Q&A: Establishing Staff Compensation Levels

How do we verify that our compensation packages are not excessive?

Are there new IRS rules requiring a church to do an annual review and evaluation of their pastor’s and staff’s compensation packages to verify that they are not excessive? Could failure to substantiate this result in severe penalties? If so, what does that entail, especially for smaller churches? Are there exclusions for smaller churches?
There are not “new” requirements for doing annual reviews of staff compensation packages. The current standards have existed since 2001. However, it is important for a church to verify that the compensation and benefits paid to its leaders (a.k.a. disqualified persons) are not excessive. If the IRS were to do an audit of the individual’s tax return or in some other way get involved in the church, they could review these transactions. If the transaction was deemed to be excessive to a senior pastor or someone else in a top leadership position, they would be required to repay the excess amount plus a 25 percent penalty. If it wasn’t repaid timely, a 200 percent penalty could then be assessed. The best way to do this is to evaluate leaders’ salaries and benefits as compared to similar organizations and positions. This evaluation should be documented and should be completed prior to approving compensation (both cash and non-cash).

Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

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