licensed, or commissioned.  Although it is clear from existing caselaw that the remaining four factors need not all be present for a person to be considered a minister for tax reporting, it is unclear how many of the remaining four factors must be met.

It is not uncommon for an employee’s job duties to include both ministerial and nonministerial functions.  However, if more than 50% of an employee’s time is devoted to nonministry (i.e. secular) duties, the church will be put in a tenuous position if it grants a housing allowance to the employee.  Many churches think it seems unfair to exclude employees from the benefits of a housing allowance if part of their job involves performing the typical duties of a minister.  However, the church cannot ignore the fact that if most of the employee’s duties are secular, in the eyes of a court they will fail to meet the definition of a minister. 

The Church Law Group has released a Guide to Executive Compensation (with forms) that is now available for purchase. Email churchlawgroup@amlawteam.com or call 972-444-8777 if you have any questions about clergy housing allowances or are interested in the Church Law Group Guide to Executive Compensation.

You can also visit us on You Tube to hear David Middlebrook speak about some important  information on housing allowances!!!

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The congregation at New York’s Riverside Church thinks a compensation package allegedly offered to their new Senior Pastor is just too much. The compensation package is allegedly in excess of $600,000.00, and supposedly includes an “annual base salary of $250,000.00, a monthly housing allowance of $11,500.00, pension and life insurance benefits; entertainment, travel and “professional development” expenses; an equity allowance for the future purchase of a home; money for a full–time maid; and private school tuition” for his young daughter. (See New York Times for the full article).

The congregation has even taken the matter to court trying to stop the new pastor—along with the $600,000.00 price tag—from being installed as senior pastor of their church. Although the court has effectively denied the congregant’s motion, we can all learn an important lesson from this church dispute: the IRS is not the only one watching how much your pastor or nonprofit executive is taking to the bank.

While it is typically the IRS that raises a red–flag warning when compensation paid to ministers or other nonprofit executives is too high, this recent story demonstrates that a Pastor’s compensation can also raise concerns among the congregation itself.

We often stress to our clients how important it is for their church or ministry to carefully assess and evaluate whether the compensation that they are paying to their senior pastors, key executives, and other insiders, is reasonable as required by the Internal Revenue Service. One of the best ways to assess whether compensation is reasonable is to conduct a compensation study.

The Church Law Group has released a Guide to Executive Compensation (with forms) that is now available for purchase. Email churchlawgroup@amlawteam.com or call 972-444-8777 if you have any questions about executive compensation or are interested in the Church Law Group Guide to Executive Compensation.

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