Key Takeaways
• IRS clarifies 2025 tax rules for clergy, religious workers, foreign employees, and military personnel.
• Housing allowance exclusion remains for clergy but self-employment tax still applies on allowance value.
• Members of religious orders must clarify work status for correct tax treatment and reporting.
As of July 10, 2025, the Internal Revenue Service (IRS) has reaffirmed and clarified the special tax rules for certain employees, including clergy, members of religious orders, employees of foreign governments and international organizations, and military personnel. These updates are especially important for those who rely on housing allowance, receive a pension, or have unique employment arrangements due to their religious or international roles. Below is a detailed summary of what has changed, who is affected, effective dates, required actions, and the implications for pending and future applications.
Summary of What Changed
The IRS has not introduced major new laws for 2025 but has issued updated guidance and clarifications, especially for clergy and religious workers. The main points include:
- Continued exclusion of housing allowance from gross income for clergy for federal income tax purposes, with clear limits and documentation requirements.
- No changes to the dual tax status of clergy: employees for income tax, self-employed for Social Security and Medicare tax.
- Clarified treatment of pension and retirement pay for clergy.
- Reaffirmed rules for members of religious orders, especially those under vows of poverty.
- No changes for employees of foreign governments or international organizations.
- Standard tax treatment for military pay remains unchanged.
These clarifications are effective immediately and apply to all income earned in 2025 and beyond, unless further changes are announced.
1. Clergy Compensation and Housing Allowance: 2025 Updates
Who Is Affected:
Ordained, licensed, or commissioned ministers, pastors, rabbis, imams, and other religious leaders who receive a salary, housing allowance, or live in church-provided housing.
Key Points:
- Housing Allowance Exclusion:
The housing allowance (sometimes called parsonage or rental allowance) can still be excluded from gross income for federal income tax purposes. To qualify:- The allowance must be officially designated in advance by the church or religious organization.
- The allowance must be used for actual housing expenses during the year it is received.
- The exclusion is limited to the lowest of:
- The amount officially designated as housing allowance,
- The amount actually spent on housing,
- The fair rental value of the home (including utilities and furnishings).
- Self-Employment Tax Still Applies:
Even though the housing allowance is excluded from income tax, it must be included in net earnings for self-employment tax (reported on Schedule SE). This means clergy pay Social Security and Medicare taxes on both their salary and the value of their housing allowance or church-provided housing. - Reporting Requirements:
- The housing allowance is usually shown in Box 14 of Form W-2, but not included in Boxes 1, 3, or 5.
- Any part of the housing allowance not used for housing expenses must be reported as wages on Form 1040, line 1h, labeled as “Excess allowance.”
- The fair rental value of a parsonage (church-provided home) is also excluded from income tax but included for self-employment tax.
- Pension and Retirement Pay:
Pension or retirement pay for clergy is treated like any other pension income and is taxable. -
Example:
Rev. Joanna Baker receives a salary of $67,000 (including $7,700 for utilities), lives in a parsonage valued at $24,000 per year, and spends $7,000 on utilities. For income tax, she excludes $31,000 ($24,000 parsonage + $7,000 actual utilities) from her income. She reports $60,000 as gross income ($67,000 salary minus $7,000 utility allowance not used). For self-employment tax, her income is $91,000 ($67,000 salary plus $24,000 parsonage value).
Required Actions for Clergy:
- Get Housing Allowance Designated in Advance:
The church or religious organization must officially designate the housing allowance before payment. This is usually done by a board resolution or similar document. -
Keep Good Records:
Save receipts and records for all housing expenses, including rent, mortgage, utilities, repairs, and furnishings. -
Report Correctly:
- Exclude the housing allowance from gross income up to the allowed limit.
- Include any unused allowance as taxable income.
- Include the full value of salary and housing allowance or parsonage in self-employment income.
