Part 5: Minister Compensation & Housing Allowance — Understanding the 2025 Parsonage Rules

Minister Compensation & Housing Allowance — Understanding the 2025 Parsonage Rules

For clergy, not all compensation is treated the same under U.S. tax law.
Ministers enjoy unique exclusions under IRC §107 and related rulings, which allow part of their pay to be tax-free when used for housing.
This guide explains how the parsonage allowance works in 2025 — who qualifies, how to calculate the exclusion, and what reporting steps churches must follow to stay compliant.

1️⃣ What Counts as Ministerial Compensation

Compensation for ministers includes salary, bonuses, fees, love offerings, and the rental or housing value of a parsonage.
The IRS views nearly all forms of payment for services as taxable compensation unless specifically excluded by law.

2️⃣ How the Parsonage Allowance Works

IRC §107 allows a minister to exclude from gross income either the rental value of a church-provided home or a designated housing allowance used to provide a home.
To qualify:

• The church must formally designate the allowance before payment (e.g., in minutes, budget, or employment contract).
• The amount must be reasonable compensation for services performed.
• The exclusion is limited to the least of three amounts:
  • 1️⃣ Actual housing expenses incurred ;
  • 2️⃣ Amount officially designated as housing allowance ;
  • 3️⃣ Fair Rental Value (FRV) of the home plus utilities and furnishings.

The designation must be prospective and documented each year. Retroactive allowances are disallowed.

3️⃣ More Examples & Special Situations

🏡 Dual-Use Property

If a minister rents part of a duplex and lives in the other half, only the personal portion qualifies for the housing exclusion.
Mortgage, repairs, and utilities must be allocated between personal and rental use (Rev. Rul. 87-32).

🧾 Mortgage Interest & Property Taxes

Even if paid with housing-allowance funds excluded from income, ministers may still claim itemized deductions for mortgage interest and property taxes under IRC §265(a)(6) and Rev. Rul. 87-32.

4️⃣ Reporting on Form W-2 and Self-Employment Tax

• Do not include the excludable allowance in Box 1 of Form W-2.
• Include the full amount in a W-2 footnote or Box 14 as “Parsonage Allowance.”
• All housing allowances are subject to Self-Employment (SE) tax under IRC §1402(a)(8), unless the minister has an approved Form 4361 exemption.

5️⃣ Special Rules for Retired Ministers

Retired clergy may receive part of their pension as a designated housing allowance for past service.
Trustees of church retirement plans may formally designate a portion of each distribution as a parsonage allowance (Rev. Rul. 63-156 and 75-22).
The same “least-of-three” rule applies.

Retired ministers may exclude this amount from both gross income and self-employment earnings under Rev. Rul. 58-359 if the benefits are from a qualified church plan.

💬 Frequently Asked Questions

Q1. Can a minister claim two housing allowances for two homes?
❌ No. IRC §107 permits only one home to qualify for the parsonage exclusion.

Q2. Can a church designate a retroactive housing allowance?
❌ No. The designation must be made before the payment is earned or received.

Q3. Does the housing allowance affect retirement contributions?
✅ Yes. Because it is excluded from income tax but not from self-employment tax, it still counts as earned income for plan contributions.

Q4. If the church pays utilities directly, is that included in the FRV?
✅ Yes. The fair rental value includes utilities, furnishings, and related amenities.

Reference Links

• IRS Publication 517 — Social Security and Other Information for Members of the Clergy and Religious Workers (2025)
• IRS Topic 417 — Earnings for Clergy and Religious Workers
• Ethical Duties Under Circular 230 (§10.20–10.23)
• The Backdoor Roth IRA

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