Church Bookkeeping: Pastor Housing Allowance and Giving Records

What bookkeeping does a small church need, and does it file Form 990?

A church must keep books and records, but it does not file Form 990, 990-EZ or 990-N and does not have to apply for tax-exempt recognition. The IRS requires every exempt organization, recognized or not, to keep records that support its exemption in an audit and let it file any required return. It sets no format, so a paper ledger, a spreadsheet or online bookkeeping all work if the records are complete. They usually include organizing documents and bylaws, minutes, property records, the general ledger, receipts and disbursements journals, payroll records, bank records and invoices (Publication 1828).

The IRS can begin a church tax inquiry only under limits set by law (IRS). They do not remove the duty to keep records, file payroll forms and pay employment tax, and the books are what the church uses to answer an inquiry.

A case is not simple if the minutes show no housing allowance vote, payroll was never run, giving statements never went out, the group is a school, mission or separate ministry rather than a church, or IRS records list it as another type of organization that must file an annual return. Gather these first:

• Articles, bylaws and the minutes, including every pay and housing vote.
• The EIN notice, and any IRS letter or denominational group-exemption paperwork.
• Bank statements, deposit slips and offering counts.
• The general ledger and property records.
• Pay records, W-2s and Forms 941.

What does a church treasurer record for each gift, and what proof does a donor need?

Record every gift, tithe and offering when it is counted: date, donor (or "unnamed plate offering"), full amount, cash, check, card or online, the fund it belongs to, and anything the donor received back. Have two unrelated people count each offering and sign the count sheet. Card and online gifts reach the bank in batches, net of fees: record the full gift, book the fee as an expense, and check that the gift log less fees equals the deposit (payment processor payouts).

A donor's proof depends on the size and kind of gift (Publication 1771).

Weekly offerings are not added together: each gift is tested on its own against the $250 line. Cash in the plate leaves the donor no bank record, so a written statement from the church is how that donor proves the gift. A church cannot acknowledge a gift it cannot tie to a donor, so numbered envelopes or online giving matter. A church that skips an acknowledgment faces no penalty, but the donor cannot deduct a gift of $250 or more without one. For 2026 gifts, a donor who takes the standard deduction can still deduct up to $1,000 ($2,000 on a joint return) of cash gifts, so more members will rely on the statement (IRS).

A gift the donor directs to a named person, such as the pastor, is not deductible and does not belong on a giving statement (Publication 526). Money the church passes on to the pastor is pay.

When must a giving statement go out, and what must it say?

A giving statement (also called a contribution statement) should go out by January 31 after the year of the gifts, which is when charities typically send them. The legal test is that the donor must have it by the earlier of the day the donor files the return and the return's due date, including extensions (Publication 1771).

A statement must contain:

1. The church's name.
2. The amount of each cash gift, or a description (not the value) of donated property. Include each gift's date: a donor's record of a cash gift must show the charity's name, the date and the amount.
3. One of three statements: no goods or services were given in return; only intangible religious benefits were given; or a description and good-faith value of anything else given.

One annual statement can cover many gifts. It can be on paper or by email, needs no donor Social Security number, and has no IRS form. Large gifts of property need more: the donor attaches Form 8283, which the church signs, and a church that sells or disposes of such property within 3 years generally files Form 8282 within 125 days and gives the donor a copy (IRS). Sample wording: "Thank you for your gifts to [church name], listed below. We gave you no goods or services in return, other than intangible religious benefits."

Intangible religious benefits are benefits from an organization formed exclusively for religious purposes that are not usually sold outside a gift setting, such as admission to a worship service or a small amount of wine used in a ceremony. Education leading to a recognized degree, travel services and consumer goods are not. Tuition, including tuition-like fees for a church school or daycare (Publication 526), and hall rent are payments for services, not gifts, and stay off the statement.

When a donor pays more than $75 and receives something back, such as a dinner ticket, the church must tell the donor in writing that the deductible part is the payment minus the value of what was received, with a good-faith value. It must be given with the request or the receipt, where the donor will notice it. Items of insubstantial value and intangible religious benefits are exceptions. The penalty is $10 per contribution, up to $5,000 per fundraising event or mailing, unless the church shows reasonable cause.

How does a pastor's housing allowance work: who sets it, when, and in what form?