- Pay Self-Employment Tax:
Clergy must pay self-employment tax on their ministerial income, including housing allowance and parsonage value, unless they have an approved exemption. -
Consider Estimated Tax Payments:
Because churches often do not withhold Social Security and Medicare taxes, clergy may need to make quarterly estimated tax payments to avoid penalties.
Implications for Pending Applications:
If you are a clergy member with a pending tax return or application for exemption, these clarifications mean you should double-check your housing allowance designation, documentation, and reporting. If you missed designating the allowance in advance, you cannot claim the exclusion for that year.
2. Members of Religious Orders: Vow of Poverty and Earnings
Who Is Affected:
Nuns, monks, friars, and other members of religious orders who have taken a vow of poverty and may work inside or outside their order.
Key Points:
- Earnings Turned Over to the Order:
If a member works as part of their required duties for the order and turns over all earnings, the income is not included in their gross income and is not subject to income tax or Social Security/Medicare taxes. -
Working Outside the Order:
If a member works outside the order (for example, as a lawyer or teacher) and the work is not required by the order, the earnings are subject to regular income tax and Social Security/Medicare taxes, even if the member gives all the money to the order. -
Example:
- Pat Brown, a member of a religious order, works as a lawyer at the order’s direction, but this is not a required duty. Her earnings are taxable.
- Chris Green, also a member, works as a secretary for the church that supervises the order, as required by the order. His earnings are not taxable.
Required Actions for Members of Religious Orders:
- Clarify Your Work Assignment:
Make sure you understand whether your work is considered a required duty by your order. -
Report Income Properly:
If your work is not a required duty, report your earnings as income and pay all applicable taxes. -
Keep Documentation:
Maintain records showing the nature of your assignment and any instructions from your order.
Implications for Pending Applications:
If you have a pending tax return or are unsure about your work status, review your assignment with your order’s leadership and consult IRS guidance or a tax professional.
3. Foreign Employer Compensation
Who Is Affected:
U.S. citizens and residents working for international organizations or foreign governments, both inside and outside the United States 🇺🇸.
Key Points:
- International Organizations:
Compensation for work performed for an international organization is not considered wages for Social Security and Medicare taxes. However, U.S. citizens must report this income as self-employment income and pay self-employment tax if the work is performed in the United States 🇺🇸. -
Foreign Governments:
Compensation for work as an employee of a foreign government is not considered wages for Social Security and Medicare taxes, no matter where the work is performed or the worker’s citizenship. -
Diplomats and Consular Officers:
These rules also apply to ambassadors and other diplomatic staff.
Required Actions for Employees:
- Report Income as Required:
U.S. citizens working for international organizations in the United States 🇺🇸 must report their income as self-employment income and pay self-employment tax. -
Check With Your Employer:
Confirm whether your employer is considered a foreign government or international organization under IRS rules.
Implications for Pending Applications:
If you are waiting for a tax decision or have recently started working for a foreign employer, review your reporting and tax payment responsibilities to avoid future problems.
4. Military Pay
Who Is Affected:
Active duty and retired members of the U.S. military.
Key Points:
- Active Duty Pay:
Most military pay is treated as regular wages for tax purposes. -
Retirement Pay:
Military retirement pay is taxable as a pension. -
No Changes in 2025:
The IRS has not changed the tax treatment of military pay or pensions.
Required Actions for Military Personnel:
- Report All Pay:
Include all military pay and retirement pay on your tax return as required. -
Check for Special Exclusions:
Some special pay (such as combat pay) may be excluded from income. Review IRS guidance or consult a tax professional if you are unsure.
Implications for Pending Applications:
No changes affect pending tax returns or applications for military personnel.
5. Best Practices and Next Steps for Clergy and Religious Employees
For Clergy:
- Get Housing Allowance Designated in Advance:
The church must officially designate the housing allowance before any payment is made. This is usually done by a board or committee resolution. -
Use Allowance Only for Housing:
Spend the allowance only on housing expenses. Keep receipts for rent, mortgage, utilities, repairs, and furnishings. -
Track Actual Expenses:
If you spend less than the designated allowance, the unused portion is taxable. -
Report Correctly:
- Exclude the housing allowance from gross income up to the allowed limit.
