PASTORAL COMPENSATION PACKAGE

Presented by:

Elder Tammy Tanner

Mar 6, 2025

BUILDING BLOCKS OF A PASTORAL COMPENSATION PACKAGE

• Questions regarding compensation packages:
• Why should we initiate a compensation package? Is compensation scripturally based?
• Who is considered a minister?
• Who are the decision-makers?
• What is the difference between reasonable and unreasonable compensation?
• How do you determine how much to compensate your pastor?
• What documentation is required to compensate your pastor?
• What are the different ways to compensate your pastor?
• When should you begin compensating your pastor?
• Now what?

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WORTHY OF DOUBLE HONOR

• I TIMOTHY 5:17-18
• LET THE ELDERS THAT RULE WELL BE COUNTED WORTHY OF DOUBLE HONOUR, ESPECIALLY THEY WHO LABOUR IN THE WORD AND DOCTRINE.
• FOR THE SCRIPTURE SAITH, THOU SHALT NOT MUZZLE THE OX THAT TREADETH OUT THE CORN. AND, THE LABOURER IS WORTHY OF HIS REWARD.

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MEANINGFUL WAYS TO HONOR OR�APPRECIATE YOUR PASTOR

• Meaningful Ways to Honor Your Pastor:
• Pay for General Assembly room with a daily meal allowance
• Reimbursement of travel expenses with an annualized capped amount
• Birthday Celebration
• Pastor Appreciation Service (i.e., one day versus 3 days depending on the size of your congregation)
• Pastor Appreciation Month Celebration – Dedicate a service or event in October (Pastor Appreciation Month) to honor your pastor.
• Personal Notes & Thank You Cards – Encourage members to write letters expressing gratitude for their pastor’s impact.
• Prayer Support – Organize prayer teams to regularly pray for your pastor and their family.
• Public Recognition – Acknowledge their hard work and achievements during church services or community events
• .Family Support – Offer support to the pastor’s family, such as childcare assistance, meals, or scholarships for their children.
• Invite Them to Dinner
• Surprise Gift Baskets – Deliver thoughtful gifts such as books, gift cards, or a favorite meal.

A well-appreciated pastor is more effective and energized to serve the congregation. Whether through financial support, acts of kindness, or words of encouragement, showing gratitude will make a lasting difference in their ministry.

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WHO IS A MINISTER�PART A

• For federal tax law the determination involves two areas of identification and analysis
• Credentials – to be classified as a minister for federal tax purposes, a minister must have something that sets him or her apart as a minister, and that “something” must be granted to the minister by a church. Congress provides a multiple-word reference to credentials using “duly ordained, commissioned, or licensed minister”
• 5 Factor Test
• Administration of the sacraments (marrying, burying, communion, praying for the sick and needy)
• Eligible to conduct religious worship
• Having management responsibility in a local church or denomination
• Ordained commissioned, or licensed, and
• Considered a religious leader by one’s church or denomination

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**The more factors met, the stronger the case for minister classification

**Traveling evangelists and some interim pastors are considered independent contractors. Instead of a W-2, they receive a Form 1099-NEC from the different churches where they provide services and file their income as self-employed.

**Warning: If an organization isn’t qualified as a church, as defined by the IRS, then the credentials issued by that organization are not recognized by the IRS as ministerial credentials and do not qualify a person to be a minister,

WHO IS A MINISTER�PART B

• For federal tax law the determination involves two areas of identification and analysis
• Duties – for an employee to be classified as a minister for Federal tax purposes, the employee must also perform duties applicable to those services performed by a minister in the “exercise of his ministry”.
• Defined by the Treasury Regulations, these include
• The ministration of sacerdotal functions
• The conduct of religious worship
• The control, conduct, and maintenance of religious organizations under the authority of a religious body constituting a church or church denomination
• The performance of teaching and administrative duties at theological seminaries, and
• Services performed under an assignment or designation by a religious body constituting the minister’s church

