Determining the Need for a Compensation Consultant
There is no definitive test to determine when a church should hire a compensation consultant. However, churches paying compensation packages exceeding $100,000 should consider engaging a consultant to establish appropriate pay for senior leadership and highly compensated employees.
Why Use a Compensation Consultant?
Beyond Salary Surveys: Compensation surveys may be insufficient for higher compensation levels.
IRS Protection: A consultant helps churches establish a “Rebuttable Presumption of Reasonableness” for salaries.
Regular Updates: Reports should be updated every 3-5 years or when major changes occur.
Choosing the Right Compensation Consultant
No governmental agency regulates who can call themselves a compensation consultant. Therefore, churches must choose consultants carefully.
Key Qualifications:
Formal education in compensation theory, business, and human resources.
Certifications such as:
Senior Certified Professional (SCP) – Society of Human Resource Management (SHRM)
Senior Professional in Human Resources (SPHR) – HR Certification Institute (HRCI)
Certified Compensation Professional (CCP) – WorldatWork
10-15 years of experience in high-level human resource management.
5+ years of consulting experience.
Finding a Qualified Consultant
Seek referrals from other churches, nonprofits, attorneys, and CPAs.
Check references from past clients.
Focus on experience and qualifications over cost.
Reviewing a Consultant’s Sample Report
Before hiring, request sample reports and ensure they include:
Employer history
Compensation philosophy
Salary history for the position
Employee qualifications
All cash and noncash compensation elements
Comparison with at least three compensation databases
Application of databases to the evaluated position
Relevant court decisions and applicable legal authorities
Final Thoughts
Hiring a compensation consultant is a strategic decision. Churches should prioritize expertise and experience to ensure fair, legally sound compensation practices.
Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.
Image: AdobeStock/NDABCREATIVITY
Best Practices for Church Compensation: Insights from David Fletcher
David Fletcher shares practical advice on church compensation, including fair salaries, benefits, and avoiding costly mistakes.
David Fletcher has two rules when it comes to paying pastors and other church staff: Be as generous as you can, and avoid the “stupid tax.”
That means paying as fair a wage a possible, says Fletcher, a veteran executive pastor and founder of XPastor.org. It also means not attempting to save a few bucks, only to drive great pastors or church staff away—and then deal with the resulting costs (or “stupid taxes”) needed to search, hire, and train their replacements.
Many churches struggle to know how much to pay their pastors and church staffers—and they don’t have the expertise to put together a comprehensive plan to treat pastors and church staff well, Fletcher says.
In response, Fletcher hosted a series of “Smart Money for Church Salaries” workshops across the country. Based on his book by the same title, the workshop gave churches of every size the tools they need to treat their staff and pastors well.
Fletcher talked with us about some of the key issues the workshops covered.
What are some of the issues that churches struggle with when it comes to compensation?
The first issue is “how do we get accurate or helpful numbers to compare our salaries to?” The average person in the pews is a little leery of simply comparing salaries to other churches. In the book, I lay out a way to find comparable salaries through nonprofits and local organizations that people can relate to. And those are some very fair numbers.
A second one is the ministerial housing allowance and answering the question of “who is a pastor?” A church might have pastors, but they also may have ministry directors. Do they qualify for a housing allowance?
A third issue is the ministerial housing form. A bad ministerial housing allowance form can really cheat a pastor out of substantial tax savings. I give an example in the book, based on several case studies, of a fictional pastor named Liz Jackson, who is the family pastor at a church. She turns in a form that claims a housing allowance of $22,000. In the book, we show that she could have had a housing allowance of $35,000—which would meant her taxable income was $70,000. But her taxable allowance should have been $57,000. That was free money, right on the table.
You talk about something called the “Big Burrito” salary spreadsheet. What is that?
It’s the total compensation we’re going to pay to a pastor or staff member. Most people think if we’re going pay a staff member $40,000, then that’s all we have to worry about when hiring them. But if the church pays health insurance and other benefits, the actual cost of the position is $56,000. So when a church talks about adding staff, they have to look at the big-picture number.
What are some benefits that churches overlook for staff members?
Here’s one: the tax-free cell phone reimbursement. It’s tax-free money and a great benefit to almost anyone in your church who’s using their personal cell phone for church work. And don’t forget to give this benefit to everyone—including the church’s facility workers. They’re using their personal cell phones to conduct church business.
Another area would be life insurance. Churches can give $50,000 of tax-free life insurance to staff members. But for another $100 a year of taxable income, a church could double or triple that amount. It’s taxable income, but a great benefit for not much money.
You talk about having a salary range for every job at the church. Talk a bit more about that.
A church should have a salary range for each job and split it into quads. A new seminary graduate, for example, should start in quad one. But a staff member with 10 years of experience is probably going to start in quad three.
The book shows how to create a compensation grid for every position in the church—from senior pastor all the way down to facility worker—so that you can ask yourselves, “What are we going to start a senior pastor at? What are we going to start an admin assistant at? A ministry coordinator? Pre-school teacher?” There should be a salary range for every job.
How can a church set those salary ranges?
A couple of sources. You can find out what local churches pay and what churches around the country pay. Then ask, “What’s our cost of living?” If you live in Orlando, for example, the cost of living is about 6 percent below the national average. But if you go to southern California, your housing cost alone is much higher than in other parts of the country.
Other questions to ask are: “What is the maximum we want to pay for this job? How do salaries at our church compare to the salaries paid at local nonprofits?”
Churches don’t want to pay too much. But they don’t want to pay so little that the pastor is moonlighting at Starbucks.
Should churches be generous when they can be generous?
