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Paying the Pastor
Paying the Pastor
Three tax considerations all churches should note before setting compensation.

Compensation planning for clergy and other church staff presents several unique tax issues that are not well understood by many church leaders and their advisers.

Here are three quick key considerations to review when structuring compensation plans:

1. Salary. The most basic component of church staff compensation is salary. There are two important considerations to keep in mind with respect to staff salaries—the amount of the salary, and the use of "salary reduction agreements." If a church pays unreasonably high compensation to a pastor or other employee, the church may lose its tax-exempt status or face intermediate sanctions, including tax on disqualified persons, additional tax on disqualified persons, and tax on organization matters.

Recommendation.Churches that pay a minister (or any staff member) significantly more than the highest 25 percent for comparable positions should obtain a legal opinion from an experienced tax attorney confirming that the amount paid is not "unreasonable" and will not expose the employee or the board to intermediate sanctions.

Many churches have established "salary reduction agreements" to handle certain staff expenses. The objective is to reduce an employee's taxable income since only the income remaining after the various "reductions" is reported on the employee's W-2 at the end of the year. It is important for churches to understand that they cannot reduce an employee's taxable income through salary reductions unless specifically allowed by law. Three ways that taxable income can be reduced through salary reduction agreements: (1) Tax-sheltered annuity contributions, (2) "Cafeteria plans," and (3) Housing allowances.

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