TYPES OF CHURCH WORKERS

• According to the IRS, a church can have four categories of workers:
• Volunteers – workers receiving no compensation
• Ministers – workers meeting certain criteria
• Employees – workers meeting a common law analysis or statutorily defined by the Internal Revenue Code (IRC)
• Independent Contractors – workers meeting the common law analysis or statutorily defined by the IRC (if a worker is truly an independent contractor, then the church must create policies and procedures to meet the documentation and reporting requirements of the IRS for the classification).
• Employee or Independent Contractor three-prong test
• Behavioral Control – instructions or training given to the worker
• Financial control – worker is reimbursed for business expenses
• Relationship of the parties – written contract, employee benefits (see pg. 51 of Church Compensation 2^nd Edition)

Sommerville, Elaine L. Church Compensation: From Strategic Plan to Compliance. 2nd ed., Christianity Today International, 2021

INDEPENDENT DECISION MAKERS

• A Pastor cannot vote on his or her compensation, nor can any of his or family members vote on his or her compensation.
• A person under the supervision of the pastor, or whose compensation might be set by the pastor cannot vote on the pastor’s compensation
• A CPA serving on the finance committee cannot vote on the pastor’s compensation if the pastor can decide whether to use or not to use the CPA for the church’s accounting services
• Your board must approve anything you pay your pastor or on behalf of your pastor.

REASONABLE �VS�UNREASONABLE COMPENSATION

• A church can pay any amount up to a reasonable point for any employment position. Due to potential excess benefit transactions, a church must formally analyze compensation paid to certain staff members in key decision-making positions – normally the senior pastor and any other senior leadership.
• Other Important Factors: ONE SIZE DOES NOT FIT ALL
• Size and complexity of church – size and scope of activities may influence responsibilities carried by pastors and staff and thus may affect their pay
• Mission of the church
• Location – a high cost of living does not automatically support a high compensation package
• Employee qualifications – a less experienced or less qualified employee does not command the same salary as one with greater experience or better qualifications
• Nature and scope of the employment duties – levels of responsibilities should be reviewed
• The prevailing economic conditions of the area – the local economy may drive compensation
• The overall salary philosophy of the church – the philosophy should be in a policy adopted by the church governing body and applied across the board to all positions
• The financial condition of the church—Consider the overall financial position of the church, not just annual revenue. Is the church carrying a huge amount of debt? Is the church capable of meeting all of its financial obligations? Does it operate comfortably within its budget?

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** Do not base compensation on a percentage of revenue unless it is subject to a cap of predetermined reasonable compensation. Open-ended percentage compensation arrangements are considered abusive and unreasonable by the IRS

COMPENSATION PACKAGE COMPARABLE DATA

• The church must base the “compensation package” on outside comparable data.
• For compensation, this includes:
• Outside compensation surveys; outside data is often the best validation to justify an amount paid. There are three sources for outside data: salary surveys, independent salary consultants, and comparison with other churches.
• Individual compensation studies
• Or direct comparisons with other organizations

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** Once a reasonable compensation for a position is determined, it becomes the foundation for developing a compensation plan.

THE UMBRELLA

• Once the reasonable is determined for a position, it becomes the “umbrella” used to evaluate all compensation that falls under it, including all benefits the church provides in exchange for performing services (cash and noncash benefits, taxable and non-taxable).
• A church may choose not to pay the full amount it identifies, but it must not exceed this amount.
• Everything benefiting the employee is key and must be reviewed. This includes all forms of salaries, fees, bonuses, deferred compensation, contributions to qualified retirement plans, severance pay, disability benefits, housing allowance, other allowances, expense reimbursements, automobiles, tuition, and any other benefits.
• Establish a value for benefits – whether a benefit is a cash benefit or a noncash benefit, it has a value. Even if a benefit is difficult to value, it needs to be valued at fair market value. The value of the benefit is not based on what the church may pay for the benefit.

