A Church Leader’s Guide to Minister Pay and Housing Allowance Setup

Are you trying to set up payroll for a pastor but confused about how housing allowance or clergy taxes actually work?

Do words like self-employment tax, stipend, and housing allowance leave you feeling overwhelmed or nervous you might get something wrong?

If you’re a church leader navigating this for the first time, it can be confusing.

In this article, we’ll break down how minister compensation works, especially the housing allowance portion, and walk you through how to set it up in a way that protects both your pastor and your church.

You’ll get a clear explanation of IRS requirements, a real-world example, and a free downloadable worksheet you can use to track ministry housing expenses.

What I Wish We’d Known About Minister Pay

When my husband took his first ministry role, one of the first questions was: “How does pastor pay even work?”

Our church asked how much of his salary should be designated toward housing allowance, and we were hearing new terms like stipends, self-employment tax, and estimated payments.

We weren’t trying to optimize taxes. We just wanted to understand what was allowed and make sure nothing came back to bite us at tax time.

Now that I work in payroll and support other churches with minister compensation, I know how common this confusion is and how easily it can be fixed with the right structure and support.

This guide is written from both personal experience and professional perspective. It’s for church leaders who want to care well for their pastor and work with a professional payroll company to keep them compliant, and for ministers who want clarity and confidence around their pay.

Why Minister Compensation Is Taxed Differently Than Other Jobs

Ministers are considered dual-status, which impacts how their compensation should be set up:

• They are employees for federal income tax
• They are self-employed for Social Security and Medicare taxes (SECA)

This means:

• Churches issue a W-2, not a 1099
• Ministers must pay their own SECA tax
• Federal income tax withholding is optional, not automatic

If this setup is missed, ministers can face surprise tax bills, penalties, or even audits.

What Is a Housing Allowance and Why Does It Matter?

A housing allowance is a portion of a minister’s pay that the church designates in advance to cover housing-related expenses. When structured properly, it reduces the minister’s taxable income for federal income tax purposes.

It’s one of the most valuable (and misunderstood) tax benefits available to ministers.

A well-set housing allowance can:

• Lower taxable income
• Create predictable, year-round tax planning
• Support pastors in managing their largest personal expense

Personally, once we understood how housing allowance worked, it gave us clarity and confidence, and it reduced our tax burden significantly.

What Qualifies for Pastor Housing Allowance?

Here’s what counts as eligible housing expenses:

• Mortgage payments or rent
• Utilities: electricity, gas, water, trash
• Internet and Wi-Fi
• Cell phone (if used in the home)
• Property taxes
• Home insurance
• Repairs and maintenance
• Landscaping or HOA dues

Commonly overlooked, but allowable:

• Furniture (couches, beds, tables)
• Mattresses and bedding
• Curtains, rugs, lamps
• Appliances (washer/dryer, stove, microwave)
• Electronics used in the home (TVs, routers, modems)

You must track actual expenses and keep receipts to use the housing allowance properly.

A Real Example: How Housing Allowance Affects Taxes

Let’s walk through how this works in real life.

Pastor Paul: 2025 Compensation Setup

Pastor Paul’s actual housing expenses: $60,000
Designated housing allowance: $40,000

How Taxes Work:

• Income tax is only paid on $35,000 (everything except the housing allowance)
• Self-employment tax (SECA) is calculated on the full $75,000

Estimated SECA tax owed: $11,475

Even though Pastor Paul spent $60,000 on housing, he could only exclude the designated $40,000 from income tax. That designation amount matters.

Planning Ahead: 2026 Adjustment Example

In 2026, the church adjusted Pastor Paul’s compensation:

Total: $75,000

Now, Pastor Paul can exclude up to $60,000 from income tax, as long as:

• His actual expenses support it
• The fair rental value doesn’t cap it

There’s no penalty for overestimating. The unused portion simply becomes taxable income.

The result? Income tax is now calculated on just $15,000. SECA tax is still based on the full $75,000.

3 Rules Every Church Must Follow for Housing Allowance

To use this benefit correctly and legally, churches must:

1. Designate the housing allowance before paying the minister
This must be in writing, ideally in board minutes or a formal compensation agreement.

2. Track actual housing expenses throughout the year
The minister must save receipts, statements, and bills to document actual use.

3. Stay within IRS limits
Ministers can only exclude the lowest of:

• The amount designated by the church
• Actual housing expenses
• Fair rental value of the home (furnished, including utilities)

Want Help Tracking Housing Allowance?

We’ve created a free Housing Allowance Worksheet. It’s the same tool we use with our own clients to help ministers and churches plan and track this properly.

🔗 Download the worksheet here

How Whirks Helps Churches With Minister Payroll

At Whirks, we help churches get minister compensation right from the beginning.

That includes:

• Housing allowance setup and documentation
• Correct W-2 reporting for ministers
• Year-round payroll compliance and SECA planning
• Fewer IRS surprises and smoother audits

If your CPA already understands clergy tax law, we’ll coordinate with them. If not, we’re happy to be your first point of contact.

What Other Churches Are Saying

“The thought of payroll was so overwhelming. Whirks walked us through every step of the process and made everything simple and understandable. They’ve been a lifeline for us.”  – Pastor Jim Rowland, Community Bible Church, Memphis

→ Read the full story

Don’t Let Payroll Hold Back Your Ministry

At the end of the day, minister compensation isn’t about tax loopholes. It’s about care, clarity, and legal compliance.

Ministers carry a huge responsibility. The last thing they need is a surprise tax bill or a payroll error that erodes trust.

Now that you understand how housing allowance works (and why it matters) your next step is simple:

→ Download the free worksheet and schedule a call with our team.

We’ve walked this road personally. We support churches professionally. And we’d love to help you make payroll the easiest part of your ministry.