by Franklin Dumond, Director of Congregational Ministries

Four Attempts at Fairness

A prayer on behalf of a pastor was short and direct, “Lord you keep him humble; we’ll keep him poor.” Even if this prayer was never prayed the result in the local church has often been the same. Sometimes the result was never intended but the method to determine fairness was itself the culprit. I have seen four attempts at fairness when it comes to pastor’s salaries. Some are more fair than others.

1. WHAT IS THE AVERAGE INCOME FOR THE CHURCH?

On the surface this seems the most fair since it is based on incomes for the families in the church. Beneath the surface, however, the fairness may be lost if:

• a) the salary package does not properly account for benefits that are also given to wage earners in the congregation,
• b) the report from the congregation is incomplete,
• c) the congregation includes a large number of retirees who have a smaller, retirement income that is adequate to their status as mortgage-free homeowners,
• d) the pastor is an entry level pastor but the average income is substantially above entry level income. (Here the fairness to the church is lost since they would be paying more than necessary. In the other cases the fairness to the pastor is lost since he is being paid less that should be expected.)

2. WHAT DOES IT COST TO LIVE IN OUR COMMUNITY?

What a church needs to do to make this method work is to find the value of a respectable middle-class home in their area, factor in the pastor’s student debt, loan on the minivan, etc. and then figure out what kind of salary he needs to make to qualify for the mortgage on that home.

3. WHAT CAN WE AFFORD?

While this may be the actual bottom line issue for most churches “What do we choose to afford?” may be the real question. Church budgets should generally allocate 40-65% of income to employee costs.

4. WHAT IS THE PROFESSIONAL EQUIVALENCY IN OUR COMMUNITY?

The suggestion is that a church look at a secular profession that is most similar to pastoral work and pay accordingly. Most of the time this will be the high school classroom teacher. Local school districts will have salary scales developed based on educational level and tenure. So when the church looks up the education level of its pastor along with his years of experience in full time ministry a community-based standard of pay will be in hand. If the pastor manages a number of staff, then pay him as a building principal using the school district salary schedule.

Of all the systems reviewed this one seems most fair to all concerned. All pastors (not just senior pastors) receive a decent middle-class salary that directly compares to salaries being paid in the community. All pastors are compensated in accord with their education and experience with proper benefit packages. Those pastors who pastor larger churches are compensated in line with their expanded responsibilities.

The New Testament calls for fairness in pastoral salaries by insisting that “The worker deserves his wages.” (I Timothy 5:18 NIV)

[Author’s Note: While the advice included here is believed to be in compliance with IRS regulations, readers should consult professional advisors to insure all local plans meet IRS expectations.]

Four Factors in a Salary Package

One of the major costs in a church’s budget is the cost of employees. Since most churches only have one employee the major costs in most church budgets will be the cost of the pastor’s salary package. As a rule of thumb 40-65% of a church budget should be spent on employees. These percentages will seem entirely too high for many businessmen who keep employee costs to 10-20% of operations. These percentages will seem too low for many school administrators since education budgets often spend 80-90% of total budgets on employees.

At the heart of the matter is a basic question that, when answered, will guide the process to a fair conclusion. How do you compute a salary package?

1. IS THE PASTOR A SELF-EMPLOYED, INDEPENDENT CONTRACTOR OR AN EMPLOYEE OF THE CHURCH?

An interim pastor, a guest speaker or an evangelist function as self-employed contractors with limited oversight from the church and a great deal of flexibility about scheduling their limited services. A permanent pastor—whether bi-vocational or fully funded—is an employee of the church by all the standard descriptions of employees used by the IRS. Self-employed contractors receive a 1099 report of payments made to them which is then used on a Schedule C where it is reduced by the costs of doing ministry. Pastors as employees receive a W-2 with a detailed list of income, tax payments, retirement contributions and housing benefits. This is reported on the wages line of Form 1040.