I say be generous across the board: “Let’s pay as much as we think is fair and reasonable, and give good benefits. Give pastors and staff vacation time and sick time and jury duty time. What we are looking for is emotional and spiritual health as a result.” Fair benefits could be vision insurance, could be dental insurance, a retirement plan—so that the pastor or staff person realizes, “I’m going to work here for 20 years, and I’ll have a fair retirement when I leave.”
One side of fair compensation is paying people well, and the other side seems to be making sure we have the right people doing the right kinds of things.
That’s right. If you take a pastor who’s really good at counseling and put them in an administrative role, they’re going to be working with their non-dominant hand all week long.
Put that person in a spot where they’re maximizing their gifts. That’s what I tried to do as an executive pastor. For years I had a great, loyal staff who loved to do their jobs. That doesn’t mean we didn’t have problems, but the staff had their sense of fulfillment. That’s where we want to see people.
I think it really gets down to this: Are we living out kingdom ethics in our churches and in compensation? Are we really seeking to consistently apply the principles of Scripture? So many churches hold the Bible up as inerrant and authoritative, but they’re not living it out in how they treat staff.
David Fletcher has more than 35 years of experience as a pastoral leader in churches. In 2003, he founded XPastor, a resource website for executive pastors, and XP-Seminar, an annual church leadership conference.
Willow Creek’s Hybels Retires Amid Allegations
Elders of the megachurch promise to examine reports of unwanted sexual comments and advances.
Compiled by Emily Lund, Assistant Editor
Megachurch to Investigate Allegations Against Founding Pastor
“[On April 10, Bill] Hybels retired six months early after 40 years as leader of Willow Creek [Community Church], calling recent allegations [of unwanted sexual comments and advances] against him a distraction for the megachurch and its ministries. Hybels denied any wrongdoing. He did admit regretting that he first responded to the allegations with anger. [Then on April 20,] the elders similarly expressed regret in the way the church handled the allegations. ‘We have at times communicated without a posture of deep listening and understanding,’ they wrote [in a letter to the congregation]. ‘We are sorry that at times our process appeared to diminish the deep compassion we have for all those involved in these matters … . Bill acknowledged that he placed himself in situations that would have been far wiser to avoid … . We agree, and now recognize that we didn’t hold him accountable to specific boundaries.’ The elders also said they wished they had worked harder ‘to collaborate with all parties,’ and promised to ‘methodically examine our church culture, enhancing policies and informal practices that support healthy and valuable working relationships between men and women.’ … [T]he elders will be examining reports that Hybels made unwanted sexual comments and advances to several women, including ‘allegations that have not been previously investigated by the Elder Board'” (“Willow Creek Promises Investigation Amid New Allegations Against Bill Hybels,” ChristianityToday.com).
Texas Appeals Court Rules Against Break-Away Anglican Group
“In The Episcopal Church v. Salazar … a Texas state appeals court issued another ruling in a long-running dispute over ownership of property of the Episcopal Diocese of Fort Worth. In 2008, the Diocese voted to disaffiliate from The Episcopal Church and to become part of the Anglican Province of the Southern Cone. In 2009, The Episcopal Church sued, claiming ownership of the Diocese’s property. The litigation has moved up and down the Texas court system, including to the Texas Supreme Court, ever since. In [a recent] opinion, the state Court of Appeals reversed in part a trial court decision and held that control of the property resides in the group that remained with The Episcopal Church under the leadership of Bishop Scott Mayer, rather than with the break-away group led by Bishop Jack Iker” (“Break-Away Texas Anglican Group Loses in Latest Round of Long-Running Case,” Religion Clause).
Wyoming Governor Signs Conceal Carry Bill for Houses of Worship
“Gov. Matt Mead has signed into law a measure allowing people to carry concealed weapons into churches and other houses of worship in Wyoming. The legislation Mead signed [on March 12] was approved earlier by the Wyoming Legislature… . Supporters say church-goers need the ability to defend themselves against attackers such as a man who killed 26 people in a Texas church shooting in November” (“Wyoming guns in church bill signed by governor,” Casper Star-Tribune).
Louisiana Church Wins Lawsuit over Confession, Sexual Abuse Reporting
“A long legal battle between the Catholic Church and a woman who argued she tried to use a confession as a way to report sexual abuse against a church parishioner has ended. In a news release announcing its pleasure with the outcome, the Diocese of Baton Rouge said it and Father Jeff Bayhi had been dismissed from the lawsuit. The lawsuit argued a priest should have to report being told about child abuse while hearing a confession… . In most cases, state law requires people with knowledge of child sex abuse to report such crimes to authorities. [A] September 2017 ruling by a district court judge in Baton Rouge found priests were not bound under the law… . Judge Mike Caldwell agreed when he ruled last year [that] part of the law that would require priests to be mandatory reporters of abuse learned during ‘privileged conversations’ was unconstitutional” (“Catholic Church wins lawsuit over confession,” WBRZ 2).
DAF Account Holders Prioritize Education
“Account holders of donor-advised funds (DAFs) … tend to be wealthier, savvier in terms of taking advantage of the tax implications of their gifts, and—according to new research—prioritize their gifts differently than the general donating public. DAF account holders and general donors shared three of the same top four subsectors to which they gave between 2010 and 2015, but the priorities skewed differently. Education (28 percent of average yearly contribution) was the top subsector for DAF grants followed by public-society benefit (15 percent), religion (14 percent), and human services (11 percent). General donations, by yearly contribution, favored religion (32 percent), education (15 percent), human services (12 percent), and foundations (12 percent) during that same time” (“Donor-Advised Funds Grantors Prefer Education over Religion,” The NonProfit Times).
