The Pastor and His Salary Package

Pastors should have a cash salary that meets the physical needs of the family independent of the wife having to work.

In the middle 1960’s as a young accountant I began helping my pastor prepare his state and federal tax returns.  Needless to say I was surprised at his meager salary, lack of fringe benefits and his inability to provide for his future financially.  His family lived in a church owned parsonage totally controlled by the church; they couldn’t even paint a wall without committee approval.  It was a large farmhouse that was difficult to maintain and expensive to heat.  I can remember visiting that parsonage and finding his wife in tears over the frustration of living under those conditions.  I can remember thinking “this is not right”.  Little did I know how that experience would begin to sow the seeds for the Stewardship Services Foundation.  A ministry that would allow me to devote my energies to counseling pastors regarding finances, helping them to prepare their personal income tax returns and teaching church boards how to structure the pastors’ salary packages staying within the limits of IRS tax law.  As a result, in 1977 the Stewardship Services Foundation ministry was born.

In this article I will attempt to discuss salary packages and their proper application in the budget process.  The most important issue when it comes to this subject is attitude, a proper understanding by the board as it relates to the salary package issue including the desire to meet the needs of the family with a spirit of generosity.  When a church calls a pastor (senior, youth, music, visitation, etc.) it is important to consider the following issues:

1.     A cash salary to meet the physical needs of the family independent of the wife having to work.  A good starting point would be to review his personal budget and build on it.  A pastor who struggles to provide for his family is a pastor who will hesitate to teach Biblical stewardship from the pulpit.  If he can’t live it, he shouldn’t teach it.

2.     Full family medical plan that provides adequate health insurance and protects the family and the church from a catastrophic illness or accident.  (tax free fringe benefit)

3.     Disability Insurance – cash replacement that provides income and protects the family and the church due to a disabling illness or accident.  (can be a tax free fringe benefit)

4.     Retirement Plan – coupled with Social Security an amount that would give the pastor approximately 80% of his take home pay at retirement, assuming he has a debt-free home.  If he has opted out of Social Security, which I do not advise, the plan must be more aggressive to meet his needs.  I recommend the plan begin as early as possible with a minimum annual contribution of $2,400 building to $6,000 as soon as possible, and even more if he starts the plan after 40 years of age.  Pastors should not be in IRA’s or Roth IRA’s.  They should be in a 403-b pension plan where the deposits are made by the church which exempts the amount from self-employment tax and makes the distributions eligible for housing allowance upon retirement which would shelter it from Federal and State Income Taxes.

5.      Life Insurance – $100,000 of term life insurance, paid by the church, with the wife as beneficiary – this protects the church and provides for the family upon a premature death.  The church can pay the premiums on the policy but only the premium on the first $50,000 is a tax-free fringe benefit.  The pastor should provide his own additional life insurance as needed, probably in the $500,000 range.

6.     Professional Expense Reimbursement Fund – the IRS looks at a pastor as a business man and recognizes that he incurs reimbursable professional expenses that allow him to perform his duties and should be paid by the church (automobile mileage, conferences, entertainment, supplies, anything pertaining to his responsibilities).  In reality these expenses are incurred for the benefit of the church not the pastor.

I have advised churches for over 30 years to get out of the parsonage business.

7.     Housing/Parsonage Allowance – I have advised churches for over 30 years to get out of the parsonage business.  I think it is very important to get a pastor into his own home as soon as possible for many reasons. Retirement – owning a home at retirement is a key ingredient to retirement planning.  Security – for his family particularly his wife, privacy – they can decorate how they want – it’s home.  I think it tends to add to longevity – the family feels more attached to the community because there’s a stronger sense of belonging.  Tax purposes – income tax law provides for generous benefits to the pastor who is buying his own home.  Federal and state income taxes are greatly reduced and sometimes eliminated due to the housing allowance and the double deduction for mortgage interest and real estate taxes.

