I’m not an a tax accountant, but I have done some bookkeeping for a few churches. The housing allowance is subject to FICA (self-employment tax for many ministers) but not federal tax. I believe because it is not considered a “wage” but an “allowance” —much the same a car allowance can be allotted (it’s not subject to federal tax either). Records must be kept to prove that the housing allowance is actually being used for housing purposes. Any amount given that is not being used for housing purposes must be declared as taxable income.
In some cases, a parsonage is provided in lieu of a housing allowance. A parsonage is usually located on the church property (which usually means the minister is available to “minister” virtually 24-hours per day). I guess it was extended to provide for those ministers to which a parsonage is not available.
And a great many ministers are able to elect out of Social Security (i.e., FICA and Medicare) and do so.
I believe there is a concern that churches are using these allowances as part of the salary but taking advantage of the tax free status.
Churches are easily racket-able. You’d be surprised how many “churches” exist simply to soak up Social Justice and political campaign money.