Image: iStockphoto | Getty
Can a Church Reject a Minister’s Housing Allowance Request?
Can churches reject a minister’s housing allowance request? Learn the rules and best practices to handle these situations.
Q: I submitted what I thought was an appropriate amount to meet my housing needs this year, ensuring the request fell within the fair market value of my home, but my church’s board rejected it. Is that legal?
Is a Church Legally Obligated to Approve a Housing Allowance?
No, a church is not legally required to approve a housing allowance for its minister. There is no authority or regulation that grants ministers a legal right to a housing allowance or mandates that a church approve a specific amount requested by the minister.
While a minister may submit a worksheet showing projected housing expenses, the church and its leadership have the discretion to set compensation levels, including the housing allowance, in a manner they deem appropriate.
Can a Church Deny a Housing Allowance Request Entirely?
It would be unusual for a church to deny a housing allowance outright, assuming the minister qualifies for one under the tax code. More commonly, church leadership might adjust the requested amount based on factors such as:
Alignment with the minister’s anticipated actual expenses
The fair rental value of the minister’s home (furnished, including utilities)
To avoid disagreements, clear communication and documentation are essential when requesting a housing allowance.
Best Practices for Requesting a Housing Allowance
To ensure smooth approval of a housing allowance, consider the following steps:
Provide thorough documentation, including projected housing expenses and supporting evidence.
Communicate with the church board beforehand to clarify the mechanics and expectations for the housing allowance.
Seek input from a local real estate agent to verify the fair rental value of your home if necessary.
Can a Housing Allowance Be Adjusted Mid-Year?
While a housing allowance cannot be amended retroactively, it can be prospectively authorized or adjusted for the remainder of the year. If circumstances change or a new amount is desired, the church’s governing board can approve a new housing allowance to apply going forward.
FAQs About Rejecting a Minister’s Housing Allowance Request
Is a housing allowance a legal right for ministers?
No, there is no legal requirement for a church to provide a housing allowance or approve a specific amount requested by a minister.
Why might a church reject a housing allowance request?
A church may reject or adjust the requested amount if it believes the amount is not supported by documentation or is not aligned with housing expenses and fair rental value.
What documentation should a minister provide when requesting a housing allowance?
A minister should provide a worksheet detailing anticipated housing expenses, including rent, utilities, furnishings, and other related costs.
Can a church retroactively approve a housing allowance?
No, housing allowances cannot be applied retroactively. However, a church can authorize or amend a housing allowance to apply prospectively for the remainder of the tax year.
Conclusion
Churches are not legally required to approve a minister’s housing allowance request, but clear communication, proper documentation, and understanding of housing allowance rules can help avoid disputes. When adjustments are needed, churches can amend the housing allowance prospectively.
Ted R. Batson Jr. is a CPA and tax attorney, and serves as a partner and Professional Practice Leader – Tax for CapinCrouse LLP, a national CPA and consulting firm. He speaks and teaches frequently for national conferences and organizations on exempt organization and charitable giving matters.
Image: Tetra Images | Getty
Setting Reasonable Compensation for Clergy
Four steps to avoid triggering costly penalties when setting reasonable compensation.
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 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.
Should you use a compensation consultant for senior leadership staff? Read more.
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).
Given the high stakes, the task of determining reasonable compensation in churches becomes critical. And it includes both objective and subjective analyses, shaped by the specific circumstances of each church.
There are a number of tools—such as compensation comparison surveys—available to help church leaders set reasonable compensation packages. These tools are a crucial starting point because, once reasonable compensation for a position is determined, it becomes foundational for developing a compensation plan. This determination creates the overall cap on what may be offered to a worker. This cap serves as the umbrella under which all payments and benefits must fit in order to meet IRS requirements.
While not specifically establishing a maximum compensation amount for nonprofit organizations, Congress enacted a new excise tax on compensation packages exceeding $1 million.
According to Internal Revenue Code Section 4960, nonprofit organizations are now required to pay an excise tax on remuneration paid in excess of $1 million to a covered employee. (Remuneration is compensation paid which is subject to federal income tax withholding.) A covered employee is one of the five highest compensated employees of the organization for the current taxable year. While the law excludes payments for certain medical professionals, it does not provide any other specific exclusions. Therefore, current law applies to churches. However, compensation paid to a minister is not compensation subject to federal income tax withholding. Due to this special definition in the tax code, compensation paid to a minister is not subject to the new excise tax, even if it in excess of $1 million.
Four steps for building reasonable compensation
A church can pay any amount up to a reasonable point for any position. By law, a church must formally analyze compensation paid to its pastor and any other senior leadership, due to the “executive” nature of their roles. But as a best practice, a church really should perform this analysis on all compensated positions. Here are four steps for doing so:
1. Establish the umbrella
As mentioned earlier, view reasonable compensation as an umbrella. Once the reasonable amount is determined for a position, it becomes the umbrella used to evaluate all compensation that will fall under it, including benefits provided by the church in exchange for performing services—both cash and noncash benefits, taxable and nontaxable—as dictated by Reg. Sec. 53.4958-4(b)(ii)(B). A church may choose not to pay this full amount it identified, but it must not exceed that amount.
2. Identify benefits
A regular paycheck does not show the complete picture of all the benefits an employee receives, and reasonable compensation does not stop at the analysis of cash.
Excluded Benefits
Certain economic benefits are disregarded. These include:
1) nontaxable fringe benefits described in IRC Section 132; and 2) amounts paid under an accountable reimbursement plan.
