The Housing Allowance: A Gift to Pastors and a Quiet Risk for Churches
- Matthew Dillingham
- Jan 19
- 3 min read
The housing allowance is one of the most significant financial supports a church can provide its pastors. When managed well, it offers genuine relief at a time when housing costs are increasing.
If it is not managed carefully, it can lead to confusion, disappointment, and risk. Often, these issues remain hidden until much later.
Most housing allowance challenges do not arise from neglect or poor intentions. More often, they result from assumptions, outdated habits, or gaps in communication between boards, payroll, and pastors.
It is helpful to consider what churches often overlook and how to address these areas with clarity.
What the Housing Allowance Is (and Is Not)
The housing allowance allows qualifying ministers to exclude a portion of their compensation from federal income taxes when that portion is used for housing-related expenses.
A few important clarifications:
It applies only to federal income tax, not self-employment tax.
It must be used for actual housing expenses.
It does not happen automatically.
It is not retroactive.
The Internal Revenue Service has very specific expectations around how this is designated and documented.
The Most Common Housing Allowance Oversight
One issue appears more frequently than others.
“We’ve always done it this way.”
Specifically:
The allowance is mentioned informally.
The amount is adjusted mid-year
Or it is assumed to apply to previous months.
Unfortunately, the IRS is very clear on this point:
A housing allowance must be formally designated before it is paid.
That designation typically needs to be:
Approved by the board or the appropriate governing body
Documented in official minutes or a written resolution
In place before the compensation period begins
If this step is missed, the allowance may not be permitted, even if the pastor used the funds for housing.
Another Overlooked Issue: “We’ll Just Fix It Later”
Many churches discover housing allowance issues during:
A payroll review
A pastoral transition
A new treasurer is coming on board.
Or a CPA asking questions at year-end
It can be tempting to try to correct these issues after the fact.
Unfortunately:
Retroactive designations generally don’t hold up.
Verbal agreements don’t count.
Good intent doesn’t override documentation gaps.
This is often when disappointment arises, both for pastors who believed the allowance was in place and for churches that intended to do the right thing.
How Much Can Be Designated?
Another common question is how much can be designated.
A housing allowance can be designated up to the lowest of:
The amount officially designated by the church.
The actual housing expenses incurred
The fair rental value of the home (including utilities)
This means:
Designating a higher amount is not necessarily harmful, but it does not increase the tax benefit.
Pastors still need to track expenses.
Churches should avoid estimating or increasing amounts without proper guidance.
Why a Written Policy Matters
One of the most helpful steps a church can take is to remove ambiguity.
A clear housing allowance policy should address:
Who qualifies
How and when allowances are designated
How changes are handled year to year
What documentation is required
Who is responsible for oversight
Without a policy:
Allowances are handled inconsistently.
Knowledge lives in one person’s head.
Transitions create risk
Pastors may be left uncertain about what they can depend on.
With a policy:
Expectations are clear
Decisions are consistent
Both the church and the pastor are protected.
This Isn’t Just a Compliance Issue
At its core, this is a pastoral care issue.
The housing allowance is intended to support pastors, not to create unexpected tax consequences or uncertainty. Handling it well demonstrates care, stewardship, and a commitment to good practice.
And the good news?
Most housing allowance issues are easy to fix before they become problems.
How We Help
We regularly help churches:
Review current housing allowance practices.
Identify gaps or risks.
Create clear, board-approved housing allowance policies.
Align boards, payroll, and pastors around a shared understanding.
Our goal is not to make churches more corporate. It is to help them be clear, consistent, and caring.
A Final Thought
The housing allowance is a gift.
Policies are what protect it.
If your church has not reviewed its housing allowance process recently, now is a good time to do so, before the next budget cycle.
If you’d like help, we’re glad to walk alongside you.
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