Clergy Housing Allowance §107: Minister Tax Exclusion

Housing Allowance Tax-Free • Three Limits Apply • SE Tax Still Owed • Parsonage Alternative • Dual Status
IRC §107IRC §1402(a)(8)Treas. Reg. §1.107-1
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Section 107 provides one of the most valuable tax exclusions available to any specific profession: a duly ordained, commissioned, or licensed minister may exclude from gross income a housing allowance officially designated by the church - up to the fair rental value of the furnished home including utilities. For many ministers, this exclusion shields tens of thousands of dollars of compensation from income tax annually. But the exclusion has limits, it does not eliminate self-employment tax, and ministers occupy a unique "dual status" for employment tax purposes that creates compliance complexity most ministers are not aware of when they first enter ministry.

The §107 Exclusion: Three Limits

The exclusion is limited to the lowest of:

1. The officially designated amount: The housing allowance must be officially designated by the employing church or organization before it is paid. A retroactive designation does not qualify. The designation should appear in church board minutes, employment contracts, or budget documents.

2. Actual housing expenses paid: The minister can only exclude housing allowance funds actually used for housing - rent or mortgage (principal and interest), utilities, furniture, repairs, property insurance, property taxes, and maintenance. Amounts received but not spent on housing are taxable in the year received.

3. Fair rental value of the furnished home including utilities: The exclusion cannot exceed the fair rental value of the home if it were rented furnished and with utilities included. This limit prevents ministers in expensive housing markets from excluding unlimited amounts.

Self-Employment Tax Still Applies

The §107 income tax exclusion does not eliminate self-employment tax on the housing allowance. Under IRC §1402(a)(8), net earnings from self-employment for ministers specifically include the housing allowance (or the rental value of a parsonage). This means a minister who excludes $30,000 of housing allowance from income tax still owes SE tax (15.3% on the first $184,500 of SE income for 2026) on that $30,000. The SE tax on $30,000 of housing allowance is approximately $4,590 - often overlooked by ministers who assume the §107 exclusion is complete.

Ministers are in a unique "dual status" for employment taxes. For income tax purposes, ministers are employees of the church (receiving W-2 wages). For employment tax purposes, ministers are treated as self-employed - they pay both the employee and employer share of Social Security and Medicare (the SE tax), rather than having the employer pay half. Churches are not required to withhold FICA on minister compensation. Instead, ministers should make quarterly estimated tax payments that include the SE tax on both their wages and their housing allowance.

The Parsonage Alternative

Instead of a cash housing allowance, a church may provide a parsonage (church-owned housing) for the minister to live in. The rental value of a parsonage provided to a minister as part of compensation is excluded from the minister's income under §107(1). Like the cash housing allowance, the parsonage exclusion does not reduce SE tax. The minister must still include the rental value of the parsonage in computing SE tax under §1402(a)(8). Churches that provide parsonages should ensure the arrangement is documented in board resolutions and that the fair rental value is established for SE tax reporting purposes.

Constitutional Status

The §107 housing allowance exclusion has been challenged as an unconstitutional government establishment of religion. In Gaylor v. Mnuchin (7th Circuit 2019), the Seventh Circuit upheld §107 as constitutional, finding that it provides a secular benefit (housing) available to other categories of taxpayers (such as the on-premises lodging exclusion under §119) and does not impermissibly benefit religion. The Supreme Court declined to hear the case. The exclusion remains in effect and is not currently under active constitutional challenge.

Related Tools & Articles
SE Tax GuideMinisters pay SE tax on housing allowance despite §107 exclusion Estimated PaymentsQuarterly estimated tax for ministers with no withholding Fringe Benefits§119 on-premises lodging exclusion - compare to §107 Nonprofit Tax GuideChurch employment and tax-exempt organization requirements Individual Tax HubAll individual income topics Disability IncomeMinister disability income - separate from housing allowance rules
Authority: IRC §107 (rental value of parsonages - gross income does not include: (1) the rental value of a home furnished as part of compensation; (2) the rental allowance paid as part of compensation to the extent it is used to rent or provide a home and does not exceed the fair rental value of the home including furnishings and appurtenances); Treas. Reg. §1.107-1 (housing allowance regulations - must be designated in advance by employing church or organization; retroactive designation not permitted; excludable amount limited to actual expenses and fair rental value); IRC §1402(a)(8) (self-employment tax on housing allowance - net earnings from self-employment for ministers includes rental allowance under §107 and rental value of parsonage; housing allowance not excluded from SE tax base); IRS Publication 517 (Social Security and Other Information for Members of the Clergy and Religious Workers - dual status treatment; SE tax on housing allowance; optional exemption from SE tax for certain qualifying ministers; Form 4361); Gaylor v. Mnuchin, 919 F.3d 420 (7th Cir. 2019) (§107 housing allowance upheld as constitutional; secular purpose; available benefit; comparable to other employee housing exclusions; Supreme Court cert denied); Form W-2 reporting (housing allowance not included in Box 1 wages; amount designated should be reported in Box 14 for information purposes; minister responsible for SE tax on housing allowance).