Everything benefiting the employee is key and must be reviewed. This includes all forms of salaries, fees, bonuses, deferred compensation, contributions to qualified retirement plans, medical plans, dental plans, life insurance, severance pay, disability benefits, housing allowance, other allowances, expense reimbursements (except for accountable expense reimbursement plans), automobiles, tuition, and any other benefits. Anything benefiting an employee, whether from the church or an indirect arrangement with another organization related to the church, must be included.
In determining reasonable compensation, it doesn’t matter if a benefit is taxable or nontaxable.
3. Establish a value for benefits
Whether a benefit is a cash benefit or a noncash benefit, it has a value. Even if a benefit is difficult to value, it needs to be valued at fair market value and not simply based on some arbitrary amount the church thinks it should be valued.
When a church determines the fair market value of all noncash benefits and adds them to the rest of the individual’s compensation, the total needs to fit under the umbrella of reasonable compensation. If not, then something in the package must be eliminated in order to meet IRS requirements.
4. Document the compensation package
After determining pay plus benefits, document the compensation package appropriately. Churches have different ways to document compensation packages, but the documentation should at least state the decision was made by a properly authorized group or person, and it should contain written documents demonstrating what was used in the process to reach that decision—such as reputable survey data.
For pastors and senior-level leaders—those considered to be at the executive level of the church’s leadership—documentation is most commonly recorded in the meeting minutes of the governing body that approves the compensation.
For nonexecutive level employees, the governing body frequently delegates the compensation authorization to an executive within a compensation policy and budget. Written minutes or other documentation help show that each benefit provided is consideration for the performance of services.
All documentation should be kept in the church’s custody and securely stored. Individual personnel files should contain summaries of each person’s documented compensation package.
Sample of compensation documentation
First Church’s personnel committee is reviewing compensation for the upcoming year. After consulting several salary surveys, the committee determines that reasonable compensation for the senior pastor is $150,000.
The committee then compiles the details of the senior pastor’s compensation, as demonstrated in Table 1.
TABLE 1 SAMPLE OF COMPENSATION DOCUMENTATION
Cash Salary
$80,000
Housing Allowance
$35,000
Medical Insurance
$12,000
403(b) Contribution
$5,000
Youth Camp for 2 Children
$500
Life Insurance Policy
$2,000
Disability Policy
$800
Tuition Assistance Plan
$3,000
Auto Allowance
$2,000
Discount at the Church-Related School
$4,000
Travel Expenses for Spouse(to attend a conference together)
$1,500
Total Value of Compensation Package
$145,800
Umbrella of Reasonable Compensation
$150,000
The sample compensation package in Table 1 fits under the umbrella of reasonable compensation. There is only $4,200 left in the overall value available for any other benefits and/or bonuses that may occur during the year.
The committee will document the package in the minutes of its meeting. The tax treatment of each component will be determined by the church’s accounting department (or the church’s outside accountant) to assure proper reporting on the pastor’s Form W-2.
Tip. The most commonly overlooked items in a compensation package are the benefits provided through tax-favored plans. Examples include the value of health insurance or a benefit received through a special group plan, such as tuition assistance. The key is to review every item that benefits an employee, despite the item’s tax treatment or whether or not it is part of a group plan provided to other employees.
Elaine Sommervilleis a CPA and editorial advisor for Church Law & Tax. This article is adapted from her bookChurch Compensation, Second Edition.
Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.
Image: AdobeStock/ paripat
Key Considerations for Clergy Compensation and Tax Planning
Discover essential tax and compensation considerations for clergy, including salary structuring, housing allowances, and equity planning for retirement.
Compensating clergy and church staff involves unique tax considerations that many church leaders—and even some advisors—don’t fully understand. This article reviews three key components of a church compensation plan:
Salary
Housing Allowance
Equity Allowance
Let’s break down the essential points church leaders need to know when building fair, compliant compensation packages.
1. Salary: Basic but Complex
Two Key Issues:
How much to pay
How to use salary reduction agreements
A. Determining Reasonable Salary
Salaries are typically set by a church’s governing body. Legally, churches may pay any amount—unless the IRS deems it unreasonably high. If that happens, churches risk:
Losing tax-exempt status
Facing IRS penalties known as intermediate sanctions
Example: A court found that a $115,680 annual salary for a religious leader and spouse was not excessive. Another court determined reasonable salaries ranged from $133,100 to $177,156 across four years, based on comparable nonprofit roles.
B. Intermediate Sanctions: What Church Boards Need to Know
When the IRS determines a “disqualified person” (e.g., a minister or other key decision-maker in the church, or one of their relatives) received excessive compensation, the IRS may impose intermediate sanctions:
25-percent tax on the excess benefit (assessed directly to the recipient)
200-percent additional tax if the benefit isn’t corrected
10-percent penalty (up to $20,000) on board members who knowingly approved the excess benefit
C. How to Avoid Penalties: Use the IRS “Presumption of Reasonableness”
Churches can rely on this presumption if:
The compensation was approved by a board or committee independent of the recipient.
The board relied on objective comparability data, such as:
Key Point: If the IRS finds compensation unreasonable, but the above steps were followed, the church may be protected.
D. Caution: Automatic Excess Benefits
The IRS has ruled that unreported taxable benefits—such as personal use of church property, undocumented reimbursements, or personal expenses—are automatic excess benefits.
Examples include:
Using church credit cards or vehicles for personal purposes
Reimbursing personal expenses without documentation
Reporting less income on W-2 or 1099 forms than actually received
Tip: Always issue corrected forms (W-2c or 1099) if a reporting error occurs.
Salary Reduction Agreements: What’s Allowed?
