Church Apartment - Taxable or Not
By Rollie Dimos | Church Administration
Q: Our church has a small apartment or “evangelist’s quarters” in it. Our pastor and his family are currently living in this apartment. Is this housing taxable to the pastor?
A: When talking about parsonages, we usually envision a house next door to the church. But if a pastor is living in a small apartment located inside the church, this would constitute a parsonage as well.
According to IRS regulations, the fair rental value of a parsonage is not considered income for a pastor for federal income tax purposes. Therefore, the fair rental value of an apartment or evangelist’s quarters is not taxable income, will not show up on the pastor’s W-2, and the pastor will not pay FEDERAL income tax on the fair rental value.
Further, the church may designate a portion of the pastor’s salary as housing allowance, and the pastor will not pay FEDERAL income taxes on this portion, as long as it is used to pay for applicable expenses like utilities, furnishings, and repairs to the evangelist’s quarters.
⮚ Tip: There are three caveats—The parsonage allowance must be designated in advance by the church, the allowance represents compensation for ministerial services, and the allowance does not exceed the fair rental value of the furnished parsonage, plus utilities.
However, the fair rental value of the parsonage and the parsonage allowance ARE taxable when computing SELF-EMPLOYMENT taxes. When the pastor is completing his income tax forms, he would include these two values in his total income to calculate the social security and medicare taxes (self-employment taxes). For this reason, it would be helpful to provide the fair rental value and the parsonage allowance to the pastor at the end of the year in a letter.
⮚ Tip: Another important caveat—the fair rental value and parsonage allowance can be excluded from self-employment taxes if the minister is retired.
Consider what IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Works says:
Regarding federal income tax: “Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services . . . You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. However, the exclusion can’t be more than the reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost.”
Regarding self-employment tax: “If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE [self-employment] tax, even if you perform these services as an employee of that church.
To figure your net earnings from self-employment (on Schedule SE (Form 1040), include in gross income:
1. Salaries and fees for your ministerial services.
2. Offerings you receive for marriages, baptisms, funerals, masses, etc.;
3. The value of meals and lodging provided to you, your spouse, and your dependents for your employer’s convenience;
4. The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you; and
5. Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. This amount is also subject to income tax.”
IRS Publication 517 also provides this helpful example:
Example. 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).
If you want to read more, see IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers or Chapter 6 of Richard Hammar’s Church & Clergy Tax Guide for more information and helpful examples.