By Franklin Dumond

One of the major costs in a church’s budget is the cost of employees. Since most churches only have one employee, the major cost in these 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. Self-employed contractors receive a 1099 report of payments made to them. Pastors as employees receive a W-2 with a detailed list of income, tax payments, retirement contributions and housing benefits.

2. What benefits will the church provide?

In the United States, some benefits paid on behalf of employees 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:

• self-employment tax  This can be an added line item in the budget, but remember: it is not part of the pastor’s take-home pay!
• vacation schedule  Should additional days of vacation be earned by employees based on length of tenure?
• 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 their workplace. 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.
• 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.
• 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.  For more information on the Pension Program, click here.

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. Additionally, young leaders have access to the Leverage Conference and 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 a 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)

This article is part two (read part 1, part 3, and 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.

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

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.  However, housing may be a housing allowance or the rental value of a parsonage. Housing is subject to self-employment tax.
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%.  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. 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.
5. 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.
6. 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.