No one in the entire tax code of the IRS is treated like a minister for tax purposes. Contrary to popular belief, the average minister pays more than his fair share of payroll taxes. To help offset the additional taxes, the IRS allows a church to designate part of a minister's salary as a housing allowance. This is a unique benefit, but churches and ministry leaders often make mistakes when claiming them on tax returns.
These are common tax mistakes churches and ministers make concerning a housing allowance.
1. The minister only pays Social Security self-employment on his housing allowance.
If a minister lives in a parsonage, the SECA tax must be paid on the fair rental value of the parsonage as well as on the housing allowance.
2. The minister fails to provide the church with an estimate of housing expenses for the coming church year.
The IRS requires the church to have a legal basis for establishing a minister's housing allowance. An annual estimate helps protect the church from any questionable legal opinion in establishing the allowance.
3. The minister does not keep adequate receipts.
In an IRS audit, the minister - not the church - must provide actual receipts to prove that he spent his housing allowance on housing expenditures. Keep all receipts for seven years to provide documentation for the IRS.
4. The minister's housing allowance claim is too large.
The housing allowance a minister is allowed to claim on an income tax return is limited to the lesser of the
(1) fair market rental value of the home (including furnishings, utilities, garage, etc.); or
(2) the housing allowance amount the church officially designates; or
(3) the actual amount of expenses the minister uses to provide a home.
The housing allowance will always be the lower of these three items.
5. The minister waits too long to request an increase in the housing allowance.
The church or church-approved committee may amend a housing allowance anytime during the church year. In such a case, then the minister should request the increase before incurring additional housing expenses. The housing allowance may not be amended at the close of the church year.
6. The housing allowance exceeds reasonable pay.
The church or church-approved committee can designate up to 100 percent of a minister's salary and other taxable income from the church as a housing allowance.
7. The minister claims a housing allowance on a second home.
The housing allowance can only be claimed on a minister’s primary residence, not a second home. The primary residence is the place where the minister is currently living and spending the majority of nights.
The ministerial housing allowance is a great benefit provided by the church to help reduce the minister's payroll tax liability. If used properly, the minister can benefit greatly and reduce his tax burden.