Pastors and church leaders around the country breathed a sigh of relief on Friday, March 15, when the Seventh Court of Appeals ruled that the housing allowance for church ministers does not violate the First Amendment’s Establishment Clause.

For months, church leaders nervously awaiting the appeals court ruling, after a Wisconsin district court ruled that the tax exemption was unconstitutional. The Freedom From Religion Foundation (FFRF) had argued that the housing allowance was clearly a handout and represented an “advance on religion on behalf of the government.” 

In Friday’s ruling, the 7th Court of Appeals disagreed, stating that the housing allowance provides opportunities for “churches to advance religion, which is their very purpose.” Judge Michael Brennan wrote that the exemption does not “connote sponsorship, financial support and active involvement of [government] in religious activity.” 

What is the Housing Allowance? 
 
According to current IRS tax guidelines, churches can compensate ministers who are “licensed, commissioned and/or ordained” for expenses directly related to the cost of living. (https://www.irs.gov/faqs/interest-dividends-other-types-of-income/ministers-compensation-housing-allowance/ministers-compensation-housing-allowance

 This housing allowance has allowed pastors to serve congregations that may have otherwise not been able to afford a pastor.  The allowance is similar to the exemption provided to military members and other workers that are displaced for their employment. 

What Happens Next? 
 
While the current ruling is indeed a victory for religious freedom, the ruling may not be the end of the story. FFRF is currently considering an appeal, which would surely drive the case to the US Supreme Court.  

What Can You Do? 
 
It’s important that we as church leaders continue to be above reproach, especially when it comes to financial management. While the housing allowance is a blessing to minsters, the allowance should never be abused. Be sure that your pastor’s compensation is calculated correctly, and only include expenses that meet proper IRS guidelines. To learn more, visit https://www.irs.gov/taxtopics/tc417. 

Are You Compensating Your Pastor Correctly? 
 
We’ve found that many churches are compensating their pastor incorrectly, or they are not confident they are doing it correctly. We can provide a FREE analysis of whether your church is handling your bookkeeping correctly and if you are paying your pastors and staff appropriately. Click here to schedule a quick call and let us know that you want to be confident that you’re handling your pastor’s compensation correctly! We’re happy to help!