Below is a Housing Allowance Policy suitable for inclusion in a church or ministry Employee Handbook. It is written in neutral language and reflects IRS requirements found in Section 107 of the Internal Revenue Code (no external citations needed for policy documents).

Housing Allowance Policy
(For Ministers and Clergy Employees)

 Purpose

This policy outlines the church’s procedures for designating and administering a clergy housing allowance. The housing allowance is a tax exclusion available to qualified ministers under Section 107 of the Internal Revenue Code. This policy ensures clarity, consistency, and compliance for all eligible clergy employees.

Eligibility

A housing allowance may be provided only to employees who meet the IRS definition of a minister for tax purposes, which typically includes individuals who:

• Are ordained, commissioned, or licensed;
• Perform sacerdotal functions;
• Conduct worship services;
• Have administrative duties in connection with a religious organization;
• Are recognized as clergy by their denomination or church.

The determination of eligibility is made by the church board or governing leadership.

Housing Allowance Designation
Annual Designation

The housing allowance must be:

• Formally designated in writing,
• Approved in advance of payment, and
• Recorded in the church board minutes, compensation agreement, or official resolution.

Recommended practice: Adopt the housing allowance designation each year before January 1.

Allowable Expenses

Expenses eligible to be paid or reimbursed from a housing allowance include, but not limited to:

• Rent or mortgage payments
• Property taxes
• Homeowner’s insurance
• Utilities (electric, gas, water, sewer, internet, garbage)
• Furnishings and appliances
• Repairs and maintenance
• Yard care and snow removal
• HOA fees
• Down payments and closing costs

These expenses must relate to the minister’s principal residence.

Tax Treatment

The housing allowance may be excluded from federal income tax to the extent of the lowest of:

1. The amount officially designated by the church;
2. The amount actually spent on eligible housing expenses;
3. The fair rental value of the home (furnished, plus utilities).

Ministers are responsible for applying this “lesser‑of‑three rule” when filing their annual tax return.

Important:

• The housing allowance is subject to self‑employment tax unless the minister has an approved exemption.
• Any unused or excess allowance must be reported as taxable income.

Minister Responsibilities

The minister must:

1. Maintain complete and accurate records of housing expenses;
2. Retain receipts, invoices, statements, or comparable documentation;
3. Determine the amount eligible for exclusion when filing taxes;
4. Report any changes that may affect the housing allowance.

The church does not calculate the final excludable amount; this is the employee’s responsibility.

Church Responsibilities

The church will:

• Approve the allowance annually or upon hiring;
• Document the designation in official records;
• Include the housing allowance as part of the minister’s compensation package;
• Report the allowance appropriately on year‑end tax forms (e.g., Box 14 of Form W‑2).

The church is not responsible for verifying personal housing expenses or determining the tax-excludable portion.

Changes During the Year

If compensation changes during the year, the board may amend the housing allowance prospectively. Retroactive designations are not permitted under IRS regulations.

Parsonage / Church‑Provided Housing

If the church provides a parsonage:

• The rental value is not taxable for income tax purposes.
• A minister may also receive a furnishings or utilities allowance, which must be designated using the same rules as a housing allowance.

Accountability and ComplianceMinisters claiming the housing allowance must comply with IRS rules. Failure to maintain records or to follow this policy may result in disallowance of the exclusion and possible tax liability.

Policy Review

This policy should be reviewed annually by church leadership to ensure ongoing compliance with IRS regulations and best practices for clergy compensation.

If you need guidance that is tailored specifically to your unique situation, we encourage you to connect directly with Pro Advisor Support. Their experienced team specializes in assisting clergy and church organizations with complex tax, payroll, bookkeeping, and HR matters. Whether you have detailed questions about compliance, deductions, or planning strategies, they can provide expert advice and walk you through the next steps with clarity and confidence.

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