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DOCUMENT�DOCUMENT�DOCUMENT

• The church must document any approval of the transaction in writing, including all supporting information.
• Documentation must include:
• The terms of the transaction and the date it was approved
• The members of the authorized body present during the discussion of the transaction and those who voted on the transaction
• A description of the comparable data and how the authorized body used it; and
• Disclosure of everyone who possessed a potential conflict of interest and how the authorized body addressed it.

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**If a decision maker does not agree with the compensation being approved, he/she must make sure his/her “no” vote is recorded in the written documentation. See pg. 33

**In the event of an IRS examination, one of the first documents requested is the organization’s minutes.

EXAMPLE OF COMPENSATION DOCUMENTATION

• After identifying the benefits and valuing them appropriately document the compensation package.
• The documentation must state:
• The decision made by a properly authorized group or person
• Written documents demonstrating what was used in the process to reach that decision
• Decision should be recorded in the meeting minutes of the governing body that approves the compensation
• A documentation should be kept in the church’s custody and securely stored. Individual personnel files should contain summaries of each person’s documented compensation package

EXAMPLE OF COMPENSATION PACKAGE

** There is only $4,200 left in the overall value available for any other benefit and/or bonus that may occur during the year. The committee will document the above package in the minutes of the meeting.

SPECIAL COMPENSATION�CONSIDERATIONS FOR MINISTERS

• Types of Special Consideration:
• Love Offerings or Special Occasion Gifts
• Sabbatical Arrangements
• Expense Reimbursements Arrangements

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SPECIAL COMPENSATION�CONSIDERATIONS FOR MINISTERS

• Love Offerings or Special Occasion Gifts – many churches show appreciation to their ministers through special gifts. There are many times when love offerings and special occasion gifts happen, including:
• A visiting minister may bring a special message or minister during service and receive a love gift or offering.
• October brings Pastor Appreciation Month, so congregants give special appreciation gifts to their minister.
• The youth minister is having a baby, and the congregation blesses his family with a special baby gift.
• After years of faithful service, retiring ministers are provided with retirement gifts.

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SPECIAL COMPENSATION�CONSIDERATIONS FOR MINISTERS

• Application of Taxation
• Direct payment from a church to a minister or employee – where the church pays directly to a minister or an employee, the amounts are not gifts, according to the IRS. Common occasions include anniversary gifts, Christmas gifts, birthday gifts, or retirement gifts.
• Facilitating Collection of Funds for Ministers and Employees - a church provided the congregation with specially designated envelopes. Certain envelopes were turned into the trustees and other envelopes were handed directly to the pastor.
• Direct Gifts to Ministers and Employees from Congregants – this is the most difficult of the common practices to evaluate the “gifts” tax effect. Ultimately, the pastor must decide if the gifts are taxable and if they must be included in his personal tax return. (see pg 168-169)

SPECIAL COMPENSATION�CONSIDERATIONS FOR MINISTERS

• Expense Reimbursement Arrangements (2^nd Most Valuable Benefit)^d
• If a minister incurs a legitimate expense on the organization’s behalf, he/she should be reimbursed.
• There are two types of core arrangements: accountable and nonaccountable plans.
• Accountable Plan: “Only pay for actual expenses”
• Expenses related correctly in an accountable expense reimbursement plan do not create taxable income for the minister.
• Establish a business connection between the employee and the expense. General approval is required for valid business expenses – hotel, airfare, meals (does not create a taxable income for the pastor)
• We will cover all your expenses up to X amount; it must be approved by the board to demonstrate it is not for personal benefit.
• The pastor must substantiate the amount, time, place, and business purpose of the expense (What you shouldn’t do is estimate how much you think it is going to cost).
• Provide the substantiation within a reasonable period to the church, including the repayment of unspent advances. To meet the “reasonable period” criteria, the organization may use a fixed date method as defined by the IRS and described below.
• Any excess is returned to the payer within 120 days after an expense is paid and incurred
• An expense is substantiated to the payer within 120 days after an expense is paid or incurred

**A church can get the pastor a church credit card, but he/she must turn in all receipts after the conference to prove it as a business expense. You must be able to track all receipts (i.e., credit card statements).

