How to report housing for a pastor

Our pastor does not receive a salary, he turned it down so that his father (our former pastor) would continue to receive his salary.

Recently our new pastor moved into the parsonage. He has not paid any of the bills and does not plan to do so in the future.

My question is, should the cost of the bills be reported as income to him? And if so, how can it be done. He is not an employee, and does not receive any other compensation from the church.

Comments for How to report housing for a pastor

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Parsonage Allowance Excluded from Gross Income
by: Vickey

I respectfully disagree, Jlscpa

IRC § 107 provides an exclusion from gross income for a "parsonage allowance," housing specifically provided as part of the compensation for the services performed as a minister of the gospel. This includes the rental value of a home furnished to him or her as part of compensation or a housing allowance, to the extent that the payment is used to rent or provide a home and to the extent such allowance does not exceed the fair rental value (FRV) of the home, including furnishings and appurtenances such as a garage and the cost of utilities. IRC § 107(2). The term "parsonage allowance" includes church provided parsonages, rental allowances with which the minister may rent a home and housing allowances with which the minister may purchase a home.

If an exemption from self-employment tax is not applied for, or is not granted, self-employment tax must be computed on ministerial earnings.

Include the following items in gross income for self-employment tax:
1. Salaries and fees for services, including offerings and honoraria received for marriages, funerals,
baptisms, etc.. Include gifts which are considered income as discussed under the section on
income.
2. Any housing allowance or utility allowances.
3. Fair Rental Value (FRV) of a parsonage, if provided, including the cost of utilities and furnishings
provided.
4. Any amounts received for business expenses treated as paid under a nonaccountable plan, such
as an auto allowance.
5. Income tax or self-employment tax obligation of the minister which is paid by the Church.

...excerpt from the IRS Audit Guide (link provided in my previous comment).

Example from IRS Pub 517 Social Security and Other Information for Members of the Clergy and Religious Workers:

Rev. Joanna Baker is a full-time minister. The church allows her to use a parsonage that has an annual fair rental value of $24,000. The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Her actual utility costs during the year were $7,000.

For income tax purposes, Rev. Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage).
1099-misc - It is taxable income
by: Jlscpa

The use of the parsonage, rent and utilities, are considered as taxable income by the IRS. Since he is not an employee, the church must issue him a 1099-MISC form at year end. It is considered business income. He can classify it as a housing allowance when he prepares his taxes.
Parsonage Taxable
by: Vickey

Not only is the utilities the church pays for the parsonage taxable to him....the fair rental value will have to be figured as well and included on his Schedule SE in his personal income tax return.

Understand that the parsonage is not "income" taxable, but unless he has opted out of paying social security taxes...it is taxable for social security.

Click on "Resources" Minister Taxes" and then go down to Figuring Fair Rental Value for instructions on how to figure that value on this site. You can also click on the "Site Map" and find it under the "Ministers and Payroll" section =)

Another great resource is the IRS Audit Guide for Ministers: https://www.irs.gov/pub/irs-utl/ministers.pdf

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