Formulating a compensation plan that is in compliance with IRS Tax Codes and Tax Efficient for the minister requires:

› Awareness of the dual tax status of ministers;

› Recognizing the difference between Salary, Benefits, and Expenses;

› A Commitment to reasonable compensation for ministerial service

For Federal Income Tax purposes, an ordained minister is considered an employee of the church;

For FICA/Social Security purposes, the minister is consider self-employed and is responsible for quarterly estimates of 15.3% of salary & housing

The Costs of Ministry are those business and professional expenses connected with going the work of the minister.

These expenses should be budgeted as ‘Ministry Expenses’ and NOT part of the compensation.

Listing expense reimbursement as compensation can result in higher taxes for the pastor

Business and Professional Business Expenses can include Automobile/Travel, Conventions, Continuing Education, Professional Dues, Books, and Hospitality.

These expenses should be reimbursed using an Accountable Reimbursement Plan (ARP) rather than an “allowance plan.”

The cost of a minister consists of appropriate benefits, housing, and cash salary.

Benefits might include Social Security offset (7.65%), Insurance, Annuity/retirement, and Gifts/bonuses

Parsonage/Housing Allowance can be used for utilities, renters’ insurance, upkeep, etc.

Social Security, Insurance, FRV of the parsonage, & utilities are non-discretionary items;

Cash Salary is a discretionary line item that is to be used as the pastor wishes

Salary + Benefits = Compensation

Reimbursements = Church Expense

Pastor’s Compensation

Salary:

A. Cash ______________

B. FRV ______________

C. Housing ______________

Allowance

TOTAL SALARY ______________

Employee Benefits:

A. Social Security ______________

B. Annuity/Retirement ______________

C. Insurance ______________

D. Gifts/Bonus ______________

TOTAL Benefits ______________

Benefits + Salary = Compensation According to the US Chamber of Commerce, Benefits averaged 37.6% of Salary nationally.

Business/Professional Expense Reimbursements:

A. Automobile/Travel _______________

B. Conventions _______________

C. CE _______________

D. Professional Dues _______________

E. Hospitality _______________

TOTAL EXPENSES _______________

** Should be paid using a church-approved “Accounts Reimbursement Plan”

Details about Ministerial Housing Allowance can be found in IRS Publication 517

With respect to use of a parsonage, the Minister is considered self-employed and must pay Social Security (FICA) tax on the FRV of the parsonage.

That rule would also apply to any Housing Allowance used to pay for utilities, renters’ insurance, upkeep, etc.

Ministers must file quarterly estimated tax payments.

However, the housing allowance is NOT subject to federal income tax, but it IS subject to Federal Income Tax.

Housing allowance must be designated in advance (i.e.: budget). It cannot be applied retroactively. However, it can be amended during the year.

Unlike Expense Reimbursement, the Housing Allowance does not have to be separated from the Salary check.

Must be formally adopted by the governing board or the church as a whole in conference.

Reimburses ministers for those business expenses that are substantiated with receipts and/or in writing within 60 days of expenditure.

Accountability should be written and kept for a minimum of 3 years

Survey nationally of churches with attendance of 40-125, a resident membership of 100-250, and a church budget of $70,000 - $140,000 resulted in these findings:

Average Salary + housing = $46,000-$62,964 Average Benefits = $ 5, 850-$10,773 TOTAL Compensation = $54,173 - $68,814

With 5,840 churches reporting, the middle 70% of those churches reported that 36% - 58% of their budgets were used for staff compensation & benefits.

Matthew 22:17-21

Romans 13:1-7

Titus 3:1

I Peter 2:13-17

Romans 12:9-18