By Dr. Franklin Dumond
Every fall thousands of committed believers serving on the finance teams and budget committees of Bible believing churches wrestle with plans for the next year’s budget. Salary for church personnel is a large factor in most of these discussions since the combined salary line items can easily account for 40%-65% of the total budget. Pastor search teams confront similar issues as they work on behalf of the church to present not only a prospective new pastor but to also explain the salary package.
Learning some vocabulary
- Base salary This would be similar to the regular income of an employee.
In our society this is often computed on an hourly rate. - Housing Currently, IRS regulations allow pastors to exclude housing costs from income that is subject to federal income tax. However, housing may be a housing allowance or the rental value of a parsonage. Housing is subject to self-employment tax.
- Self-employment Tax For Social Security purposes pastors are considered self-employed. This means that their income, including housing, is subject to self-employment tax at the rate of 15.3%. Computed on a separate form as part of the 1040 income tax return, a small credit is allowed to offset some of the costs of self-employment tax.
- Professional Expenses Pastors generally incur some costs to undertake their ministry. These would often include the cost of a cell phone plan, travel on behalf of the church, office expenses, professional dues and continuing education. Since full time pastors are employees of the church, not contract employees, these are actually costs of the church not personal costs of the pastor.
- Matching Contribution Employers in the United States are required to contribute 7.65% of each employee’s salary to their individual Social Security accounts. Employees are also required to contribute 7.65% of their salaries to their individual Social Security accounts. Churches may provide an extra salary line item to address Social Security taxes. When this is done, it increases the pastor’s taxable income but it is a fair approach in our culture. A church may not withhold self-employment/social security taxes from the pastor but may, as a courtesy, withhold additional income taxes to offset the self-employment tax if requested by the pastor on his W-4.
- Take-home Pay This is the amount left after deductions for federal, state and local income taxes have been made. Other deductions for retirement and health care may also be included here. As most of us know take-home pay is much lower than total income!
Jesus reminded his hearers of the importance of careful planning:
“Is there anyone here who, planning to build a new house, doesn’t first sit down and figure the cost so you’ll know if you can complete it? If you only get the foundation laid and then run out of money, you’re going to look pretty foolish. Everyone passing by will poke fun at you: ‘He started something he couldn’t finish.’ Or can you imagine a king going into battle against another king without first deciding whether it is possible with his ten thousand troops to face the twenty thousand troops of the other? And if he decides he can’t, won’t he send an emissary and work out a truce?” Luke 14:28-32 The Message
Church budgets and pastor’s salaries demand the same care.
This article is part one (continue reading with part 2, part 3, part 4)of a six part series by Dr. Franklin Dumond, Director of Congregational Ministries, on understanding and planning for a pastor’s salary. Check back over the next few weeks (or subscribe using the box to the right) to learn more about the process and intricacies of paying your pastor.
