Setting Pastoral Compensation: A Guide for Church Boards
When Steve Hoden became pastor of Salem Covenant Church in Oakland, Nebraska, he had one simple request for the church board: take care of his family.
The board understood the local cost of living. Hoden trusted them to fairly set his compensation—and they always did.
“We’ve never talked money for 14 years,” said Hoden, who recently retired.
Now, as the church searches for Hoden’s successor, setting a fair salary is front and center.
“We’re starting all over,” said Jim Goth, chairman of Salem Covenant. “I have no idea what the starting salary for a new pastor should be.”
Salem Covenant is not alone. Many churches face this challenge. To help, Church Finance Today asked financial experts and church leaders what boards and finance committees need to know about setting fair and responsible compensation for pastors.
Start with the Big Picture
Dan Busby, president of the Evangelical Council for Financial Accountability and an editorial advisor for Church Finance Today, says churches must first assess:
- The church’s overall budget
- Cost of living in the community
- The goals and vision of the church’s ministry
With that information, churches can create a compensation philosophy tailored to their context.
“How do we compensate the pastor so that they want to stay and so that they are not stressed out every minute?” Busby asked.
The goal: Let pastors focus on ministry—not on how to pay their bills.
Research Matters: Gather the Right Data
Churches should collect compensation data from:
- Similar-sized local congregations
- Community leaders in non-ministry roles
- Denominational and national salary surveys
➡️ Visit ChurchSalary for data based on education, experience, church income, setting, and more.
This research is especially valuable for small churches, where tight budgets can lead to undercompensating staff.
“The challenge is whether the church can identify enough money to adequately compensate a pastor,” Busby said.
Learn from Other Churches
At Seven Mile Road Church in the Boston area, compensation decisions are informed by:
- External compensation consultants
- A committee of lay leaders
- Local cost of living data
- The financial maturity of new church plants
“We want to be generous, to be good stewards, and to be able to set people up to stay over the long term,” said Executive Pastor Justin Gottlieb.
Stan Reiff, a partner at CapinCrouse, suggests that compensation also reflect the congregation’s income levels.
“A rule of thumb is that you probably shouldn’t have the pastor paid more than the 80th percentile of your congregation,” Reiff said.
Know the Legal Limits
Elaine Sommerville, a CPA and editorial advisor for Church Finance Today, emphasizes the importance of reasonable compensation under IRS rules.
Key guidelines:
- Churches must document how they determine compensation.
- Compensation must reflect the value of the pastor’s work.
- The IRS is more concerned about overpaying than underpaying.
“If a pastor’s job is worth a maximum of $100,000 and the church pays $120,000, that can cause problems,” Sommerville warned.
Be Actively Involved in the Process
At Maury City First Baptist Church in Tennessee, deacons set the pastor’s salary.
“We looked at our budget, talked to our local Baptist association, and negotiated with our new pastor,” said deacon chair Mike Gilliland.
Churches should consider:
- Salary
- Housing allowance
- Vehicle, book, and education allowances
- Insurance and retirement contributions
Don’t assume the pastor should determine how to divide the package. Churches must approve and document each part, including:
- Housing allowances
- Health benefits
- Reimbursement processes
At Seven Mile, pastors submit housing allowance forms, which are reviewed and approved by a compensation committee.
Health Insurance: A Common Challenge
Churches handle insurance in various ways:
- Some use denominational health plans.
- Others purchase group or individual policies.
- Some, like Salem Covenant, reimburse for out-of-pocket expenses.
⚠️ Caution: Simply giving pastors a cash equivalent for insurance can cause tax issues for all staff.
“It ruins the tax benefits for the rest of the staff,” Sommerville warned.
Don’t Miss These Important Details
Here are other key issues to keep in mind:
1. Social Security
- Ministers do not pay FICA taxes.
- They pay self-employment tax instead.
- Churches cannot withhold and match FICA for ministers.
2. Expense Reimbursements
- Approved, receipt-based reimbursements (e.g., mileage, books) are tax-free.
- Lump-sum allowances without receipts are taxable.
3. Recordkeeping
- Keep detailed meeting minutes on compensation decisions.
- Document housing allowances and reimbursable expenses.
4. Ask for Help
- Use denominational guidance and compensation surveys.
- Consult nonprofit tax attorneys or financial experts.
5. Pension Contributions
- Only taxable compensation can be used for pension calculations.
- Don’t include housing allowances unless permitted—and be careful not to exceed IRS limits.
“If a pastor designates 100% of salary as housing allowance, they’ve removed their wage base for retirement contributions,” Sommerville explained.
6. Liability for Overpayment
- Board and finance committee members can be personally liable for excessive compensation.
- The IRS may impose penalties of 225% of the excess amount.
Every Pastor Needs an Advocate
Compensation can be awkward for pastors to discuss directly.
Dan Busby suggests that pastors need someone on the board to represent them:
“Every pastor needs a champion, someone who understands their situation and who can advocate for them.”
This advocate should:
- Have the pastor’s trust
- Be respected by the board
