Many people may feel like the only type of unreasonable compensation in churches is unreasonably low compensation. The reason is that many churches feel they cannot afford to pay market rates for the talent needed to lead and maintain their operations, and the idea that churches may set compensation too high seems like a foreign concept.
However, the megachurch, multisite church, and international church movements require advanced skills, which usually requires higher compensation. Other churches may face challenges in filling skilled positions. Small and midsize congregations are more involved in technology and other operations requiring specializations than in the past. Today, senior pastors, regardless of church size, face decision-making and management responsibilities that are more akin to the duties of a chief executive officer, rather than those handled by the senior pastors of yesteryear. The expectations that come with these expanded responsibilities, and the skills necessary to meet these expectations, are changing the church employment and financial landscape.
Competition further complicates matters. Churches not only compete for talent, but also increasingly compete with other nonprofit and for-profit employers to attract and retain that talent.
Many churches increasingly feel obliged to pay more, contemplating arrangements that move pastors and staff toward the upper end of the pay scale. However, as "reasonable compensation" now encompasses legal connotations as well as social and market connotations, even churches with small or modest budgets can still violate IRS rules related to compensation. Special bonuses, tuition assistance, and other seemingly low-cost ways of financially blessing leaders can trigger penalties.
In short, regardless of size and setting, if leaders are not cautious with how they handle payments and transactions for pastors and staff, problems can arise.
High stakes and costly penalties
Setting reasonable compensation for tax-compliance purposes is required for both for-profit businesses and churches alike. But a significant difference between businesses and churches is the potential tax consequences. Businesses usually can keep operating, even when they run afoul of the tax rules. Churches, however, face tax penalties and the loss of tax exemption, both of which can threaten their very being. And if an IRS examination occurs, the IRS's determination is presumed correct and the burden of proving the reasonableness of compensation is on the church (refer to Hendriks Furniture. Inc., TC Memo 1988-133).