** Expense accounts or accountable plans can include study materials, can turn in business miles to the conference, and can be reimbursed for driving to/from the hospital.

SPECIAL COMPENSATION�CONSIDERATIONS FOR MINISTERS

• Two Core Arrangements Cont….
• Non-accountable plan: arrangements are classified as nonaccountable expense reimbursement plans that are 100% taxable to the minister and included on Form W-2 as wages for federal tax.

PASTORAL SALARY

• The board is the legal governing body of the church and must approve any benefit arrangement.
• First, designate the amount i.e., $1,000 must be approved per month
• All $1,000 must be designated as a housing allowance or salary or both ($500 for each)
• Have the pastor fill out the housing allowance form and turn it in (optional)
• Church Tax & Law has a tool used to determine the range of salary payments
• Salary data service is also provided through thechurchnetwork.com
• Can use a payroll processing service or a church can assume this responsibility
• It is a violation of federal law to leave salary open-ended to how much income the church receives monthly or yearly; the church would need to set a maximum for the year, For example, the church will pay 10% of tithes and offerings NTE $50,000 per year. Can be considered an excess benefit as church membership grows. The IRS hates open-ended compensation packages.

PASTORAL SALARY CONTINUED

• Clergy (Employees) are subject to estimated tax payments every quarter, which include federal, social security, and state taxes.
• 2025 quarterly estimated tax due dates:

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HOUSING ALLOWANCE

• Housing allowance is the most valuable benefit to a minister.
• The board is the legal governing body of the church and must approve any benefit arrangement in advance of payment (Housing allowance must be established before you pay it via written minutes or in an approved budget detailing the amounts allocated to the minister).
• First, designate the amount, i.e., $1,000, then the amount must be approved by the board of directors.
• For example, if you can, designate the full amount of $1000 as a housing allowance or split it in half with salary (i.e. $500 for each).
• Complete the housing allowance form if you want to receive a housing allowance. Minister Housing Allowance (MHA) can be used for rent, downpayment on a home, mortgage payments, real estate taxes, home insurance, utilities (electricity, gas, water, trash removal), furniture and appliances, repairs, maintenance or improvements, and homeowner association fees.
• Have the pastor fill out the form and turn it into the board (can be used by the pastor to estimate how much he/she wants to be designated as housing allowance).
• The average church of 500 ppl pays their pastor X amount, which helps to determine reasonableness.
• You can pay a Pastor 100% Housing Allowance, but if you do this, you won’t be able to contribute to his/her retirement plan. The biggest downfall.
• Ministers have the ultimate responsibility to report housing allowance on their Form 1040 box 14 of W-2, and they will need to include housing allowance as income for self-employment taxes.

**The regulations require that the housing allowance be designated under official action taken in advance of such payment by the employing church or other qualified organization. Treas Reg 1.107-1(b)

** This resolution shall remain in effect until amended or revoked.

PASTORAL RETIREMENT PLANS

• Qualified Retirement Plans allow employees to save funds for the future without currently paying income tax on the funds. The taxation of the funds is deferred until the funds are removed from the plan by the participant
• There are several types of Qualified Retirement Plans:
• 401K - The 401(K) is a common workplace retirement solution offered by many private-sector employers. It provides employees with the opportunity to invest for retirement in a tax-advantaged way.
• 403B - A 403(B) is a retirement plan offered by public schools and non-profit organizations and is similar to a 401(k) plan. A 403(b) plan is designed for certain employees of tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.
• Clergy 403B - The Clergy Advantage® 403(b) is powerful and portable, so you can enjoy tax-free money for life. A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.

