15.accountingpicjanMinisters can reduce their taxable income by having the church board (or compensation committee) designate a portion of their salary as a housing allowance. A minister cannot designate his own housing allowance.

Since the IRS does not allow an allowance to be made retroactively, it should be made prior to the beginning of the year, or as soon as possible in January. We recommend the resolution include the following language: “This housing allowance shall apply to calendar year 2016 and all future years unless otherwise provided.” This allows the allowance to only need to be updated if the amount changes.

The allowance should also be slightly more than the minister thinks he will need, to cover any unforeseen expenses. However, when the minister’s tax return is prepared, the amount of the allowance cannot exceed his actual expenses or the fair market rental value of the home, including utilities and furnishings. Any excess allowance is treated as regular income.

While the allowance is not subject to federal or state income taxes, it is subject to self-employment taxes, unless the minister has filed for exemption from social security.

Lastly, we strongly recommend that the housing allowance be paid directly to the minister, who then pays his own housing expenses, rather than the church paying for the housing expenses on behalf of the minister.

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