Salary reductions are only valid if specifically permitted by law. Common legal uses include:
Tax-sheltered annuities (403(b) plans)
Cafeteria plans (flexible spending arrangements)
Housing allowances (for ministers)
Important: Salary reductions cannot be used to fund accountable reimbursement plans. The IRS prohibits this common—but incorrect—practice.
In 2013, a federal court struck down the housing allowance as unconstitutional.
In 2014, a federal appeals court overturned the ruling—on procedural grounds (plaintiffs lacked standing).
The Freedom From Religion Foundation (FFRF) then refiled, correcting the standing issue, but the US Court of Appeals for the Seventh Circuit ultimately ruled the clergy housing allowance is constitutional.
No further challenges have been brought.
If the Housing Allowance Were Ever Invalidated:
Ministers will owe more income tax.
Estimated quarterly payments may need to increase to avoid penalties.
Churches may need to increase salaries.
Increases could be phased in to manage budget impact.
Key Point: Ministers should know the housing allowance remains constitutional and available.
3. Equity Allowances: Building Retirement Security
Ministers living in parsonages don’t build home equity. This can leave them at a disadvantage during retirement.
A Good Solution:
Some churches offer an equity allowance—extra compensation placed in a tax-sheltered retirement account.
Benefits:
Helps ministers retire with housing security
Avoids tax penalties when structured properly
What Not to Do:
Giving the parsonage to the minister upon retirement creates problems:
The home’s value becomes taxable income.
The IRS may view it as unreasonable compensation, triggering intermediate sanctions.
Recommendation: Consider equity allowances for ministers who rent, not just those in parsonages.
Virtual currency (also known as cryptocurrency) is gaining popularity—and that makes it increasingly relevant for churches and nonprofit organizations.
What Is Virtual Currency?
The term “cryptocurrency” refers to a digital asset used as a medium of exchange. These currencies:
Exist in digital form only.
Use strong cryptography to secure transactions.
Operate on decentralized ledgers (blockchains).
Allow users to verify ownership and transfer assets securely.
Bitcoin, created in 2009, was the first major virtual currency. Other well-known options include:
Bitcoin Cash
Ethereum
Litecoin
Why It Matters to Churches and Nonprofits
Many people have invested in virtual currencies—and some have made significant gains. Some donors now want to contribute a portion of their holdings directly to churches or nonprofits.
Here’s why that matters:
Donors can give appreciated virtual currency without selling it first.
This helps them avoid capital gains tax.
The church receives the full value of the donation—tax-free.
The IRS treats virtual currency as noncash property, which means the same tax rules apply as with gifts of stock or real estate.
Example: Bitcoin’s Value Swings
Cryptocurrency values can be volatile. For example:
In January 2015, Bitcoin traded at $266 per unit.
By January 2021, it reached nearly $42,000.
In fall 2021, it climbed to over $50,000.
By May 2022, it dropped to around $25,000.
In May 2025, it soared to $102,654.
This volatility means churches should be cautious when handling large gifts of virtual currency.
Tax Benefits for Donors
If a donor holds virtual currency for more than a year and donates it:
They may deduct the full fair market value of the donation.
They won’t pay tax on the appreciated value.
The church, as a 501(c)(3) public charity, won’t pay tax either.
How to Acknowledge Cryptocurrency Gifts
Treat virtual currency like any other noncash donation. Your acknowledgment should include:
A description of the gift (e.g., “3 Bitcoin units”).
The date of the gift.
A statement that no goods or services were provided other than intangible religious benefits (if applicable).
⚠️ Do not include the dollar value of the gift in your acknowledgment.
If goods or services were provided in exchange, you must follow quid pro quo reporting rules.
IRS Compliance Steps for Donors and Churches
Because cryptocurrency is noncash property, donors and churches must follow IRS rules, which may include:
For donors:
Filing Form 8283 with their tax return.
Obtaining a qualified appraisal (for gifts over $5,000).
Asking the church to sign Form 8283.
For churches:
Signing Form 8283 only to confirm receipt.
Issuing a separate acknowledgment letter to the donor.
Filing Form 8282 within 125 days if the currency is converted to cash within 3 years.
Most churches will convert virtual currency to dollars soon after receiving it.
How to Accept Virtual Currency Donations
To accept these gifts, your church needs to:
Open a digital wallet (a secure account for receiving cryptocurrency).
Involve staff or consultants with both tech and finance expertise.
Follow necessary security protocols and test the system before going live.
Choosing the Right Platform
Research platforms carefully. Consider:
Security features.
Supported cryptocurrencies.
Ease of use.
Example: Coinbase (not an endorsement) allows churches to receive Bitcoin, Ethereum, Litecoin, and more.
Alternatively, you can partner with:
A community foundation;
A donor-advised fund sponsor;
Another third party that converts crypto to cash and transfers it to your church.
Let Donors Know You’re Ready
Once your system is set up:
Publicize your ability to accept virtual currency.
Share instructions with interested donors.
Make the process as easy and secure as possible.
This article is adapted from the article “Granny Is Still Investing in Bitcoin,” which originally appeared in BMWL’s Nonprofit Special Alert. Used with permission.We’ve used a combination of AI and human review to make this content easier to read and understand.
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
The Right Way to Handle Wage Classifications
Properly applying the Fair Labor Standards Act to church employees.
Many church leaders propose that the Fair Labor Standards Act (FLSA) does not apply to churches. That may have once been true, but the church of today is not the church of yesterday. Advanced activities easily make the law applicable to most churches, either on an organizational level (meaning the FLSA applies to the church operations as a whole) or on an individual level (based on an employee’s duties).