MALPRACTICE INSURANCE

• This does not exist in the church world, primarily for doctors and lawyers.
• However, the church needs adequate insurance to cover accidents in the church, sexual misconduct, accidents at camps, retreats, athletic events, etc.
• The church should look into an umbrella policy. This is an added coverage that acts as an umbrella over your other liability coverage should those coverage limits be reached through claims activity. This coverage is for those rare but extremely expensive liability claims.
• Always make sure the church has good insurance as it will/should cover anything concerning the pastor carrying out his official duties.

MEDICAL INSURANCE

• Medical Insurance is tricky as it involves merging the Federal Tax Law & Affordable Care Act (ACA) provisions
• If the church only has one employee, the church can provide reimbursement for a medical insurance policy, free of charge, as long as the policy was not purchased via the health insurance exchange.
• The policy should not be obtained on the local exchange market.
• A church can obtain a group policy; the ACA is a big proponent of group policies; the church should sit down and see what it wants to do and then seek out a council to see what its options are.
• ACA violation penalties are $100 per day per employee.
• Group health insurance does not include Medicare.

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LIFE INSURANCE

• Most American families are not prepared for a tragedy that removes the primary wage earner from the household.
• Life insurance may be provided to employees through three plans:
• Group plans – Group term life insurance is a policy carried by the church covering a group of employees. Coverage may be provided tax-free by the church for up to $50,000 on the employee’s life and up to $2,000 of coverage for his/her spouse and dependents.
• Individual-Term Life Plans – coverage provided to just one or more specific employees, not covered as group coverage, is taxable based on the cost of the premiums.
• Whole-Life Insurance Plans – Whole-life insurance has many varying options on the structure of ownership and benefits. This type of policy creates a tax benefit for the employee.
• Life Insurance outside of a group plan. Life Insurance is a taxable benefit if only paying for one person (the church pays the premium and the pastor would be responsible for paying the tax).
• For example, if the premium is $100 per month, the pastor’s taxable income would be $1, 200 per year.
• See the table on slide 31
• Key Man Insurance – when a church purchases life insurance on a key staff member where the proceeds of the policy are payable to the church. This policy does not create a taxable benefit to the employee unless the employee selects a beneficiary for a portion of the policy proceeds.

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DISABILITY INSURANCE

• There are two types of disability insurance:
• Short-term disability insurance – This may replace all or a percentage of your income when you’re temporarily unable to work due to a non-work-related illness, injury, or medical condition. This can help cover everyday living expenses — such as rent, mortgage payments, and groceries — while you’re momentarily absent from work.
• Long-term disability insurance - Long-term disability coverage is disability insurance that pays a portion of your lost wages if you’re injured or become ill and can no longer do your job. Long-term disability payments may be available for many years—for example, five or 10 years—depending on the policy. This can help with brain injuries, cancer, kidney disease, heart attack, stroke, mental health, and musculoskeletal disorders.
• Disability is the most overlooked life benefit, yet it is one of the most needed life benefits.
• It is estimated that 1 in 10 Americans become disabled before retirement
• This benefit is provided when an active member of the clergy is unable to work because of illness or injury.
• Disability Insurance is not considered medical insurance by the ACA.
• If an employee pays tax on the premiums for the disability income policy, then the employee will not have to pay tax on the distributions under the policy.
• If the premiums are not taxed to the employee (included in W-2), then the policy distributions will be taxable to the recipient.

