Clergy Housing Allowance – Church Law
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!!!