2. WHAT BENEFITS WILL THE CHURCH PROVIDE?

In the United States some benefits paid on behalf of employees, like the matching portions of Social Security/ Medicare, are legally required of the employer. Others have become cultural expectations. Still others have been developed to attract and hold quality employees. A church would be wise to develop benefits for its employees that address:

1. SELF-EMPLOYMENT TAX REIMBURSEMENT. This can be an added line item in the budget but remember it is not part of the pastor’s take-home pay!
2. VACATION SCHEDULE. Should additional days of vacation be earned based on length of tenure?
3. HEALTH INSURANCE. This is a very BIG issue in light of the affordable care act. Individual health insurance is increasingly expensive. Many pastoral spouses subsidize the church by providing family coverage through the work place. As a rule of thumb health insurance premiums are not taxable income if the church pays the insurance company directly. However, if the same premiums are paid directly to the pastor they are probably taxable income.
4. PROFESSIONAL EXPENSES. What the church will and will not cover as professional expenses must be determined in advance and in writing to avoid misunderstanding, conflict and tax problems.
5. RETIREMENT. The General Baptist Pension Program provides a strategy of employee contributions with employer contributions in a self-managed portfolio that is available to all General Baptist church employees.

3. WILL HOUSING BE PART OF THE PACKAGE?

Many churches provide a parsonage. Others use a housing allowance. Each has its benefits and its pitfalls. Housing in rural communities or small towns is often at a premium. In those cases a parsonage is advantageous. On the other hand, every year spent in a parsonage is one less year’s equity in a home!

4. WHAT ABOUT CONTINUING EDUCATION?

Although it could be included in the benefit list above, Continuing Education merits a separate paragraph. Currently General Baptist Ministries provides conference and event packages that provide quality continuing education through the Mission & Ministry Summit and the General Baptist Minister’s Conference. Youth Pastors can find specialized training opportunities and networking through the National Youth Conference.

The built-in difficulty for most oversight committees that develop church salary packages is that they have never seen the true cost of having an employee. The weekly pay stub received by most employees will have a list of tax deductions and other contributions but it will not include a behind-the-scenes look at what an employer contributes.

Unfortunately church budgets often look only at the bottom line of total cost for an employee to determine if that is a fair wage when in actual fact salary package is very different from take home pay.

The New Testament is pretty clear about salary packages for teaching pastors: The elders who do good work as leaders should be considered worthy of receiving double pay, especially those who work hard at preaching and teaching. (1 Timothy 5:17 GNT)

Six Terms Everyone Needs to Learn

Let the elders who rule well be counted worthy of double honor, especially those who labor in the word and doctrine. For the Scripture says, ‘You shall not muzzle an ox while it treads out the grain,’ and, ‘The laborer is worthy of his wages.’ (I Timothy 5:17-18 NKJV)

Every year 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.

[Note: Lest this be considered excessive it should be noted that many public school systems spend 80-90% of operating budgets on personnel costs.]

LEARNING SOME VOCABULARY.

1. BASE SALARY. This would be similar to the regular income of an employee. In our society this is often computed on an hourly rate.
2. HOUSING. Currently, IRS regulations allow pastors to exclude housing costs from income that is subject to federal income tax. Housing may be a housing allowance or the rental value of a parsonage. However, housing is subject to self-employment tax. A ruling in Wisconsin in October 2017 alarmed many participants in housing allowance plans. Currently this ruling is under review and if it is upheld by the Seventh Circuit Court of Appeals it would apply only to Illinois, Indiana and Wisconsin until review by the Supreme Court. It should also be noted that the ruling applies to housing allowance not to parsonages that are provided. (For more information see the October 2017 blog posted at www.churchlawandtax. com.)
3. 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%. Self-employment tax is the equivalent of employer and employee combined Social Security/Medicare withholdings. 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.
4. MATCHING CONTRIBUTION. Employers in the United States are required to contribute 7.65% of each employee’s salary to their individual Social Security and Medicare accounts. Employees are also required to contribute 7.65% of their salaries to their individual Social Security and Medicare accounts. Churches may provide an extra salary line item to reimburse pastors for Self Employment Tax which is the equivalent of Social Security/Medicare contributions. When this is done, it increases the pastor’s taxable income since he is being reimbursed for a stated expense. 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 withholding form.
5. 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.
6. TAKE-HOME PAY. This is the amount left after deductions for federal, state and local income taxes, retirement and health care have been made. 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.