You may find it helpful to begin by considering the goals of a compensation package. A church should provide its staff with adequate income so that they can fulfill their roles without undue concern about current and future financial needs. Freedom from financial anxiety lets the minister focus on his or her service. It also helps your church attract and retain qualified pastoral leadership.
A good compensation package is the fair thing to do. It compensates pastoral leaders for their investment in education, as well as for their talent, experience, and effort.
Minister’s compensation should include the following five components. Consider the tax implications of each component as you design the compensation package. The way you allocate these components can have a significant impact on the taxes.
The cash salary is the basic amount paid to the minister, not including housing, allowances, benefits, or reimbursable expenses. Depending on the minister’s individual tax and housing situation, some or all of the salary may be subject to federal income tax and self-employment tax. Ministers are considered employees for income tax purposes and self-employed for Social Security purposes. A minister’s cash salary can be subject to federal, state, and local income taxes.
A second, major portion of a minister’s compensation is housing, which is provided either in the form of the rent-free use of a church-owned house or a housing allowance. Various options for housing should be considered as part of the agreement and may be renegotiated as required. The amount of total salary designated for housing must be established in advance by a vote of the church or official board and reported in writing to the minister, before payment at that salary level begins.
Section 107 of the Internal Revenue Code allows ordained, licensed or commissioned ministers to exclude from federally taxed income some or all of the cost of providing their principal residence.
For example, a minister receiving a cash salary of $50,000 might have $20,000 of the cash amount designated as a housing or parsonage allowance. Only $30,000 would be considered taxable for federal income taxes.
The amount of the allowance should cover the cost of maintaining and furnishing the primary home:
- mortgage or rent payments
- utilities, etc.
For federal income tax purposes, the excludable amount of the housing allowance is limited to the lesser of:
- The amount designated by the church, or
- The amount actually spent on housing by the minister for the year,
- The fair rental value of a furnished house, plus utilities such as gas, electricity, oil, telephone, and water.
Social Security Allowance
While ministers are employees for federal income tax reporting purposes, they are self-employed for Social Security purposes with respect to services they perform in the exercise of their ministry.
This “dual status” means they are not subject to withholding requirements for the employee’s share of Social Security and Medicare taxes. Instead, they pay a Self-Employment Contributions Act (SECA) tax. Churches are not permitted to pay the SECA tax for their ministers; however, most churches assist ministers by
providing them with a Social Security Allowance of at least 50% of the SECA tax. This provides an equivalent of Social Security/Medicare (FICA) taxes that the church would pay on behalf of a non-clergy employee.
Salary – $30,000
Housing – $20,000
Total – $50,000 x .0765 = $3,825.00
Social Security Allowance – $3,825.00
Accountable Reimbursement Plan
Reimbursable expenses are those costs, reimbursable to the minister, that are incurred in the performance of their duties. They are not part of the minister’s compensation. They are “business” expenses for which the congregation is responsible.
The church should establish an accountable reimbursement policy. Ministers are allowed to exclude all reimbursed expenses from their reportable income. The church reimbursement policy should include the following, but not limited to:
- office supplies
- religious material
- books, publications, subscriptions
- dues and memberships
- continuing education
- travel, etc.
A strong benefits plan includes retirement plan contributions and medical, life and disability coverage for ministers and other employees. Having this type of plan shows tangible concern for your church’s staff, which can reduce turnover and increase attractiveness for potential new employees.
The benefits and insurance components protect both the minister and church from unexpected setbacks. They ensure that their ministers receive support, even if they are unable to fully carry out the church’s ministry.
Benefit packages can also include;
- Paid holidays
- Vacation and sick accruals
- Continuing education leave
- Sabbatical leave
- Parental leave
- Bereavement leave
- Personal leave
- Military leave
- Dental and vision care
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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