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PASTORAL STATISTICS

Recent Statistics on Pastoral Burnout & Resignation

• 42% of pastors considered quitting ministry in 2022 – A Barna Group study found that nearly half of pastors seriously thought about leaving full-time ministry due to stress, burnout, and loneliness. (Barna Group, 2022)
• 80% of pastors feel that ministry has negatively affected their families – Many report experiencing strained relationships, lack of time, and financial struggles due to their pastoral responsibilities. (Pastoral Care Inc.)
• 75% of pastors report feeling highly stressed regularly – The overwhelming demands of ministry, including sermon preparation, counseling, and leadership duties, contribute to chronic stress. (Fuller Institute, 2023)
• 50% of pastors would leave the ministry if they had another way to support their families financially – Financial insecurity remains one of the leading reasons pastors consider leaving their roles. (Lifeway Research, 2021)
• 38% of pastors say they feel isolated and lack close friendships – The pressures of ministry can lead to loneliness and emotional exhaustion. (Barna Group, 2022)
• Over 1,500 pastors leave the ministry every month: Reasons include burnout, church conflicts, financial stress, and declining mental health. (Pastoral Care Inc.)
• Only 1 in 10 pastors will retire as a pastor – Many leave the ministry for different careers before reaching retirement age. (Focus on the Family, 2023)

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PASTORAL BURNOUT & RESIGNATION

Top Reasons Pastors Are Quitting

• Burnout & Mental Health Challenges
• Financial Struggles
• Lack of Work-Life Balance
• Church Conflict & Criticism
• Declining Church Attendance & Engagement

How to Support Pastors & Prevent Burnout

• Encourage regular sabbaticals and vacations
• Provide fair compensation and financial support
• Foster a strong support system within the church
• Offer counseling and mental health resources
• Recognize and appreciate their efforts consistently

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These statistics highlight the urgent need to care for and support pastors to ensure their well-being and longevity in ministry.

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BACKUP SLIDES

• Tax Forms Used by Clergy
• Summary of Taxation Codes
• Sample Housing Form
• References and Useful Links
• Church Insurance

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TAX FORMS USED BY CLERGY

• Form 1040 is the core tax document to report your income and summarize other important tax information. On it, you’ll state your filing status, name and address, dependents, and earnings.
• Schedule A is used to itemize deductions like medical and dental expenses as well as taxes, interest, qualified disasters (casualty or theft of your personal property, hurricanes or wildfires), and charitable donations.
• Schedule C is meant for reporting income and expenses relate to activities beyond your ministerial duties. That could include speaking events at other churches, or fees you’ve received directly from church members for services like weddings, funerals, baptisms. You can also deduct expenses like travel, office needs, books, and computers.
• Schedule SE is intended for reporting social security taxes owed on your self-employment income, unless you’ve received a Form 4361 exemption (Application for Exemption from Self-Employment Tax for Use by Ministers, Members of religious orders, and Christian Science Practitioners).

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Basic Forms of Cash Pay:

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Health Plans

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Transportation

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Education

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Personal Life Benefits

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Personal Life Benefits Continued

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Personal Life Benefits Continued

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Work Related

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Forms of Termination and/or Retirement Plans

SUMMARY OF TAXATION OF COMMON FORMS OF COMPENSATION

Fringe Benefits: Forms of Termination and/or Retirement Plans

SAMPLE HOUSING ALLOWANCE FORM

ANOTHER SAMPLE HOUSING ALLOWANCE FORM

SAMPLE HOUSING ALLOWANCE FORM

REFERENCES/USEFUL LINKS

• Church Compensation 2^nd Edition by Elaine Sommerville, CPA
• https://thechurchnetwork.com/
• https://www.ministrypay.com/
• https://www.ecfa.org/
• https://www.churchlawandtax.com/
• https://www.cpg.org/
• https://www.resourceumc.org/en/content/the-academy-of-church-business-administration
• https://www.clergysupport.com/life-disability-insurance-overview/
• https://www.ministryworks.com/services/payroll-tax-filing/
• https://www.clergyfinancial.com/

REFERENCES: CHURCH INSURANCE

• https://www.alfainsurance.com/insurance/other-insurance/church-insurance/church-insurance-coverages
• https://www.churchmutual.com/
• https://www.agfinancial.org/resources/article/understanding-church-insurance-liability-coverage
• https://www.nationwide.com/business/insurance/industries/types/churches
• https://www.brotherhoodmutual.com/