Furthermore, every state maintains its own version of the FLSA, either layering additional rules on top of federal rules or applying similar rules where the federal rules don’t apply. The law most favorable to an employee, whether at the state or federal level, always applies.
Key point. The FLSA establishes a minimum wage of $7.25 an hour, maintains a 40-hour work week, and it also sets a minimum salary test for exempt positions to become eligible for overtime at $684 per week (or $35,568 per year). The Wage and Hour Division of the US Department of Labor (DOL) is responsible for enforcing this law.
Under the FLSA and DOL rules, there are three primary classifications for church employees:
Employees meeting the “ministerial exception”
Exempt employees
Nonexempt employees
Vital information about each classification is offered in this article.
The ministerial exception
Established more through judicial application than through any statute, employment law embraces a concept known as the “ministerial exception.” The concept revolves around the idea that the government does not have authority to intervene in the relationship between a church and its ministers. As ruled in McClure v. Salvation Army, 460 F.2d 553 (5th Cir. 1972), matters between a church and its ministers, including salary, are of ecclesiastical concern only, and any governmental intervention violates the First Amendment protections guaranteeing separation of church and state.
Who qualifies as a “minister” for this exception is different from who qualifies as a “minister” for other payroll tax rules enforced by the Internal Revenue Service. According to employment law, a minister is an employee who performs essential religious duties as a required element of the employee’s job.
Unlike the concept of “minister” for the Internal Revenue Code, the employee is not required to have ministerial credentials. Without this requirement, the group of employees eligible for the ministerial exception is wider for FLSA/DOL classification purposes.
Key point. Job descriptions for all employees are important, but especially for those whose work qualifies for the ministerial exception. Employee classifications, and the wage implications related to them, may be won or lost based on job descriptions.
A position qualifying an employee for the ministerial exception may include:
a requirement of previous religious training or ongoing religious training, such as continuing education requirements;
a title reflecting spiritual or religious duties or a spiritual position;
duties supporting and/or conveying the core beliefs of the church;
duties of conveying the message and teachings of the church;
selecting or creating the religious content for a program; and/or
leading others to grow or mature in their faith.
EXAMPLE Suzy is the director of children’s ministry at First Church. She selects the curriculum and leads all the children’s ministry workers in learning the curriculum and preparing for their teaching duties. She also leads children’s church each Sunday morning and Wednesday evening. Suzy is not a licensed or ordained minister and does not qualify to be treated as a minister for federal tax purposes. A review of Suzy’s duties and position indicates she performs essential religious duties and qualifies for the ministerial exception. Suzy is not subject to the FLSA wage and hour rules.
Exempt employees
After reviewing the duties of employees and identifying those who qualify for the ministerial exception, the next step is to categorize the remaining employees either as exempt or nonexempt. Start by determining which employees are exempt before evaluating which ones are nonexempt. There are two tests that help you decide:
1. Salary test. An exempt employee’s compensation must be at least $684 per week (or $35,568 per year) and paid on a salaried basis. This is a minimum salary amount. It is not prorated for employees working part time. An employee who does not receive the minimum salary amount cannot be an exempt employee. A “salaried basis” means the salary is the same rate if paid every week, regardless of the number of hours worked. The employer may not dock the employee’s pay in less than one-day increments for disciplinary reasons. The employer may track paid time off in any time increment, but in most instances, an employee’s wages may not be docked in less than one-day increments.
WORK WEEK DEFINED
A work week is defined by the FLSA as any 7-day period selected by the employer. For federal purposes, a nonexempt employee who actually works more than 40 hours during this 7-day period must be paid overtime for all hours worked beyond 40 hours at the rate of time and one-half the employee’s regular pay rate. Stated another way, hours paid for nonwork time, such as paid vacation time, do not count toward the 40 hours worked to determine overtime hours.
CAUTION Overtime is paid in increments of 6 minutes per federal statute. Overtime is also due to an employee whether or not the overtime has been authorized by the appropriate supervisor. Churches should be aware of potential overtime causes in order to appropriately budget for the additional payroll costs.
—Elaine Sommerville
EXAMPLE George is a church business administrator. His duties include extensive authority over the business administration of the church, and he directly supervises 10 employees. George’s compensation is $600 per week. At his compensation rate, George cannot be classified as an exempt employee. George is a nonexempt employee and is subject to the FLSA wage and hour rules. Even though George’s duties may meet one of the duties’ tests for exempt employees (see below), his duties are never evaluated because he receives less than the $684 per week minimum to qualify as an exempt employee.
Key point. “Exempt employee” and “salaried employee” are not synonymous terms. The existence of an equalized and consistent pay arrangement does not determine if an employee is an exempt employee or a nonexempt employee. A salaried employee is paid a consistent amount each pay period, but the employee still may be classified as a nonexempt employee if the weekly pay is under $684 per week.
TIPThe salary test is more complicated than can be covered in this article. For more details, go see this PDF on the DOL website.
2. Duties test. If an employee passes the salary test, then the employee is evaluated based on his or her duties. To be considered exempt, an employee’s duties must be described in one of four major classifications set by the DOL. Employees become classified as exempt when at least 80 percent of their time is spent on one of these classification’s duties and responsibilities. The four classifications are:
Executive exemption. Manages the organization, or a distinct department, supervising at least two full-time employees (these individuals cannot be volunteers) and possessing the authority to hire and fire employees.
Administrative exemption. Office work or nonmanual labor relating to the management of the organization, exercising significant discretion and independent judgement on matters of significance. These employees may have significant leadership roles, but do not have staff reporting to them to meet the executive exemption. Leadership roles also may be fulfilled by administering an area where volunteer labor is a significant factor in carrying out the programs. Employees should have significant abilities to operate in a manner of authority over an area or a program.
