Church owned Parsonage plus housing allowance, can the same Pastor have both?

by Janet
(Massachusetts)

Our Church owns a Parsonage which our newly chosen ordained pastor and his family will live in.

It is my understanding that the fair market (utilities included) rental value of the Parsonage must be claimed by him as income for SECA, but it is not added to his salary in box 1 of his W-2.

By rule, can part of his salary also be designated as housing allowance-and spent as real money for setting up house? (They are starting from scratch and need everything: furniture, pots, pans, small appliances, bedding, dishes, tools, etc).

Can he request, out of his salary, that say $10,000 be considered housing allowance, paid to him outside of his paycheck and, if so, can that amount be subtracted from his salary so it is not included in box 1 of his W-2?

Say the fair market (utilities included) rental value of the Parsonage is $20,000 per year. He is not getting $20,000 in money, but instead the VALUE of what it would have cost if he had to rent the parsonage with utilities included.

His salary is $70,000/yr so, without getting a housing allowance, Box 1 of his W-2 would say $70,000 for Federal and State tax purposes, but He would pay SECA on $90,000 because the value of the parsonage would have to be added to his salary.

However, is it legal for the the Board to approve $10,000 of his $70,000 salary be designated housing allowance and paid to him outside payroll?

He'd then be personally responsible to account for housing expenses to back up the $10,000. So that would mean Box 1 of his W-2 would now say $60,000 and but he'd still pay SECA on $90,000? (If he only used say $8000 of the $10,000, then it'd be up to him to add the extra $2000 back in when he does his taxes)

Is a permissible arrangement?

Federal and State taxes would be based on ($70,000 salary - $10,000 housing allowance = $60,000)
So, $60,000 goes in Box 1 of W-2, correct?

SECA would be $90,000: based on $70,000 salary + $20,000 Fair market rental (utilities included) of Parsonage, right?

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thanks!
by: Carol

I find this a very clear Q&A. As a church treasurer AND a tax preparer/Enrolled Agent, I thank you!
It frightens me how many churches and pastors mess up housing allowances in so many ways. Had two done incorrectly this tax season alone...FICA withholding on ordained pastors who had housing allowances. *sigh*
Parsonage and a Housing Allowance
by: Vickey

First of all... your governing board can designate and approve a housing allowance as part of your pastor's compensation package... even though he lives in the parsonage.

However, please be aware that a housing allowance is never "retroactive" so your pastor will not be able to claim any eligible housing expenditures made BEFORE the date that the housing allowance was board approved. More on that later ...in my replies to your questions below...

1) It is my understanding that the fair market (utilities included) rental value of the Parsonage must be claimed by him as income for SECA, but it is not added to his salary in box 1 of his W-2.

If the church is paying the utilities on the parsonage then... yes, your pastor will be responsible to record that amount on his Schedule SE in his personal income tax return and pay the self employment tax (SECA) due. The church can help determine that amount and include it in Box 14 on his W-2. You are correct in that the amount should NOT be included in Box 1 of his W-2.

2) By rule, can part of his salary also be designated as housing allowance-and spent as real money for setting up house? (They are starting from scratch and need everything: furniture, pots, pans, small appliances, bedding, dishes, tools, etc).

Yes, but as I mentioned above... please make sure your pastor understands that he will only be able to claim eligible housing expenses from the date the housing allowance is approved. For example, your board designates and approves $10k a year as part of the pastor's compensation package as of July 1st. He will only be able to claim housing expenses incurred from July 1st to Dec 31st.

3) Can he request, out of his salary, that say $10,000 be considered housing allowance, paid to him outside of his paycheck and, if so, can that amount be subtracted from his salary so it is not included in box 1 of his W-2?

Yes, he can fill out an estimated housing expense worksheet and present it to the governing body for consideration. It is then up to that body to designate the amount and approve it.

4) Say the fair market (utilities included) rental value of the Parsonage is $20,000 per year. He is not getting $20,000 in money, but instead the VALUE of what it would have cost if he had to rent the parsonage with utilities included.

His salary is $70,000/yr so, without getting a housing allowance, Box 1 of his W-2 would say $70,000 for Federal and State tax purposes, but He would pay SECA on $90,000 because the value of the parsonage would have to be added to his salary.

However, is it legal for the the Board to approve $10,000 of his $70,000 salary be designated housing allowance and paid to him outside payroll?

Yes, you are correct; however, I am not sure what you are referring to as "outside of payroll"? You can and should run his housing allowance and anything paid to him as compensation... through his payroll... just make sure that if you are using payroll software... you set up his housing allowance as "nontaxable" compensation.

5) He'd then be personally responsible to account for housing expenses to back up the $10,000. So that would mean Box 1 of his W-2 would now say $60,000 and but he'd still pay SECA on $90,000? (If he only used say $8000 of the $10,000, then it'd be up to him to add the extra $2000 back in when he does his taxes)

Is a permissible arrangement?

Federal and State taxes would be based on ($70,000 salary - $10,000 housing allowance = $60,000)
So, $60,000 goes in Box 1 of W-2, correct?

SECA would be $90,000: based on $70,000 salary + $20,000 Fair market rental (utilities included) of Parsonage, right?

Correct. He is responsible to submit to his tax preparer... the amount he was paid as a housing allowance and how much he actually paid in eligible housing expenses since the housing allowance was board approved.

Using your example, if he only incurred $8k in eligible housing expenses, but he was paid $10k in housing allowance payments... his tax preparer will only claim $8k as a housing exclusion and the other $2k will be reported as "other income".

That is a permissible arrangement and you have correctly stated how it should be reported.

If I was doing his W-2, I would report $60k in Box 1 ... NOTHING in boxes 3, 4, 5, and 6. $20k (Parsonage) and $10k HA (housing allowance) in Box 14... which is just an informational box for him and his tax preparer.

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