Short answer: a housing allowance only counts if the church designates it in advance, in writing, before the minister is paid — normally by a board resolution recorded in the minutes. It can never be applied retroactively. The fix that prevents the most common failure is a single sentence making the designation "evergreen" so it renews automatically. Below is a four-step process and a resolution you can adapt. (For how the allowance is taxed and the limits on it, see the complete housing allowance guide.)
Step 1 — The minister estimates housing costs
Before the board acts, the minister should estimate next year's housing expenses on a simple worksheet: mortgage or rent, utilities, insurance, property taxes, repairs, and furnishings. This estimate sets a sensible designation amount. Remember the exclusion is ultimately capped at the lowest of the designated amount, actual expenses, and the home's fair rental value — so estimate realistically, and it's fine (even wise) to designate a bit above the estimate as a cushion, since unused designation simply becomes taxable.
Step 2 — The board designates it in advance, in writing
The governing body (board, elders, or finance committee) formally designates a dollar amount as housing allowance before the calendar year starts and before any paycheck, and records it in the minutes. This is the step small churches most often skip — and it can't be repaired after the fact.
Sample resolution — cash housing allowance (adapt to your church):
"Resolved, that of the total compensation of $______ to be paid to Pastor ______ during the year 20__ and all future years unless otherwise modified, the sum of $______ per year is hereby designated as a housing allowance within the meaning of Section 107(2) of the Internal Revenue Code; and further resolved that this designation shall remain in effect for all future years until modified by this body."
Adopt it in the minutes, dated before the first paycheck of the year, and keep a signed copy.
Sample resolution — parsonage utilities/allowance (if the church provides a home):
"Resolved, that in addition to the church-provided parsonage furnished to Pastor ______, the sum of $______ of annual compensation for the year 20__ and all future years unless otherwise modified is hereby designated as a parsonage/housing allowance under Section 107(1) of the Internal Revenue Code for utilities, furnishings, and other eligible housing costs the minister pays directly."
Step 3 — Make it evergreen
Notice the phrase "and all future years unless otherwise modified" in both samples. That's the evergreen clause, and it does one crucial job: if the board forgets to re-vote next January, the designation is still in place. A one-year-only designation that nobody renews is the classic way a pastor loses the benefit for months. You can still revisit the amount annually as compensation changes — the evergreen clause just guarantees there's never a gap.
Step 4 — Document and report it
Keep the signed resolution with the church's permanent records. At year-end, the designated allowance is typically noted in Box 14 of the minister's W-2 (it is not included in Box 1 taxable wages). The minister then reconciles actual expenses and the three-part limit on their own return. If you run payroll, set the allowance up as a non-taxable clergy pay item so it's tracked cleanly — see how ministers are paid.
Timing, new hires, and mid-year changes
- Best practice: designate for next year at a board meeting in November or December.
- New minister mid-year: designate at the first board meeting after hire — it applies prospectively, to pay from the designation date forward, not to pay already received.
- Raise or move mid-year: you can adopt a new, higher designation prospectively; it takes effect going forward.
What if we forgot, or it lapsed? You can't fix the past — compensation already paid without a designation can't retroactively become housing allowance. But act now: adopt a designation (with the evergreen clause) at your next meeting so everything from that date forward is covered, and put a recurring calendar reminder on the board's year-end agenda. Going forward is always salvageable; the past is not.
We do this with churches every year. We'll help your board set the amount, adopt a clean evergreen resolution, and wire it into payroll and the pastor's return correctly — for churches across the South. See church & clergy accounting.