What Is a Parsonage Allowance?

Minister greeting churchgoers
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Definition

A parsonage allowance is a housing payment provided to a minister, which can then be excluded from the minister’s gross income so they don't have to pay income taxes on that amount. The IRS uses the umbrella term minister but this includes other ordained or licensed faith leaders who might receive a salary and housing allowance, like rabbis or imams.

Key Takeaways

  • A parsonage allowance, also known as a housing or rental allowance, is an amount that a congregation provides to a minister for housing, which the minister can typically then exclude for income tax purposes.
  • These housing allowances are not only for Christian religious leaders, but for religious leaders of all faiths, even though words used by the IRS, such as “minister” and “church,” might indicate otherwise.
  • Parsonage allowances can’t be excluded for self-employment tax purposes.
  • Parsonage allowances can take the form of direct payments or in-kind contributions, the latter of which would be based on fair market rental value.

How a Parsonage Allowance Works

A parsonage allowance works by providing an income-tax benefit to religious leaders, as they can exclude this housing payment from their gross incomes. The allowance is either a direct payment or an in-kind contribution a minister receives for housing purposes. This amount needs to be designated for housing in advance of the payment to a minister. They can't just receive a lump-sum salary and later find out how much counts toward housing.

A parsonage allowance can’t be excluded for self-employment tax purposes. That includes the taxes that go toward Social Security and Medicare, which ministers and religious leaders may also have to pay.

Note

While words including “minister” and “church” are often used by the IRS when referring to a parsonage allowance, they apply to all or most religious leaders and houses of worship.

Because they can exclude the parsonage allowance from gross income, a minister can save more money on income taxes than if they were to receive that same amount as part of their regular salary. Religious leaders might not always be able to exclude their full housing allowance, or the full amount they pay for housing. Instead, they have to exclude the lowest dollar amount of one of the following:

  • The official amount designated in advance as a housing allowance
  • The amount used to provide or rent a home
  • The fair market rental value of the home (including furnishings, utilities, garage, etc.)

Note

A parsonage allowance can also be referred to as a housing allowance or a rental allowance.

The IRS allows faith leaders to deduct more than just mortgage payments and rent. You may be able to exclude other costs, like mortgage interest or utilities. Review all of your housing costs and check to see which may be deductible. Ministers and faith leaders are also eligible for real-estate income tax deductions, like the one for mortgage interest, even if the parsonage allowance is used to pay for that.

Religious leaders still need to pay self-employment taxes on their self-employment income and parsonage allowance. That holds true even if a congregation provides a minister with housing as an in-kind contribution instead of directly paying them a housing allowance.

If the congregation is giving the faith leader housing without charging them for living there, then only the fair market rental value of the housing can be excluded from income taxes. However, the fair market value would have to be added to the minister’s base pay for self-employment tax purposes. Ministers who are employees of a religious organization are still generally subject to self-employment tax.

Example of a Parsonage Allowance

For example, a minister or religious leader might receive a $40,000 salary plus $20,000 that can be used for housing in a given year. In that case, the $20,000 housing allowance is not a taxable benefit, assuming certain conditions are met, such as the amount not making the pay for the minister’s services unreasonably high.

Assuming the housing allowance meets IRS requirements, the minister would only have to pay income taxes based on the $40,000 salary rather than $60,000 ($40,000 regular pay + $20,000 housing allowance).

The religious leader would have to use the full $20,000 annual housing allowance to fully deducted $20,000 from their taxes, however. If they only actually used $15,000 for housing in a given year, they would have to exclude the lesser amount ($15,000) instead of the full $20,000.

Note

You can only exclude a parsonage allowance in the year you receive the allowance.

Frequently Asked Questions

How much housing allowance can a pastor claim?

The housing allowance must be "reasonable pay" for your work, but you can exclude either the fair market rental value of the home you live in, the amount you actually pay to live in your home, or the amount of housing allowance you receive. You can only exclude the smallest of these three amounts. Your housing allowance must be included when paying self-employment taxes.

Is a parsonage allowance considered income?

A minister or faith leader can exclude a parsonage allowance from their income taxes. However, they must include the parsonage allowance as part of their income when paying self-employment taxes.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Social Security and Other Information for Members of the Clergy and Religious Workers."

  2. Internal Revenue Service. "Social Security and Other Information for Members of the Clergy and Religious Workers," Page 9.

  3. Internal Revenue Service. "Ministers' Compensation & Housing Allowance."

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