Housing Allowance for Nonprofit Clergy: Yes or No?

Housing Allowance for Nonprofit Clergy: Yes or No?

Article posted in Income Tax on 7 March 2013| comments
audience: National Publication, Dennis Walsh, CPA | last updated: 16 February 2015


Dating from the 1920's and well rooted in American tradition, the ministerial housing allowance, authorized by Section 107 of the Internal Revenue Code and which allows clergy to exclude the value of such allowances from their gross income, has survived various legal attacks over the years. In this article, Dennis Walsh, CPA discusses housing allowance eligibility with an emphasis on clergy employed outside the traditional religious organizational setting and how a clergy member's special tax status may affect a decision to treat qualifying remuneration as paid for ministerial services.

By Dennis Walsh, CPA

It is not unusual for faith based and other nonprofit organizations to employ clergy in the conduct of their programs or for the benefit of their organization staff.  In addition to traditional employment by churches, synagogues, mosques, and their integral agencies, clergy employed by other types of organizations may be eligible to receive a tax qualified housing allowance in appropriate circumstances.

Dating from the 1920’s and well rooted in American tradition, the ministerial housing allowance, authorized by Section 107 of the Internal Revenue Code, has survived various legal attacks over the years.  It remains an important financial subsidy to a minister and the employing organization by increasing the after-tax value of compensation paid.

A housing allowance may take the more traditional form of an exclusion from the minister’s gross income for the rental value of a home provided by the employer, such as a church parsonage, or alternatively the designation of a portion of cash salary as a housing allowance.  With certain limitations, to the extent that a housing allowance is used to provide a home, it may be excluded from the minister’s gross income.

This is a very technical area of tax law and in many instances the lines of qualification aren’t bright.  But in appropriate situations, the ability to offer a housing allowance as part of a minister’s pay package can have a positive impact on an organization’s ability to recruit and retain highly qualified staff and thereby add to program effectiveness.  And employment tax savings to the organization may be significant.

However, the Internal Revenue Service takes a limited view of this special provision outside of the church proper.  In such case, the decision to pay a housing allowance should be preceded by a careful examination of applicable tax authority.

The remainder of this article discusses housing allowance eligibility with an emphasis on clergy employed outside the traditional church setting and how a minister’s special tax status may affect a decision to treat qualifying remuneration as paid for ministerial services.

As used in applicable federal tax law, terms such as “church” and “minister of the gospel” are not limited to the Christian faith but apply similarly to individuals performing ministerial services under the authority of a religious body constituting a church or church denomination within the meaning of the Internal Revenue Code.


Internal Revenue Code (IRC) § 107 authorizes an exclusion from gross income for the rental value of an employer provided home or for the payment of an allowance to the minister to provide a home.  In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.

For the types of services that are ordinarily the duties of a minister, one must look initially to the Section 107 Regulations and then to a separate set of Regulations under Section 1402(c) for additional guidance.

Under Treas. Reg. § 1.107-1(a), such duties include:

  • The ministration of sacerdotal functions
  • The conduct of religious worship
  • The control, conduct, and maintenance of religious organizations and their integral agencies
  • The performance of teaching and administrative duties at theological seminaries

The following provisions are fundamental to analysis of qualifying ministerial services.

  • The determination of what constitutes the performance of “sacerdotal functions” and the conduct of religious worship depends on the tenets and practices of the individual’s church. Treas. Reg. § 1.1402(c)-5(b)(2)(i).
  • A minister who is performing the conduct of worship and ministration of sacerdotal functions is performing service in the exercise of his/her ministry, whether or not these services are performed for a religious organization.  Treas. Reg. § 1.1402(c)-5(b)(2)(iii).

The following example from the Regulations illustrates the latter provision:

Example: M, a duly ordained minister, is engaged to perform service as chaplain at N University.  M devotes his entire time to performing his duties as chaplain which include the conduct of religious worship, offering spiritual counsel to the university students, and teaching a class in religion.  M is performing service in the exercise of his ministry.

The following facts, drawn from actual employment, illustrate application of the Regulation guidance to the “ministration of sacerdotal functions” by a minister employed by a non-religious organization.

Example:  Pastor X was ordained as a minister in the Y denomination.  X is duly licensed by Y to perform religious worship and other duties of a minister in the Y denomination.  X is employed by Z Hospice Services as Chaplain.  X’s duties involve caring for the spiritual needs of patients, including making a spiritual assessment, teaching from Scripture, and when requested the performance of baptism, the ministration of communion, attendance at the time of death, and the performance of funeral services.  X is performing services in the exercise of her ministry.

Assignment by church

If a minister, pursuant to an assignment or designation by a religious body constituting his church, performs service for an organization which is neither a religious organization nor operated as an integral agency of a religious organization, all service performed by him, even though such service may not involve the conduct of religious worship or the ministration of sacerdotal functions, is in the exercise of his ministry.  Treas. Reg. § 1.1402(c)-5(b)(2)(v).

Thus, if there is an appropriate assignment or designation, the minister’s duties need not include the conduct of religious worship or the ministration of sacerdotal functions to qualify as duties ordinarily those of a minister.  An example from the Regulations illustrates this provision.

