Through a basic understanding of ministry compensation and tax regulations, there can be extensive savings for ministry personnel:
- Understand the difference between staff compensation and operating expenses
(especially in new churches) there are items that the church planters pay for simply to help the church operate. These church related expenses usually include travel and office related expenses--including telephone and long distance, office rental postage, printing, travel. As the church is able these expenses should be born by the church and not by the pastor or church planter.
- There are differences between self employed compensation and employee compensation.
The main differences between self employed and compensation and employee compensation are in the areas of taxes and benefits. Ministers pay both ends of social security, which means that 7.51 percent of their total salary and housing package comes out of their pocket. This is in contrast to church members and board members who are employees who have that amount paid by their employer.
Some times when a church quotes a figure in terms of compensation they quote the total package including all benefits. In most church members who are employees, their earnings are quoted as gross salary not including benefits.
There are some strategies that can be followed to help reduce the taxes that ministers pay less in federal income taxes and social security taxes.
- Parsonage allowance
Each year a pastor along with the church board can determine an appropriate parsonage allowance. This applies whether a pastor lives in a church owned parsonage, rents a home or is purchasing a home.
http://www.providentmutual.com/p.cfm/products_services/rcmd/fin_interest/housing.cfm
- Retirement plans
Employers in the business world provide for retirement through 401 K programs. For non profit organizations including churches these plans are known as 403 B. Monies paid in by the church on behalf of a pastor are sheltered from all taxes including federal income tax, social security and state taxes. Sometimes there are denominational plans available, or private plans through American Express, Dreyfus, Fidelity, Vanguard or others. Choose funds that have no load or very low loads. These funds are taxable when they are withdrawn, but can be declared as parsonage allowance coming out. Some plans (variable annuities) have loan provisions that can be used for housing down payments.
The following is information on 403 b accounts from a planner:
http://invest-faq.com/articles/ret-plan-403b.html
Publication 517 from the IRS has helpful information on retirement benefits for minister:
http://www.irs.ustreas.gov/plain/forms_pubs/pubs/p51707.htm
IRS Publication 571has helpful information on tax sheltered annuity programs for non profit organizations
http://www.irs.ustreas.gov/plain/forms_pubs/pubs/p571toc.htm
- The church should pay for health insurance premiums for the staff.
At times churches include the amount for insurance in the cash salary. This unnecessarily increases the tax liability for the pastoral staff. If the church pays the insurance premiums directly as a benefit, there will be no taxes. Again many times churches will include insurance in the amount quoted as cash salary. For most employees this is a benefit not included in the cash salary.
Check out Medical Savings Accounts as one attractive alternative. They have a high deductible insurance piece ($4500 for a family) and a self insured savings account. Together they usually cost less than a traditional medical plan. The difference is that a family can put up to $3375 per year in a MSA. If needed for medical expenses, it is available. If not needed, IT IS YOURS! It becomes part of a retirement vehicle that can invest in mutual funds including stocks, bonds, and money market accounts. In this way the insured instead of the insurance company benefits from good health years.
http://www.msaadvantage.com/msafacts.html
- Take advantage of "Flexible Spending Accounts" for staff
There are Flexible Spending Accounts can lower taxable income for a minister in terms of federal income tax, social security and state taxes. There are expenses that are incurred in any cases. If paid out of regular income, they will not be deductible. These are set asides which reduce taxable salary. It is important to estimate as best as possible the amount to be spent because in each case the money set aside if not used is lost. They must be declared before the year begins. Records must be kept and requests must be submitted in writing usually on a monthly basis.
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Here are links that give more information on flexible spending accounts
http://www.udel.edu/Benefits/FSA.HTML
http://www.ourwebmall.com/AspenSft/flexible.htm
- Understand the different categories when evaluating staff compensation
There are different considerations in staff compensation. One level is a cost of living raise which seeks to keep staff in pace with inflation that takes place in the local area. A local chamber of commerce or research librarian can be a good source of this information. You can also check out the Statistical Abstract put out by the Department of Commerce. A performance raise is based upon achievement of goals in ministry. Longevity in ministry is a key area in the long term development and growth of a church. One key in longevity is fairness when it comes to compensation. There are guides available that provide comparative guidelines for ministry that is based upon the size of the church, experience in ministry, educational attainment, as well as regional considerations.
- Other areas of agreement vacation time, sick days, conference time, continuing education.
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