Housing Allowance - who qualifies and who doesn't
Autumn and the fourth quarter are finally upon us. As this time of year involves lots of activity, it should also be a time that you are thinking about updating your Ministers compensation package. Though there are many working parts to a fair and solid compensation package, today we will discuss the most beneficial portion, the housing allowance.
Last week we kicked off the series with a description of the dual-tax-status of the minister and who qualifies as a minister per the IRS. As a reminder, we will list those qualifications again today just in case you missed last week’s email.
The IRS Housing allowance causes some confusion at times and that's because the IRS in involved. :-) Here is a quick summary of who qualifies for the housing allowance deduction. This information can be found in further detail in IRS Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers.
· Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes.
· Ministers must be actively serving in ministry. According to Publication 517 Most services you perform as a minister, priest, rabbi, etc., are ministerial services. These services include: • Performing sacerdotal functions; • Conducting religious worship; and • Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. A religious organization is under the authority of a religious body that is a church or denomination if it’s organized for, and dedicated to, carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.
BOTH of the above requirements must be met to qualify for the IRS housing allowance.
For example, a retired minister that is now servicing as the janitor of your church does NOT qualify for the housing allowance. He may still meet requirement #1, but he does not meet requirement #2, therefore, he is not a qualified minister according to the IRS code.
In the same manner, a retired minister that goes to work for the local school system may NOT consider his pay as housing (or ministerial pay) as he is not actively serving in ministry at the school. (even though it takes a Saint to work in today's schools!)
One last example is a former minister that left his previous denomination and therefore lost his qualifications as a minister according to that denominations governing rules, cannot go serve on a church of another denomination and receive housing allowance pay without being licensed, commissioned or ordained by that denomination. Therefore, he may meet requirement #2, but does not meet requirement #1.
Another reminder from last week, not all payroll processors understand the dual-tax-status of ministers and they really don't comprehend the housing allowance, so please check with your tax professional to ensure you are paying your ministers correctly for their protection and yours as you CAN personally be held liable for any mistakes made in this area.
Next week we will discuss the factors that go into calculating the proper housing allowance for your minister.
As always, if you have questions, or need additional assistance, please feel free to reach out to me at email@example.com and if you're ready to go into more in-depth training you may request to join our paid membership group at https://www.churchfinances.org/membership
Until next time... Keep Representing Him well!
~ Michelle R Brown, EA