Helping Boards Set Pastoral Compensation

When Steve Hoden first became pastor of Salem Covenant Church in Oakland, Nebraska, he had one request for the church board: take care of his family.

The church board knew the cost to live in the rural community. So Hoden trusted the board members to do the right thing when it came to setting his compensation. The church, he said, always did.

“We’ve never talked money for 14 years,” said Hoden, who recently retired.

Now the church is looking for Hoden’s successor. That includes figuring out how much to pay the new pastor. It’s a complicated task. And the church can use all the help it can get, said Jim Goth, chairman of Salem Covenant.

“We’re starting all over,” he said. “I have no idea what the starting salary for a new pastor should be.”

Many churches are in a similar position. Compensation setting is complex, and treasurers and other financial managers must walk alongside board members as they learn how to navigate these complexities. With that in mind, Church Finance Today asked several financial experts and church leaders for their insights into what boards and finance committees need to know about setting pay for pastors.

Look at the big picture

Dan Busby, president of the Evangelical Council for Financial Accountability and an editorial advisor for Church Finance Today, said the first step in setting pastoral compensation is to look at the big picture. That includes looking at the church’s budget, the cost of living in the church’s community, and the goals for the church’s ministry. Using that data, the church can develop a philosophy of compensation that fits their context, Busby said.

Next, he said, they should ask this question: “How do we compensate the pastor so that they want to stay and so that they are not stressed out every minute?”

The goal is to set a compensation package that helps a pastor focus on the church’s ministry—and not on how to come up with the money to pay this month’s bills.

Research and decision-making

A church should collect data about the cost of living and compensation paid by other similar congregations in their community, as well as the salaries of other local community leaders—including nonclerical jobs. Salary surveys from denominations or other Christian organizations can help as well.

A salary survey is especially helpful for smaller congregations—it can help them make sure their compensation isn’t too low. That’s always a concern, especially if budgets are tight, Busby said.

“If you are in a typical church, the challenge is whether the church can identify enough money to adequately compensate a pastor,” he said.

Seven Mile Road Church, located in the Boston area, uses an outside consultant to provide data for compensating its senior pastor. A committee of church members and lay leaders approves staff salaries.

The cost of living makes it difficult for pastors to find affordable housing, said Justin Gottlieb, the church’s executive pastor. Also, the church is planting new congregations—so there’s a lag between when a new pastor begins work and when that new congregation gives enough money to pay an adequate salary.

The church takes all those factors into consideration when setting compensation, said Gottlieb. The goal, he stressed, is to allow pastors and church staff to thrive over the long haul.

Seven Mile Road wants “to be generous, to be good stewards, and to be able to set people up to be able to stay over the long term,” Gottlieb said.

Along with the cost of living, the income levels of the congregation should also play a role in setting compensation, said Stan Reiff, a partner with the accounting firm CapinCrouse.

In some congregations, the pastor is paid at about the median income of church members, Reiff said.

“A rule of thumb is that you probably shouldn’t have the pastor paid more than the 80th percentile of your congregation,” he said.

Don’t break tax laws

IRS regulations are another factor to consider in setting compensation.

Elaine Sommerville, a Church Finance Today editorial advisor and a partner with Sommerville & Associates, a Texas-based CPA firm that specializes in nonprofits, said that the IRS has rules about how much compensation nonprofits, including churches, can provide.

“The number one thing they need to know about is that they are bound to pay reasonable compensation,” she said.

Determining reasonable compensation requires due diligence, Sommerville said. Churches need a process for determining a reasonable value for a pastor’s work. They also need to document the steps they took in determining the level of compensation.

The IRS is mostly concerned about overpaying pastors or other staff members, Sommerville said. If a pastor’s job is worth a maximum of $100,000 and the church can only pay $50,000, that’s considered reasonable. But if a pastor’s role is worth a maximum of $100,000 and the church decides to pay $120,000—that can cause problems.

Take an active role in the process

At Maury City First Baptist Church in Maury City, Tennessee, the church’s deacons set the pastor’s compensation.

The church has had several long-term pastors in a row and recently called a new one, said Mike Gilliland, chair of the deacons.

The deacons looked at their budget and decided on what percentage they wanted to designate for their pastor. They also talked to their local Baptist association about guidelines on details like pension, insurance, and a housing allowance.

Then they negotiated with their new pastor, figuring out what he needed to make a move to the new church. And they had a frank discussion over what they could afford to pay the pastor for the long haul.

Both the pastor and the deacons wanted to be sure that the compensation level was sustainable, said Gilliland.

