Compensation: Handle with Care

Failure to correctly document compensation packages can lead to issues at the state and federal levels.

All too often churches approach compensation packages in a haphazard way. They make quick decisions without much forethought and with little or no documentation. These churches are asking for trouble.

Set Reasonable Compensation

When it comes to compensation, churches must guard against excess benefit transactions. Such a transaction takes place when an employee is: (1) paid too much for the services rendered, (2) paid without the proper authority (e.g., the pastor sets his or her own compensation), or (3) receives benefits that are not approved and properly reported for tax purposes. Along with the possibility of severe penalties, excess compensation can jeopardize a church’s tax exempt status.

It’s essential that churches determine the maximum compensation that can be paid to an employee or minister for services rendered to the church. To prove that the maximum compensation proposed is still reasonable, churches should use outside sources of data. Here are three sources for obtaining outside data: Church Law & Tax’s, The Church Network’s, and independent compensation experts. While many professionals may purport to be compensation experts, keep in mind that attorneys and CPAs are not qualified as compensation experts unless: (1) compensation consulting is their primary service, (2) they have received specialized training, and (3) they have specifically worked in this area for several years.

While outside data is a required component and the foundation for establishing reasonable compensation, don’t determine compensation through outside data alone. Integrate it with other pertinent information, such as:

  • The employee or minister’s qualifications
  • The nature and scope of the employment
  • The size and complexity of the church
  • The prevailing economic conditions of the area
  • The church’s overall salary philosophy
  • The financial condition of the church

Careful Documentation

Compensation packages must be documented in the minutes of the board or committee that makes key financial/compensation decisions for the church. Compensation and benefits not documented in writing can be construed as unapproved and create both state and federal issues for the executive staff.

Minutes regarding compensation must:

  • Document the amount of the package including all elements of the package—both taxable and nontaxable, both cash and noncash.
  • Document why the package is reasonable, including the outside data that was used to prove it was reasonable.
  • Document the vote of each person on the committee or at least any person who votes against the package. Penalties can be assessed against persons who agree to pay an unreasonable amount of compensation to any staff member.

The employment files of the employees should also include details of the compensation packages as well as authorization of raises and bonuses paid during the year. It is also wise for the personnel files to include copies of the credentials of any ministers on staff.

All documentation should be maintained by the church at the church’s facilities and not kept by anyone outside the church. Unfortunately, there have been situations in which individuals have taken documents home and they’ve ended up lost, shredded, or the individual has refused to turn them over. This could lead to serious consequences.

By following the above guidelines, churches can cut down on the possibility of penalties or, at worst, the loss their exempt status.

Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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