Setting Pastor's Compensation & Housing Allowance
The church Board should consider setting the Pastor/Ministers compensation package prior to the end of every year. Following are a few thoughts to consider in doing so.
Pastors Compensation and "Intermediate Sanctions"
We personally have not met too many pastors who we thought were over paid, [well maybe one], but the IRS insists you follow certain guidelines in how the total compensation package for the Senior Pastor is established. The IRS has established guidelines, and documentation requirements, which must be followed in setting the compensation for the Sr. Pastor. This subject is called "Intermediate Sanctions." In essence, it is taking the Biblical admonition of "Avoiding the very appearance of evil," to a bit of an extreme. For those of you who have our Church Administration "How To" Manual, we have explained this in great detail in Chapter 9 pages 9-12. We have written a recommendation of how to carefully design his compensation package, and comply with the intent of this law in Chapter 10 on page 10 (A-3).
HOUSING ALLOWANCE
The Federal Government has made provision for two segments of the populace of America to receive a substantial portion of their compensation, free of Federal, State and City Income Tax, in the form of a housing allowance. They are the U.S. Armed Forces and licensed, commissioned or ordained ministers. The housing allowance is not exempt from social security tax, unless the minister has filed the IRS Form 4361 in a timely manner.
To learn more about exempting from Social Security, read this On-Line Article: http://www.adminassist.com/blog_detail/31_Social_Security_Should_The_Minister_Exempt
WHO QUALIFIES FOR A TAX EXEMPT HOUSING ALLOWANCE?
The housing allowance is not limited to the senior minister. It is available to any minister, Ordained, Licensed or Commissioned, who fulfills the legal criteria of ministry. Specifically, his credentials must give him the authority to Marry and Bury - and there are a few additional guidelines regarding "the exercise of his ministry."
In the past, the IRS has ruled that a minister who holds an administrative position or teaches in a parochial school which is under the authority of a church or church denomination may qualify for housing allowance under Section 107. [Rev. Rul. 62-171, 1962-2 C.B.39].
"Services performed in the exercise of a ministry include (1) ministration of sacerdotal functions, (2) conduct of religious worship, and (3) control, conduct and maintenance of religious organizations (including religious boards, societies and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination, and services performed as a minister for an organization that is neither a religious organization nor operated as an integral agency of a religious organization when such services are performed under assignment or designation by a religious body constituting a church," [Reg. 31.3401(a)(9)-1(b)].
HOW TO OBTAIN THE TAX EXEMPT HOUSING ALLOWANCE
The minister qualifying for a housing allowance should request the Board of Directors to designate a specific portion of his compensation as housing allowance. However, the board could establish a housing allowance even if it is not requested to do so. The housing allowance would only be valid subsequent to board action. If, and as, the ministers housing circumstances change during the year the amount can be adjusted [increased, or decreased] from time to time.
NOTE: The IRS Regulations say the request must be made in advance of receipt of any monies as Housing Allowance. e.g. an adjustment made in August effective September 1, in the ministers compensation package with higher dollar amounts for Housing Allowance, is totally acceptable.
In order to properly document this Housing Allowance Agreement the following should be observed:
- A request for Housing Allowance should be made by the minister to the Board of Directors, or the Board Minutes could reflect that the Board initiated the action. [Either]
- A specific dollar amount designated as the Housing Allowance should be mentioned in the Board Minutes, or reference made to the financial details on the Compensation Worksheet in the employee's file. [See sample of such a worksheet on CHAPTER 10 (A-2)]
- Documentation recommended: The church should have a file on every minister, containing:
- The Minister's Contract or Agreement; [Good idea]
- Documentation for Housing Allowance; [Required}
- A signed memorandum of the financial relationship between the minister and the church; [Very good idea, if there is no written contract]
- A copy of his/her Ordination Certificate; [Good idea]
- A copy of the IRS approved Form 4361, if he has one. [A good idea - for his sake].
- The Minister's Contract or Agreement; [Good idea]
HOUSING ALLOWANCE - Rules Revised in 2002
The court abolished the annual "Rental value" test, [Warren VS Commissioner, 114 T. C. 23 (2000)]. The IRS appealed, and inferred a question of its constitutionality. A Bill was quickly drafted and passed in both houses, with the president signing it into law on May 24, 2002. So - the Housing Allowance criteria is back to exactly the way it had been. ie: The lowest [or the lesser] of the following:
- The amount officially designated as a rental allowance [in the records, in advance].
- The amount actually used to provide a home;
- The fair market rental value of the home, including garage, furnishings, and utilities
There was one positive thing that came out of that confusing time . Prior to this, a minister could not receive 100% of his compensation as Housing Allowance. It is now acceptable for the "part time" minister to receive only a Housing Allowance, subject to the above rules and conditions.
WHAT CAN BE INCLUDED IN THE HOUSING ALLOWANCE
There are a great number of things that can be included in this category, in addition to the rent or mortgage payment, free of all state and federal income taxes. We have included a Worksheet in Chapter 10 (A.1) in The Church Administration 'How To' Manual that will explain what those things are. It will help you to maximize your "take home," and minimize your taxable incomeFINAL THOUGHTS:
1. Ministerial Expenses: It is always best if the church clarify [document] just what expenses will be paid directly, or reimbursed by the church. That way, these type of expenses are not to be considered as "Benefits," as they are directly related to "Getting the job done." By doing it in this manner, you minimize reporting of taxable income, and eliminate the SECA tax expense to the minister on those "Ministerial related expenses." This is also clearly explained in our "How To" Manual.
The Cell Phone, if furnished by the church or ministry, is really being scrutinized by the IRS. See our Cell Phone Use Policy for further information on this very touchy subject.
2. Salary: is what is paid after exhausting all of the above. Obviously, we want to minimize salary, and maximize the above. Salary is all that has to be reported on the W-2. It is not required to report the Housing Allowance or any of the above.3. Withholding: The pastor is not subject to withholding {FICA] as is other non ministry employees. Rather, he is a "Self employed" person, and pays his own taxes. He is to file a 1040ES, and pay an estimate of what he believes he will owe. Unless he has filed the Form 4361 [in a timely manner] exempting from the Social Security system, he pays 100% of his own Social Security taxes on the SECA basis. Other than in the state of Oregon, Unemployment tax is not an issue.
4. Stipend: I hear this mentioned from time to time, usually in the context that, If they call the amount paid the minister a, 'Stipend,' then that somehow allows funds to be paid without consideration of any tax owed? Is it not obvious, that if he is “Paid,” that he has earned it? And if he has earned it, taxes are to be paid. By whom? BY THE MINISTER, not the church;
NOTE: this is the Dictionary definition of “Stipend:” stipend [sty-pend] Noun - a regular salary or allowance, esp. that paid to a member of the clergy [Latin stipendium tax] stipendiary adj
Collins Essential English Dictionary 2nd Edition 2006 © HarperCollins Publishers 2004, 2006
To show how to adopt the compensation package in the Minutes, we have included sample Resolutions in our SAMPLES Manual.
The above information is provided as a service to the Body of Christ by ADMINISTRATIVE ASSISTANCE – Rev. Don L. Buckel - Director.
Copyright © 2003 by Administrative Assistance
