Church Law & Tax Richard R Hammar and Christianity Today
Compensation Handbook for Church Staff
The above 2 links are a good place to start in framing the compensation of church employees. Consider the use of a compensation committee for approval of the Senior Pastor's compensation and housing allowance. This committee should be unrelated to the pastor. The committee should review and establish guidelines based on reasonable amounts. The handbook above is a good place to start.
The housing allowance should be broken down into general housing expenses and utility housing expenses. The fair-rental value of the parsonage should also be established. The church should establish these allowances in the minutes of the church board meeting before the start of each calendar year and before any compensation is paid to clergy employees. The excludable portion of the housing allowance is the lower of three amounts:
1. The housing allowance established in the church minutes and paid to the clergy employee.
2. The actual housing expenses incurred by the clergy employee.
3. The fair-rental value of the parsonage the clergy employee resides in.
In the preparation of the annual W2 for each clergy employee it is a good practice to report the actual amount paid in total housing allowance in Box 14 of the W2. The clergy employee will then have to reconcile the amount in Box 14 on their personal return comparing the three amounts as described in the preparation of their return or by informing their tax preparer of the amounts paid.
Any payments made in excess of actual housing expenses or fair rental value of the parsonage as established will be reflected on the clergy employee's individual tax return as excess housing allowance subject to federal income tax.