- Report any excess as taxable income.
- Include the full value of salary and housing allowance or parsonage in self-employment income.
- Pay Self-Employment Tax:
Use Schedule SE to calculate and pay self-employment tax on your ministerial income. -
Consider Estimated Tax Payments:
If your church does not withhold Social Security and Medicare taxes, make quarterly estimated tax payments to avoid penalties.
For Members of Religious Orders:
- Clarify Your Assignment:
Make sure your work is considered a required duty by your order if you want to avoid tax on your earnings. -
Keep Documentation:
Maintain records of your assignment and any instructions from your order.
For Employees of Foreign Employers:
- Understand Your Status:
Confirm whether your employer is a foreign government or international organization. -
Report and Pay Taxes:
U.S. citizens working for international organizations in the United States 🇺🇸 must report their income as self-employment income and pay self-employment tax.
For Military Personnel:
- Report All Pay:
Include all military pay and retirement pay on your tax return.
6. Official Resources and Where to Get Help
- IRS Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers – This publication provides detailed guidance on clergy taxes, housing allowance, and self-employment tax.
- IRS Tax Topic 417: Earnings for Clergy – Offers a summary of tax rules for clergy.
- Church Pension Group: Offers resources and tools for clergy tax planning.
- Tax Professionals Specializing in Clergy Taxes: For complex situations, consult a tax professional with experience in clergy and religious worker taxation.
7. Implications for Pending Applications and Future Planning
- Pending Tax Returns:
If you have a pending tax return, review your housing allowance designation and documentation. Make corrections if needed before finalizing your return. -
Future Planning:
- Ensure housing allowance is designated in advance each year.
- Keep detailed records of all housing expenses.
- Review your self-employment tax payments to avoid underpayment penalties.
- For members of religious orders, clarify your assignment with your leadership to determine the correct tax treatment.
- For Churches and Religious Organizations:
Review your policies and procedures for designating housing allowance and reporting clergy compensation. Provide training and resources to clergy and staff.
Conclusion and Practical Guidance
The 2025 IRS clarifications reinforce the importance of proper planning, documentation, and reporting for clergy, members of religious orders, and others with special employment arrangements. The housing allowance remains a valuable benefit for clergy, but only if designated and used correctly. Pension income for clergy is treated like any other pension, and the dual tax status continues to require careful attention.
As reported by VisaVerge.com, these clarifications are not new laws but important reminders and updates that help clergy and religious workers avoid costly mistakes. For the most current and detailed information, always refer to IRS Publication 517 and consult a qualified tax professional if you have questions about your specific situation.
By following these guidelines, clergy and other affected employees can make the most of their benefits, stay compliant with IRS rules, and avoid unexpected tax bills.
Learn Today
Housing Allowance → Amount designated by a church to cover clergy housing expenses excluded from gross income for federal tax.
Self-Employment Tax → Social Security and Medicare taxes paid on net earnings by self-employed persons, including clergy housing allowances.
Parsonage → Church-provided housing whose fair rental value is excluded from income tax but included for self-employment tax.
Vow of Poverty → A commitment by religious order members to renounce personal income and possessions, affecting tax obligations.
International Organization → An entity recognized by IRS tax rules whose employees’ compensation may be exempt from Social Security and Medicare taxes.
This Article in a Nutshell
The IRS updated 2025 tax guidance affirming housing allowance exclusions for clergy. Members of religious orders and foreign employees face clarified rules. Military pay treatment remains unchanged. Proper documentation and reporting are essential to comply and maximize benefits. Clergy must designate housing allowances in advance and pay self-employment tax appropriately.
— By VisaVerge.com
