Clergy Housing Allowance (Section 107)
Quick Definition
A portion of a minister's salary that the church designates for housing expenses — excluded from federal income tax under IRC Section 107.
What Is Clergy Housing Allowance (Section 107)?
The clergy housing allowance is one of the most significant tax benefits available to ordained ministers. Under Internal Revenue Code Section 107, a minister can exclude from gross income the portion of their compensation that is designated in advance by their church as a housing allowance, to the extent it's used for housing expenses and doesn't exceed the fair rental value of the home (furnished, plus utilities).
Three conditions must all be met for the exclusion to work. First, the church board must officially designate the housing allowance amount in advance — typically through a board resolution passed before the beginning of each tax year (or at the time of hire). Second, the minister must actually spend the designated amount on eligible housing expenses: rent or mortgage payments, utilities, property taxes, insurance, furnishings, repairs, and maintenance. Third, the excluded amount cannot exceed the fair rental value of the home, furnished, plus utilities.
The housing allowance reduces the minister's federal income tax but does not reduce self-employment tax. Ministers are treated as self-employed for Social Security and Medicare purposes (more on that under SECA vs FICA), so the housing allowance is still subject to self-employment tax. The allowance must be designated in advance — it cannot be retroactively applied. If the minister doesn't spend the full designated amount on housing, the unused portion is taxable income.
Why It Matters for Churches
For most ministers, the housing allowance is worth thousands of dollars in annual tax savings. A minister earning $60,000 with a $24,000 housing allowance effectively reduces their taxable income by $24,000 for federal income tax purposes. At a 22% marginal rate, that's $5,280 in savings. Because this benefit is so valuable, getting the mechanics right matters enormously. The board must pass the resolution before the year starts, the amount should be reasonable (not the entire salary), and the minister must track actual housing expenses to substantiate the exclusion if the IRS ever asks.
Example
Pastor Sarah earns $65,000 per year from her church. In December, the church board passes a resolution designating $26,000 of her salary as a housing allowance for the coming year. Sarah owns a home and tracks her housing expenses: $14,400 mortgage, $3,600 property taxes, $2,400 insurance, $3,000 utilities, $1,200 repairs, and $1,000 furnishings — totaling $25,600. The fair rental value of her furnished home plus utilities is $28,000/year. She excludes $25,600 (the lesser of: designated amount, actual expenses, or fair rental value) from federal income tax. The remaining $400 of the $26,000 designation that she didn't spend on housing is included in her taxable income. Her W-2 shows $65,000 in box 1 minus the $25,600 housing exclusion = $39,400 in federally taxable wages.
Key Takeaways
- ✅ The housing allowance must be designated in advance by the church board — not retroactively
- ✅ It reduces federal income tax but not self-employment tax (SECA)
- ✅ The exclusion is limited to the least of: designated amount, actual expenses, or fair rental value
- ✅ Ministers should track all housing expenses carefully to substantiate the exclusion
How Holdings Helps
Holdings helps churches track clergy compensation and housing allowance designations with clean, organized records — so payroll and tax time are stress-free.
Related Terms
Parsonage
A home owned by the church and provided to a minister as part of their compensation — the fair rental value is excluded from the minister's income tax.
Dual-Status Minister
A minister who is treated as an employee for federal income tax purposes but as self-employed for Social Security and Medicare tax purposes — a unique IRS classification that affects payroll processing.
SECA vs FICA (Clergy)
FICA is the payroll tax split between employers and employees for Social Security and Medicare; SECA is the self-employment equivalent that ministers pay in full because they're treated as self-employed for these taxes.
Form W-2 for Clergy
The annual tax form a church issues to its minister showing total compensation — but with unique handling because the housing allowance is excluded and no FICA is withheld.
Love Offering
A voluntary monetary gift from a congregation to a minister or guest speaker — often collected during special occasions — with specific tax implications depending on how it's handled.
Parsonage
A home owned by the church and provided to a minister as part of their compensation — the fair rental value is excluded from the minister's income tax.
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