A parsonage allowance is an amount excluded from taxable income for ordained ministers who perform qualified services including teaching and administration at La Sierra University. The parsonage allowance exclusion is regulated by section 107 of the Internal Revenue Code. Box 1 on the W-2 wage statement does not include amounts designated as parsonage allowance.

In order to be granted a parsonage allowance, an employee must be ordained by the Seventh-day Adventist Church, and perform qualified services at La Sierra University, which is an integral agency of the Seventh-day Adventist Church. Upon employment, the minister needs to show evidence of his ordination.

The amount of parsonage allowance an employee may receive is limited to the lesser of the following:

1. The actual expenses of operating a home including mortgage and utilities.
2. The fair rental value of the home, plus utilities
3. The amount designated in advance by La Sierra University as parsonage allowance.

Utilities include electricity, gas, water, insurance, trash removal, furnishings, upkeep and maintenance, and lawn care.

When purchasing a home, the down payment, mortgage payment, interest, taxes, and legal fees for acquiring the home are allowable as long as they do not exceed the fair rental value of the home.

It is the responsibility of the employee to maintain appropriate records used in the calculation of the parsonage allowance for substantiation in the event of an Internal Revenue Service audit.

La Sierra University calculates the maximum parsonage allowance each year based on the following formula. Current Category A + cost of living $270 x wage factor 150% x 12 months x 80%. Cost of living increases mid year do not change the maximum exclusion for that year.

The parsonage allowance exclusion is to be determined in advance before the beginning of each calendar year. Each minister is to furnish La Sierra University annually in December a statement estimating their parsonage for the following year. In the absence of an estimate, the current year’s parsonage amount will be used. La Sierra University designates an amount each year as the maximum parsonage allowance allowed. When the employee’s estimate is greater than the amount designated by LSU, the amount designated by LSU will be the amount used.

The required parsonage allowance exclusion form is available here in the PDF file format. (PDF File - help here)

La Sierra University will take an official action in advance of each calendar year approving for each minister the parsonage allowance for the coming year. Newly hired ministers will need to provide an estimate upon hire, which will be approved with an official action.

At the end of the year, each minister is to provide a statement declaring their actual parsonage expenses for that year. An adjustment will be made in cases where the actual expenses are less than the estimate. When the expenses exceed the estimate, the estimate is used as the parsonage allowance for the year, and no adjustment will be made.

The required parsonage expense form is available here in the PDF file format. (PDF File - help here)

The parsonage allowance reduces federal and state wages. It does not reduce social security or self-employment wages. Self-employment taxes must be paid on all wages including parsonage allowance.

Contributions made into the Adventist Retirement Plan are based on wages including parsonage allowance. Internal Revenue Service regulations limit employee contributions into a retirement plan to 25% of gross income. When calculating the maximum exclusion allowance annual contributions from both employee and employer cannot exceed 20% of gross income. Gross income is reduced by the parsonage allowance under IRS code section 107. Gross income is used to determine the maximum deferral, including employer contributions, that may be made into the Adventist Retirement Plan. A minister’s parsonage allowance may reduce the amount that can be contributed to the ARP by both the minister and LSU, and in instances where the parsonage allowance reduces most of the gross income for a minister, it may prevent amounts from being contributed. Please refer to the ARP plan summary. Ministers need to take this into consideration when declaring their parsonage allowance each year.