A minister or member of the clergy can exclude a housing allowance from income tax only if the church officially designates a definite amount before paying it. With no designation, the pastor's whole pay is taxable (Publication 517).

• Who: The church that employs the pastor. A denomination's resolution does not designate for a pastor paid by a local congregation; it can for a minister the denomination employs directly.
• Form: Minutes, an employment contract, a budget or another official action. Informal talk is not enough. The record must let a payment be identified as housing rather than salary.
• When: Before the payment, as a set amount. It cannot be fixed later. Publication 517 does not say whether a vote carries into later years, so a vote each year before the year starts is the cautious course.
• Changing it: The church can vote a new amount for later payments, not for amounts already paid.
• Sample wording: "The church designates [definite amount] of the pastor's pay, starting [date], as a housing allowance."

Only ministers qualify: ordained, commissioned or licensed. Keep the pastor's ordination, commissioning or licensing record with the minutes. A music director or office manager who is not authorized to perform substantially all the religious duties of an ordained minister cannot use it. If the church instead provides a parsonage, the fair rental value, with utilities, is excluded, up to reasonable pay.

How much of the allowance is tax-free, and does it reduce self-employment tax?

For income tax, the tax-free part is the smallest of three amounts, and never more than reasonable pay for the pastor's services. It does not reduce self-employment tax. For a pastor who owns a home, the three are (Publication 517):

A renter faces the same limits, with rent as the actual cost. The pastor adds any excess to income and labels it "Excess allowance" on Form 1040. The church does not test these limits; the pastor does, so the pastor needs cost records and a fair rental estimate.

This is the federal rule; state income tax on the allowance varies by state.

The designated allowance, and the fair rental value of a parsonage the church provides (with utilities it pays), count in full toward ministry earnings. Self-employment tax is 15.3% (the Social Security part stops at an annual earnings cap), figured on 92.35% of those earnings after ministry expenses. A minister who is conscientiously opposed to public insurance for religious reasons, not economic ones, may apply for an exemption on Form 4361. The minister files it, and must have told the ordaining, commissioning or licensing body of the opposition. Once approved, it is irrevocable. The deadline is the return due date, with extensions, for the second year in which the minister has at least $400 of net self-employment earnings, some from ministry.

How do I record the allowance and the pastor's pay in the church books?

Record the cash salary and the designated allowance on separate lines, and pay the allowance as an identifiable amount. That matches the designation, which must let a payment be told apart from salary.

On Form W-2, box 1 shows taxable pay without the designated housing allowance. The church may report the allowance, a utilities allowance or the parsonage's rental value in box 14a (Publication 15-A). Keep the minutes with the pay records.

Is the pastor an employee or self-employed, and what does the church file?

A pastor paid a salary and directed by the church is generally a common-law employee for income tax, yet is self-employed for Social Security and Medicare (Publication 517). The common-law control test decides which; Form SS-8 asks the IRS to decide.

In both cases the church withholds no Social Security or Medicare tax and pays no employer share on ministry pay (Publication 15-A). For an employee pastor, a voluntary agreement can also cover self-employment tax. Without one, the pastor generally makes quarterly estimated payments; see quarterly estimated tax payments. Fees a member pays the pastor personally for weddings, baptisms or funerals are the pastor's own income and count toward self-employment tax. An offering given to the church is not the pastor's income (Publication 517).

Treating an employee as a contractor creates employment-tax exposure; see contractors who may be employees.

What about other staff: Social Security, quarterly returns and reimbursements?

Staff who are not ministers are generally employees, unless the facts show a contractor (see contractors who may be employees): the church withholds income tax and, in most cases, Social Security and Medicare tax. Each side pays 6.2% and 1.45%. The church files W-2s and files Form 941 each quarter, due the last day of the first month after each quarter (Form 941 instructions), unless the IRS has told it to file Form 944 once a year. For setup, see setting up payroll. A treasurer, trustee or other person with authority over church funds who willfully fails to collect or pay over withheld income tax and employee Social Security and Medicare tax can owe that unpaid amount personally (IRS); see the trust fund recovery penalty.

