Within the world of church finances, housing allowances are understood by many to be a benefit for employment. With that understanding, there is a lot of confusion on whether housing provided as a part of compensation qualifies as a tax-free benefit. Many churches believe that their clergy’s housing or housing allowance is a tax-free benefit. But what is the truth?
The truth is that housing is a benefit that can be provided to employees of a church. Whether it is a tax-free benefit, or a taxable benefit depends on who is receiving the benefit and why the benefit is being received. Let us take a look:
Clergy Housing
The benefit of housing provided for a clergy employee is not a tax-free benefit. Clergy housing is a distinction written into the Internal Revenue Code that allows for a portion of clergy compensation to be classified for either for the rental value of his/her home or as an allowance based on rental value of the home paid to him/her as part of their compensation. Clergy housing (cash or in-kind) is not included in the minister’s gross income for income tax purposes but is taxable for self-employment tax. This allocation of compensation from salary to housing is a tax-advantaged way of planning a minister’s income. There are two types of clergy housing compensation: cash housing and in-kind (parsonage) housing.
Cash housing: Cash compensation received either with or in the place of salary provided to the clergy employee. Cash housing enables clergy to pay for housing related expenses out of pocket such as rent/mortgage, utilities, furnishings, etc.
In-Kind (Parsonage) Housing: When housing (owned by the employer) is included as a benefit of “employment” but no cash exchanges hands (does not increase the amount of cash received by the clergy) this is considered in-kind housing. Just like Cash Housing, In-Kind housing is still considered taxable compensation for SECA (Self Employment Contributions Act) purposes.
For more information on clergy housing, check out this blog post: https://www.wisdomoverwealth.com/blog-posts/2021/housing-allowance
Non-Clergy Housing
If a housing benefit is provided to an employee and they are not clergy, they would not fall under the clergy housing compensation listed above. For those non-clergy employees, there are three specific circumstances in which the IRS (Internal Revenue Service) allows employers to provide housing tax-free:
1. Housing is located on the business premises. This housing would be at the main business location and is not applicable for business-owned property outside the main business location.
2. Housing is offered for the employer’s convenience. An employer must have a substantial business reason for providing housing to the employee such as 24/7 access for the employee to business premises, etc.
3. Employees must accept housing as a condition of employment. The employer would have to require the employee to accept housing to properly perform their work duties.
If housing provided does not meet one of the specific circumstances listed above, it is taxable income and should be included on the employee’s W2 within boxes 1, 3 and 5 with adequate taxes withheld for income tax and FICA.
If the housing does meet the specific circumstances listed above, it is considered a tax-free benefit.
If you are offering housing to your employees and wonder if you are handling it correctly within payroll, contact Wisdom here and let us take a look.
