What is a parsonage allowance?

Posted Mon, 01/04/2010 - 18:34 by Anonymous

A parsonage (or rental) 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. A minister can receive a parsonage allowance for only one home. The term home means a dwelling place, including furnishings, and the appurtenances (e.g., garage)
Ministers are allowed to exclude a parsonage allowance from gross income. To be excludable, the fair rental value of the parsonage or the parsonage allowance must be reasonable in amount.

A parsonage allowance includes the following:
• the rental value, including utilities, of a furnished home, or
• a cash allowance paid to a minister for purposes of renting or purchasing the home.
Note, expenses for food and servants are not considered to be directly related to providing a home and thus do not qualify. If the minister rents, purchases, or owns a farm or other business property in addition to a home, the portion of the rental allowance expended in connection with the farm or business property is not excludable from gross income.
The value of the parsonage allowance is excludable in computing taxable income and should not be included in Form W-2 wages. However, the parsonage allowance is subject to self-employment tax (if the minister has not elected the SE tax exemption explained above). Therefore, the fair rental value of a parsonage provided to the minister (including the cost of utilities furnished with the property), and any rental allowance paid to the minister for the parsonage allowance (including any amount for payment of utilities) must be included in calculating the minister’s net earnings from self-employment on Schedule SE of Form 1040. Although the parsonage allowance is not included in Form W-2 boxes 1, 3, or 5, it can be reported in box 14 so that the minister knows how much to pay self-employment tax on.
When a cash allowance is received by a minister, the IRS has indicated that the income tax exclusion is limited to the lesser of:
• The amount the employing church designated as a parsonage allowance in an employment contract, minutes of the church governing body, etc.

• The amount actually used to provide a home, or

• The fair rental value of the home, including furniture and utilities.
Note, the designation of parsonage allowance amounts in an employment contract, minutes of church’s governing body, the church’s budget, etc., must be completed before the amounts are actually paid to the minister.

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