• Church election: A church opposed to these taxes for religious reasons may elect out on Form 8274, filed before its first quarterly return would be due. Its staff then generally pay self-employment tax themselves, and income tax withholding continues (Publication 15-A).
• Federal unemployment tax: Section 501(c)(3) organizations are generally exempt (Form 940 instructions). State unemployment rules are separate.
• Reimbursements: Under an accountable plan, expenses with a business purpose, receipts or records within a reasonable time, and excess returned, are not wages. A flat allowance without receipts is wages on the W-2 (Publication 1828).

When does a church owe tax on rent or other unrelated income?

A church owes tax on the net income from a trade or business that is regularly carried on and not substantially related to its religious purpose, even when the money funds ministry (Publication 1828). Examples include advertising in a bulletin or website, raffles and public parking fees. Activities run almost entirely by volunteers, for members' convenience, or selling mainly donated goods are excepted.

Rent from real property, such as a hall, is usually excluded, with exceptions (Publication 598):

• The hall carries a mortgage, which can make part of the rent debt-financed income (income from property bought with borrowed money).
• Personal services are provided to the occupant along with the space, as in a hotel or boarding house.
• The rent depends on income or profits from the property (a fixed share of gross receipts is allowed).
• Rent for furnishings or equipment is more than 10% of the total rent, which can make part or all of the rent taxable.

A church with $1,000 or more of gross unrelated business income in a year files Form 990-T by the 15th day of the 5th month after year end, and must file it electronically (Form 990-T instructions). If its expected unrelated business income tax is $500 or more, estimated payments are generally due on the 15th day of the 4th, 6th, 9th and 12th months of the tax year (Publication 598). Book rent and unrelated income in their own income accounts, not as giving.

How long should a church keep its records?

The IRS church guide advises keeping revenue and expense records for at least four years after filing the return they relate to. Keep employment tax records for at least four years after the tax becomes due or is paid, whichever is later (Publication 583). The IRS church guide sets no period for organizing documents and minutes; because the housing designation lives in the minutes, keep them as long as the church exists (Publication 1828). See how long to keep business records.

Example

These examples are illustrative and use US dollars.

Housing allowance vote

In December the church votes to designate $24,000 of the pastor's $60,000 package as a housing allowance for the coming year. The minutes show the amount and date. The pastor owns the home: actual costs for the year are $30,000, fair rental value is $26,000. The smallest figure is the $24,000 designated, so $24,000 is tax-free for income tax. If actual costs were only $20,000, $20,000 would be tax-free and $4,000 taxable. W-2 box 1 shows $36,000, and the church may show the $24,000 in box 14a. Self-employment tax is still figured on the full $60,000, less ministry expenses.

A member's year of giving

A member gives twelve gifts of $100 in numbered envelopes and by check, $1,200 in all. Each gift is under the single-gift line, but the donor still needs a record of each. The church's year-end statement lists each date and amount, the total, and says no goods or services were given in return, or only intangible religious benefits. A $500 gift in the same year would need an acknowledgment; the same statement can carry it.

Renting the hall to a daycare

The church rents its hall to a daycare for $1,500 a month, $18,000 a year. The hall has no mortgage, the rent is fixed, and the church provides only the space. This is rent from real property, generally excluded, and the books record it as rental income, not giving. With a mortgage on the hall, part of the rent could be debt-financed income, and the church checks the Form 990-T threshold.

Different for you?

• The minutes show no housing designation: the exclusion covers only payments made after an official designation, so earlier pay may be taxable on the pastor's return. That return is an individual tax question; the church's pay records and minutes are a bookkeeping one.
• Payroll never ran, withholding went unpaid, or W-2s or 1099s were missed: see late contractor and employee tax forms and behind on payroll taxes; bookkeeping help rebuilds the pay records.
• Giving statements never went out: send them before donors file. Bookkeeping help sets up the gift log and fund tracking they come from.
• The books are a shoebox or behind, or church money has run through a personal account: see catching up on overdue books, fixing commingled funds or bookkeeping help.
• The pastor has no Social Security number, is not a US citizen or resident, or serves on a religious-worker visa: this page's pay rules may not fit. The pastor's own return is an individual tax question; setting up the church's payroll is bookkeeping.
• The group is not a church, or gifts carry donor restrictions: see nonprofit restricted funds and the IRS information return.
• The hall has a mortgage, or the church runs events or sells ads: this income may be taxable and may need a Form 990-T. It has to be booked apart from giving first (bookkeeping help).
• A business gives to the church: see charitable donations from the business.
• Year end is near: use the year-end close checklist.