8.     The self-employment tax is another issue that is often misunderstood – A pastor is a dual status employee.  He is an employee for income tax purposes and self-employed for Social Security and Medicare purposes (called self-employment tax).  Instead of paying 7.65% for his Social Security and Medicare and his employer paying 7.65% as all other employees do, he must pay 15.3% (less a small credit).  I recommend the church include in his salary an amount that would cover the 7.65% that the church would normally pay if he weren’t the pastor.  Because he must pay taxes on the additional 7.65% a proper increase would be 9.8%.

Note:  A pastor pays the self-employment tax on the total of his wages including his housing allowance (if buying or renting).  In the event that he lives in a church owned parsonage, he pays his self-employment tax on the total of his wages including the parsonage value and church paid utilities.

Now let’s express the above in a budget format:

This Pastor is 40 years of age, married and has 2 teenage children

Example – #1 – this pastor receives a cash salary of $45,000 per year and lives in a church owned parsonage with a monthly Fair Market Rental Value (FMRV) of $1600; the annual FMRV is $19,200.  The church pays the utilities (which they should) that amount to $2,800 per year.  His annual self-employment tax (Social Security) will amount to $9,467 ($45,000 + 19,200 + 2,800 = $67,000 x 92.35% = $61,875 x 15.3% = $9,467) of which the church agrees to pay $6,500 (9.8% of $67,000).

Pastor’s Financial Package

Cash Salary – (45,000 + 6,500)                                        $51,500

Fringe Benefits: Medical Plan $700/mo.                            8,400

Disability Insurance                                                                 1,500

Retirement Plan                                                                       9,000

Life Insurance                                                                      400

Total                                                                    $70,800

The above pastor drives his car an average of 13,000 miles a year for the church which is reimbursed by the church at the current IRS rate of .51¢ per mile for a total of $6,630.  In addition he spends approximately $1,000 for conferences he and his wife attend, $400 for ministry related books and periodicals, $500 for meals he provides for counselees and church related guests in his home and $300 for miscellaneous expenses.  A total of $8,830 is added to the church budget for church ministry expenses on a line item totally separate from the pastor’s financial package category.

Example #2 – Is the same as Example #1 except this pastor is buying his own home.  An additional amount of $20,000 has been added to his cash salary and a $30,000 housing allowance is designated to cover his mortgage payment ($22,000), utilities ($3,200), real estate taxes ($2,300), insurance ($500) and maintenance ($2,000).  The church has already been paying the utilities, insurance and maintenance of $4,700 for the parsonage in past years, so this portion of his increase is not new money.  His annual self-employment tax will amount to $9,184 ($35,000 + 30,000 = $65,000 x 92.35% = $60,028 x 15.3% = $9,184) of which the church agrees to pay $6,370 (9.8% of $65,000).

Pastor’s Financial Package

Cash Salary (35,000 + 30,000 + 6,370)                    $71,370

Fringe Benefit: Medical Plan 700/mo.                          8,400

Disability Insurance                                                           1,500

Retirement Plan                                                                 6,000

Life Insurance                                                                  400

Total                                                                        $87,670

The professional expense amount of $8,830 would appear in a line item in the budget separate from the salary package category.  The pastor would be reimbursed from this line item as he accounts to the treasurer with all details including mileage logs and receipts.  A church credit card can be used for many of these expenses.

I realize the above number may be currently out of reach for some churches.  However, stewardship principles require each of us to be responsible with the resources and families he has entrusted to our care.  A good procedure is to assign two board members to review the needs of the staff annually and make recommendations to the full board for consideration.  When it comes to our pastors we should take I Corinthians 9:14 and I Timothy 5:17 very seriously.  Addressing all of the above issues at one time may be difficult but by prayer, planning and proper stewardship all the issues can be addressed.

 
Attention: Tax Law is subject to interpretation. Please be advised that the material contained on this Web site is for information only and is not intended to be a substitute for professional legal advice. The Stewardship Services Foundation endeavors to update the information on this site on a regular basis, but cannot guarantee its accuracy at all times.