Compensation & Expenses
“Let the elders who rule well be considered worthy of double honor, especially those who labor in preaching and teaching; for the scripture says, … ‘the laborer deserves to be paid’” – Timothy 5:17-18
Fair compensation for those in ministry is often viewed as a puzzle with disparate pieces. Making decisions about pastoral compensation requires careful review of many facts. The church’s financial resources and unique circumstances play a major role in determining cash salary and housing, but there are many pieces that need to be examined before a fair solution can be found.
Most ordained ministers are considered “common law employees” by the Internal Revenue Service (IRS) for the purpose of Federal income tax, but are self-employed for Social Security. As a result, you will be responsible for paying your estimated taxes quarterly.
You should obtain IRS Schedule 1040-ES to declare your estimated income and taxes, and begin paying estimated taxes at the appropriate quarterly due date. The quarterly payments are due April 15, June 15, September 15 and January 15. Contact your local IRS office or call 800.829.3676 to obtain Schedule 1040-ES.
Your housing allowance or the rental value of parsonage and utilities is excluded from Federal income tax. However, the item is included for determining Social Security/Medicare taxes.
Since ministers must pay Social Security/Medicare taxes on a self-employed basis, MMBB recommends that churches and church related organizations provide an “offset” equal to 50% or more of the minister’s annual Social Security/ Medicare tax. Any offset provided is additional income to you and must be included as income for calculating Federal income tax, as well as computing your Social Security/Medicare tax.
While the law allows clergy the option of not participating in Social Security, very few are eligible for exemption. Exemption must be for reasons of conscience or religious principles. It is illegal to obtain an exemption for financial reasons, personal preference, or any other reason except as stipulated above. Exemption is possible only if you apply within two years of receiving earnings of $400 or more for the performance of service in the ministry.
Before an exemption is approved by the IRS, you must inform the Ministerial Leadership Commission of American Baptist Churches that you are opposed to participation in Social Security for reasons of conscience based on religious principles. The address for the Ministerial Leadership Commission is P.O. Box 851, Valley Forge, PA 19482-0851. You will be contacted by a representative of the IRS to verify that you are aware of the grounds for exemption and that you want the exemption on such grounds. You must pay the Social Security/ Medicare tax until receiving notice from the IRS that the exemption has been approved.
Determining pastoral compensation is among the most important decisions that your church will make. It not only affects the minister’s current financial status, but has consequences far into the future. The minister’s cash salary also impacts his or her ability to save for retirement through MMBB’s plans.
Many churches with multiple pastoral staff members relate staff compensation to a percentage of the senior minister’s pay. For example, a staff person responsible for planning, developing and leading ministries across a broad spectrum of congregational life might receive 75% to 85% of the senior minister’s compensation; someone responsible for one or two aspects of congregational life and requiring minimum supervision, 70% to 80% of the base; and someone with entry level skills requiring substantial supervision, 65% to 75%.
If a church considers these factors and finds that appropriate pastoral staff compensation is not feasible in the current year, the church can establish a plan now to reach that goal over two or three years.
After setting the base compensation, the church should revisit compensation issues each year and consider a cost-of-living increase. Due to the effects of inflation, a salary that doesn’t keep pace is actually a reduction in pay. Many churches provide merit increases to recognize pastoral leadership in achieving church goals. Other considerations, such as completing a course of study that will be valuable to your church’s ministry, may also deserve a compensation increase. Lay employees may also deserve a merit increase.
From the 2012 MMBB Guide for Church-Related Employers. For the full guide, please visit our Download Documents & Resources section.