Professional exemption. Employees with a high level of training and a special skill set. Examples include attorneys, teachers (but not daycare workers), engineers, and accountants/CPAs.
Computer professional. Includes systems analysts, programmers, and software engineers. This group does not include network administrators or other general IT employees.
Key point. Administrative assistants rarely have the discretion and the authority in the church to meet this exemption qualification. As such, most administrative assistants do not qualify as exempt employees. This also includes the senior pastor’s assistant.
Nonexempt employees
With both the “ministerial exception” and exempt classifications addressed, the final step is to classify all remaining church employees as nonexempt employees. Nonexempt employees usually constitute the majority of a church’s workforce. This group is subject to minimum wage requirements and overtime pay for all hours worked exceeding 40 hours in the work week.
CAUTIONSome states reduce the required number of hours an employee needs to work before receiving overtime pay. Some states may even apply overtime based on the number of hours an employee works per day. These examples underscore why churches must become familiar with state laws. Remember, the law most favorable to an employee applies.
TIPFor a detailed explanation of what constitutes exempt and nonexempt employees, go to flsa.com/coverage.html.
Churches sometimes receive a communication that can be deemed “hate mail.” Hate mail is a letter delivered to the church, a note placed there, an email, a voicemail left on the church’s phone. It could even be sent through a social media platform.
We spoke with attorney Frank Sommerville about his experience with these situations and how churches should respond when they occur.
What’s a useful, working approach for churches in terms of understanding these messages? How can churches determine when messages need to be taken to local authorities (and when they can be dismissed)?
There is no one response. It depends on who sent it, whether it’s anonymous, whether or not it’s specific, what the threat is: It depends on lots of variables.
If taken to local authorities, would the police do anything with the threat?
Not necessarily. It depends, again, on what kind of threat: how specific it is, whether it’s from somebody who’s known or unknown. For the most part, anonymous ones that are just left at the church, or even through the mail, are a lot less credible. The more specific—the more concrete the threat is—the more you need to take it seriously. That’s about the only pattern you can ascertain from that.
The more specific and concrete the threat is, the more you need to take it seriously.
Sometimes it’s a pastoral stalker—sometimes we’ll get those. The general consensus on stalkers is you want to keep them engaged, because they’ll tell you what they’re going to do if you just keep them engaged. Exchange emails or texts with them, so you know where they’re at and what they’re doing. You want them communicating—they’re not going to communicate with the target because somebody else (probably a police officer) is intervening and playing the target for that person. Usually they’re associated with someone in the church. They may not be a member, but they may be a family member of a family that’s in the church. Or they may be a member, but they may be inactive.
You need to take the threat seriously, every time.
If you get an anonymous message and discard it, and then something happens, is that treated as a foreseeable event? Could the church be held liable?
Again, it’s specifics. If I sent you an anonymous email that said, “On Thursday morning, when you’re having a staff meeting here, I’m going to kill you,” that’s specific enough. And if your organization did not take any precautions to make sure that did not happen on Thursday morning, it could be liable for not taking those. But if you got an email that simply said, “I’m going to kill you,” there’s nothing your organization could be responsible for because it’s not foreseeable when or if that’s going to happen.
But even so, you said to take these threats seriously every time. Does that mean contacting law enforcement immediately?
If it’s a threat of violence, you contact law enforcement immediately.
What about messages that may not explicitly state violence, but that contain the implied possibility—e.g., “I’m going to take care of you”?
Those are harder to take seriously. Law enforcement is going to ask, “Who do you think sent it, and what do you think they mean by that?” You’re going to get two hours of grilling if you send that to law enforcement to help identify who, potentially, that threat came from. If it was via email, they’ll want to get access to your computer so they can trace your IP address back to the address where it was sent from. There are lots of tools out there, but I think if it comes out of the blue with not a clue, there’s not a whole lot law enforcement can do, either. Frequently, you just trash something like that.
In “Responding to Anonymous Allegations,” attorney Richard Hammar provides insight as to how church leaders should respond to anonymous allegations.
Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.
Image: Getty
Creating a Crisis Communication Plan for Your Church
Five questions every church needs to ask when preparing a crisis communication plan
Jamie D. Aten
Last Reviewed: September 10, 2024
Several years ago, I saw firsthand how important it is for church leaders to be ready to communicate in a crisis.
I was visiting a church when a bad storm with strong winds knocked out the power during the service. At first, the pastor tried to awkwardly keep preaching as the generator struggled to start.
After a few minutes, he quickly ended his message and walked off the stage. Another pastor, obviously caught off guard, walked up and abruptly ended the service.
No one addressed the blackout, and no one provided instructions on what to do next. Some people were scared and started to panic. Others hopped into their cars and drove off, only to return moments later because of the dangerous weather outside. Those who did manage to keep driving eventually returned as well, because of a downed tree in the road.
It’s a small miracle no one got hurt.
No matter how much time you spend planning and perfecting your church’s disaster response plan, that plan won’t do you much good if you can’t communicate it to your church during the crisis.
Crisis communication is essential
Crisis communication is an essential element of disaster ministry, one that requires planning and training so you’re ready to go when crisis hits.
To begin creating an effective crisis communication plan for your church, your leadership team will need to walk through the following questions.
Who will be the point person?
Identify who will take ownership of the crisis communication plan and be the “face” that people know they can look to for information when a disaster hits.
You will also want to identify a few back-ups—when disaster strikes, it’s likely that members of your own congregation will be impacted as well.