When a new pastor is hired, he or she often expects a fairly complicated compensation package. Along with salary, many get a designated housing allowance, along with allowances for a vehicle, books, and continuing education.

Often a church may set an overall amount for compensation and then defer to the pastor when deciding how to split up the compensation. But Sommerville suggested that churches should take an active role in the process.

For example, a pastor can set the level of the housing allowance—although the allowance cannot be over fair market value. But the church also needs to approve and document the reasons for the amount, she said.

At the Seven Mile family of churches, the pastors fill out a form designating their housing allowances. A compensation committee then approves them.

Another part of compensation may be providing health insurance for a pastor, which can be complicated as well. Some churches have access to a denominational health insurance plan. Others don’t. Some are large enough to buy a group policy for their pastors and staff. Others aren’t and have to provide individual plans to cover employees.

At Salem Covenant, the church didn’t provide a health insurance plan for their former pastor. Instead, he got insurance through his wife’s job. Instead of paying for a policy, Salem Covenant reimbursed Holden for out of pocket medical expenses, Goth said.

Some churches go one step further and simply give the pastor the money that they would have spent on a health insurance policy. But Sommerville cautioned that there are risks to doing that. If a pastor gets the cash equivalent to the cost of his or her health insurance, instead of receiving group insurance, this can jeopardize the tax-free status of the provision of group health insurance offered to other staff members. Both the pastor and the rest of the staff then could be required to pay taxes on their health benefits, Sommerville said.

“It ruins the tax benefits for the rest of the staff,” she said.

Overall, church leaders must retain control over the compensation for pastors. Failing to do so puts them at risk, said Sommerville.

“Compensation is highly regulated, complicated, and the number one area where a church could pay a monetary penalty,” Sommerville said. She suggested that churches consult experts when working on compensation, so they know their responsibilities and risks.

Don’t overlook these details

Other issues to be aware of when looking at compensation:

• Ministers are not eligible to pay into the social security system through FICA. A pastor must pay into the social security system through self-employment taxes with an option to opt-out under certain circumstances, said Sommerville. But they can’t have the church withhold and match through the FICA program, if they perform ministerial duties. “It is not a call made by the church,” Sommerville said.
• Expenses need approval. A church can reimburse a pastor for expenses, such as mileage, books, or continuing education. If a pastor submits receipts for expenses, which are then approved by the church, those reimbursements can be tax-free. If the church provides an allowance for expenses like a car or books—without having to turn in receipts—that allowance is taxable.
• Keeping clear records is crucial. Church leaders should keep minutes for their meeting when setting compensation for both pastors and nonclergy. They should also have detailed records for the amounts of any housing allowances and reimbursable expenses.
• Don’t be afraid to ask for help. Denominations often offer advice and information for churches on how to set compensation—including guidelines for benefits as well as survey data on pastoral compensation. Other national organizations and publications also provide survey data and guidelines. And a local tax attorney or financial professional with nonprofit expertise can provide guidance.
• Be careful when calculating pensions. Some churches or denominations include a pastor’s housing allowance when calculating pension contributions. That’s tricky, Sommerville said. The IRS says that only taxable compensation should be considered as part of pension calculations. And churches should be careful not to exceed the IRS’s limits when deciding how much to pay into a pastor’s pension plan. For example, “If a pastor has designated 100 percent of their salary as housing allowance, they’ve removed their wage base for retirement contributions,” Sommerville said.
• Understand possible liability for excessive compensation. Board and finance committee members must understand that they could be held liable for giving excessive compensation to a pastor. In fact, they could face a tax penalty of “225 percent of the amount of compensation the IRS determines to be in excess of reasonable compensation,” said attorney Richard R. Hammar in the January/February 2017 Church Law & Tax Report.

Find an advocate for the pastor

ECFA’s Busby suggested that every pastor needs an advocate when it comes to setting compensation. A pastor’s intimate relationship with the congregation can create a conflict when it comes to compensation, including any negotiation the pastor desires to ensure the overall package is fair, he said. It’s hard for pastors to advocate on their own behalf during the process, knowing they have to maintain a long-term, close relationship with church members. And every dollar that goes to their salary is a dollar that can’t be spent on other ministry.

The best advocate would be someone on the church board who has the pastor’s trust and who has the respect of fellow board members, said Busby.

“Every pastor needs a champion, someone who understands their situation and who can advocate for them,” Busby said. “That way, when the doors are closed and the pastor is out of the meeting while their salary is being discussed, someone can plead their case.”