Example:  M, a duly ordained minister, is assigned by X, the religious body constituting his church, to perform advisory service to Y Company in connection with the publication of a book dealing with the history of M's church denomination.  Y is neither a religious organization nor operated as an integral agency of a religious organization.  M performs no other service for X or Y. M is performing service in the exercise of his ministry.

The services must be significantly and directly related to accomplishing the purposes of the assigning church or denomination.  A designation cannot be a mere formality or perfunctory ratification of the minister’s activities but must directly serve the purposes of the church.

IRS Revenue Ruling 78-229 provides helpful guidance by identifying three specific situations where the IRS will not consider a valid assignment or designation to exist.  In this ruling, the IRS stated that services of a minister will not constitute assigned or designated services if any of the following circumstances are present:

  • The employer organization did not arrange with the minister's church for the minister’s services
  • The minister is performing the same services for the organization as employees who have not been designated, or
  • The minister performed the same services before and after the designation

Advance designation

The Regulations require that the housing allowance be designated pursuant to official action taken in advance of such payment by the employing church or other qualified organization.  Treas. Reg. § 1.107-1(b).

While this Regulation does not require the designation to be in writing, as a practical matter the designation should always be documented in advance of payment by official action of the qualified organization.  This may take different forms, such as by resolution, budget line item, corporate minutes, employment contract, etc.

The potential peril of an undocumented designation is demonstrated in Libman v. Commissioner, 44 T.C.M. 370 (1982).  In this case, a Jewish rabbi’s claimed housing allowance was disallowed by the IRS because his employer, the United Jewish Appeal, failed to designate a rental allowance in advance of payment.

Rabbi Libman requested that a portion of his compensation be designated as housing allowance shortly after his employment.  The employer granted his request on an informal basis but did not document the designation.  Libman prevailed upon appeal to the Tax Court on the strength of his testimony, corroborated by an official from the employing organization.  But the Tax Court acknowledged that “While it may be that a written instrument is preferable and in most instances would be required, we deal here with unusual facts …”

Qualified organization

The IRC and Regulations do not provide a definition of “qualified organization” for purposes of designating a housing allowance.  However, past rulings and cases suggest that the degree of ongoing supervision, control, or oversight by the designating organization in the performance of the minister’s duties is integral to the determination of whether it is qualified to make a housing allowance designation.  And it may not be necessary for the designating organization to be the employing entity.

For example, in Boyd v. Commissioner, 42 T.C.M. 1136 (1981), a chaplain employed by a police department received a housing allowance designated by a federation of churches that organized the chaplaincy program.  The Tax Court determined that the federation was a “qualified organization” for purposes of making a housing allowance designation because of its constant and detailed involvement in the police department’s chaplaincy program.

Private letter rulings by the IRS have, in certain circumstances, also permitted a housing allowance designation to be made by religious nonprofit organizations not affiliated with any particular church or denomination.  Other rulings have determined that hospitals, retirement homes, and other types of entities may be qualified organizations for purposes of designating a housing allowance.  Private letter rulings cannot be used as precedent, but they may provide helpful guidance as to how the IRS might interpret a tax provision involving a similar set of facts.

Dual employment status

It is important for an employer, minister employee, and their advisors to understand how an employer’s decision to classify and treat remuneration to a minister employee as for services performed in the exercise of ministry will affect the manner in which Social Security tax is paid.

IRC § 3121(b)(8) excludes service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry as earnings covered under the Federal Insurance Contributions Act (FICA).  Instead, ministers are covered by and pay Social Security and Medicare taxes under the Self Employment Contributions Act (SECA).  In addition, IRC § 1402(c)(4) specifically excludes services performed by a minister in the exercise of ministry from the definition of a “trade or business” under IRC § 162.

As a result of these provisions, most ministers have a “dual” tax status for their earnings as a minister.  Generally, a minister is properly classified as an employee under common law rules, but always retains self-employed status for Social Security tax purposes for earnings received in the exercise of ministry. 

This self-employed treatment has the effect of shifting the employer burden for “matching” the employee share of FICA tax to the minister, except in cases where the minister has applied for and received exemption from Social Security coverage (IRS Form 4361).  In such case no FICA or self-employment tax is paid with respect to qualifying ministerial earnings.

In addition, a housing allowance excludable under IRC § 107 is not similarly excluded in computing self-employment tax.  IRC § 1402(a)(8).  Thus, the presence of a housing allowance has no effect on the amount of Social Security taxes paid on ministerial earnings.

Depending on the minister’s level of income and other personal factors, the income tax savings resulting from the exclusion of a qualified housing allowance will usually defray added Social Security tax borne by the minister, often resulting in a net overall savings.

And it is common for parties to negotiate additional compensation to offset added Social Security tax paid by the minister.  This is frequently accomplished through enhancements to pre-tax fringe benefits such as medical and retirement plan arrangements.


The ministerial housing allowance is a valuable financial benefit to employing organizations and their clergy staff.  But apart from traditional church employment, determining eligibility is fact intensive and requires careful application of limited guidance found in Treasury Regulations and from rulings and cases covering a range of unique situations.

A case by case evaluation of the benefits and potential risks to the employing organization should be undertaken in consultation with the minister and qualified counsel when needed.  Minister employees receiving employer provided housing or a cash housing allowance will usually require ongoing compliance assistance from a tax practitioner skilled with clergy tax issues. And both the employer and minister employee should stay apprised of developments as the result of legislation, IRS rulings, and emerging court cases.

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