Pastor housing allowance worksheet

Why a low designation costs the pastor money

A pastor can exclude from income tax the smallest of three numbers: the amount the board designated, the amount spent on the home, and the home's fair rental value, furnished, plus utilities. It also can't be more than reasonable pay for the pastor's work.

In the sample, Cedar Hill Church designated $24,000 for 2026. Pastor Ruiz's water heater failed in August, and his housing costs came to $25,300. The designation was the smallest number, so $1,300 of real housing costs got no exclusion. Had the board designated $26,000, he would have reported the unused $700 as income on his return, the same as salary.

Setting next year's number

Start from this year's log. On the Next Year tab every category carries over, so type a new amount only where something will change: a new mortgage payment, a rent increase, higher utilities. The tab adds up the expected costs and works out the ceiling from the home's rental value and next year's utilities.

Designate at the ceiling, not at the expected costs, and not past it: nothing above the ceiling can be excluded. Cedar Hill expects $24,850 in 2027 and designates $26,700, the ceiling, which leaves room for another water heater. The Next Year tab tells you when the amount you type is below the expected costs or above the ceiling.

Getting it into the minutes

The IRS says the church "must designate a definite amount. It can't determine the amount of the housing allowance at a later date." The designation can be in an employment contract, the minutes, a budget, or any official action taken before the allowance is paid. A conversation with the pastor doesn't count. With no designation, the whole salary is taxable income.

The Resolution tab fills in the pastor's name, the year and next year's amount. Print it, have the board or congregation adopt it, and keep it with the minutes.

If the church provides a parsonage, choose Church parsonage on the This Year tab. The parsonage's rental value is excluded on its own, and an allowance for utilities is excluded up to what the pastor spends on them.

At year end

For the treasurer: leave the housing allowance out of W-2 box 1. You can show it in box 14 or on a separate statement. Don't withhold Social Security or Medicare tax from a minister's pay, and don't withhold income tax unless you and the pastor agree to voluntary withholding. And, in Publication 15-A's words, "Don't show on Form W-2, Form 941, or Form 944 any amount as social security or Medicare wages."

For the pastor: any excess allowance goes on Form 1040, line 1h, marked "Excess allowance." The allowance still counts toward self-employment tax unless the pastor has an approved exemption. The This Year tab gives both amounts.

Keeping the allowance next to payroll

Generic small-business payroll doesn't handle clergy pay well. Grain's payroll keeps housing allowance tracking beside clergy and staff pay, in the same books that hold your funds, and handles W-2s and 941s. Payroll is $50 a month plus $10 per employee, on any plan. See church payroll in Grain.