Do I pay Social Security and Medicare tax on my housing allowance?

In most cases, yes, and this surprises many pastors. The housing allowance exclusion applies only to federal income tax. It does not apply to self-employment tax.

For Social Security purposes, ministers are treated as self-employed for their ministerial income, even if they receive a W-2. That means you pay SECA tax (currently 15.3% on most earnings) via Schedule SE instead of having FICA withheld. When you fill out Schedule SE, IRS Publication 517 requires you to add back both your cash housing allowance and, if you live in a parsonage, its fair rental value plus utilities. So a pastor with a $50,000 salary and a $20,000 housing allowance generally pays self-employment tax on about $70,000, even though income tax applies only to $50,000.

The one exception: ministers who have an approved Form 4361 on file with the IRS. Form 4361 is a one-time, irrevocable application to opt out of Social Security for ministerial earnings, available only to those with a religious or conscientious objection to public insurance, and it must be filed by the due date of your return for the second year you have at least $400 of ministerial self-employment earnings. If your Form 4361 was approved, your housing allowance (like the rest of your ministerial income) is exempt from SE tax.

Budget for SECA on your housing allowance, usually through quarterly estimated payments or extra income tax withholding.