The IRS excludes the costs of renting or maintaining a home from the gross income of a “duly ordained, commissioned, or licensed minister of a church.” For simplicity, we will use the word “commissioned.” (An employee holding an administrative position may also qualify for a housing allowance.)

The housing allowance is limited to the lesser of:

• The amount designated as the housing allowance.
• The amount actually spent on housing expenses.
• The fair rental value (FRV) of one’s home.

IRS regulations say a request must be made before any money is paid as a housing allowance. So in order to properly document a housing allowance, these steps should be followed:

The employee should make a request for a housing allowance to the board of elders, or the board of elders should initiate a housing allowance. This should be documented in the board minutes.

A specified dollar amount designated as the housing allowance should be mentioned in the minutes.

The church should have a file for each commissioned employee that contains:

1. a worksheet computing the housing allowance
2. a copy of the ordination certificate
3. a copy of an approved Form 4361 (if applied for)

The amount of the housing allowance should be based on a percentage of the employee’s salary that might be reasonably spent on housing. For example, a housing allowance that equals the employee’s salary will trigger an IRS audit because a person doesn’t reasonably spend 100 percent of his or her salary on housing.

Housing allowances can be increased or decreased mid-year. Unused housing allowance must be claimed as income when taxes are filed. A good time to review housing allowances is during the budgeting process for the coming year.

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