There’s no way to predict who that will be, so it’s important to identify and train at least a few people in case one or more of the appointed leaders are themselves impacted by the event and unable to fulfill their duties.
Who will need to be contacted?
You will need to gather contact information for not just your leaders and congregation, but also local emergency services (if you don’t already have that information on file).
Doing your research now will save you valuable time and energy so that when disaster strikes, you are ready to point people to the services they need.
Identify the vulnerable members of your congregation, too. These are the people who have distinctive needs or will require extra help in the case of an emergency: e.g., the elderly, children, people with serious or chronic medical conditions, differently abled people, single parents with small children, immigrants and refugees.
These are the people you want to be sure are contacted in the case of an event.
Make sure multiple people know where information is located and how to access it.
Keep secure electronic copies of your congregation members’ information. You might also consider a secure cloud storage system; if you evacuate to a location with internet access, or another church leader has access outside of the emergency zone, the information can be accessed remotely. If you rely on digital copies alone, however, you could end up stuck if power or internet service goes down. Store physical copies somewhere secure and safe from potential damage.
Update these lists on a regular basis, and make sure multiple people know where the information is located and how to access it—but also make sure that confidential information is protected and can only be accessed by authorized users.
What will be communicated?
You can’t know exactly what disaster or crisis you’re going to face, but you can prepare messages ahead of time that can be adapted for possible scenarios.
When disaster hits, it will be much more difficult to think clearly and comprehensively about what people need to know.
By preparing basic information now, you can add relevant specifics when the time comes and get important information to your people much more quickly than if you have to start from scratch.
Here are a few basic guidelines as you script different types of messages:
Craft these messages around the information developed during the risk assessment process, which is ideally your first step into disaster preparedness.
Share what you do or don’t know at the time of the communication.
Provide information about the seriousness of a potential threat or damage.
Stick to the facts. Don’t be tempted to share hearsay, rumors, or what you cannot verify.
Include information about possible resources for assistance.
Discuss when and where services will or won’t take place because of the crisis.
Share what the church leadership and congregation is doing to address the crisis.
Note how and when church leadership will remain in communication.
How will people be contacted?
There’s no need to reinvent the wheel on this one. Think about the ways your church already communicates effectively, and pivot those systems to deliver crisis information.
How do you communicate with your church today? Plan to use those systems that are already in place (e.g., mass texts or calls, mass emails, social media, website, cloud documents). People already know to look there for information and will do so instinctively.
However, you also need to plan for what you will do if technology goes down. Often during extreme weather events, cell phone towers go out or get overloaded. You may not have access to your email accounts or website.
How will we prepare people now?
The church leadership team should prepare their own personal individual and family communication plan and how they will communicate with one another in the midst of a crisis. Not only will this improve your church leadership’s crisis communication capabilities, but it also models the importance of crisis communication planning to others.
Lastly, be sure to encourage your church attendees to also develop their own emergency communication plans (Ready.gov is a great resource you can point them to).
Once you have answered all these questions as a leadership team, it’s time to communicate your strategy to your congregation so they know what to expect if an event occurs.
Jamie D. Aten is a disaster psychologist and the founder and executive director of the Humanitarian Disaster Institute at Wheaton College in Illinois. His latest books include the Disaster Ministry Handbook and Spiritually Oriented Psychotherapy for Trauma . You can follow Jamie on Twitter at @drjamieaten or visit his website jamieaten.com.
Image: getty/kanawaTH
When Expenses Eclipse Your Church’s Budget
Does your church have a plan for responding to when expenses eclipse the budget? Use this resource to guide those conversations.
For churches that view the operating budget as an expense control mechanism, the matter of how to deal with expenditures in excess of budgeted amounts is an important element of policy that is poorly developed in many churches.
For example, a church operating budget will typically include line items for each of the church’s main areas of ministry operations. Line items will exist for worship activities, educational activities, children and youth ministries, missions, and so on.
Set boundaries, establish authority
Suppose a church develops and approves an operating budget for the year reflecting total expenses of $1.5 million, of which $200,000 relates to educational activities. Also suppose that, due to unexpected developments, it appears the church’s expenses for its educational activities will exceed the amount budgeted by $50,000 for the year.
Many churches do not have good answers to these questions. For churches that view the operating budget as an expense control mechanism, it is essential to have an appropriate budget policy that clearly addresses such matters and leaves little room for misunderstanding.
Is it acceptable for the church’s staff leadership to make the additional expenditures for the educational ministries, so long as total expenses do not exceed the total amount of expenses budgeted for the church of $1.5 million?
Question 2:
Even if church staff leaders are permitted to reallocate budget line items so long as the total amount spent remains within the amount of total expenses authorized by the budget, who on the church staff leadership has the authority to make such a reallocation decision? Or should church staff leaders be required to obtain specific authorization to incur expenses that exceed the amount budgeted for the educational ministries?
Question 3:
If authorization is required in order to exceed expenses for an individual line item or for the budget as a whole, who must provide that authorization? If the congregation approved the annual budget, must the congregation be involved in an authorization for such a variance? Or, may such approval be granted by the governing body of the church or by some other group? Would the answer to these questions change, depending on the amount by which actual expenditures are expected to exceed budgeted amounts?
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
Image: Marvin Meyer / Unsplash
Should Your Church Use Crowdfunding for Fundraising?
A fundraising expert offers insights on this increasingly popular online tool.
Interview with NextAfter’s Brady Josephson by Bob Smietana
Brady Josephson, a self-described “charity nerd” and managing director of NextAfter Institute, spends much of his time helping organizations raise more money online. ChurchLawAndTax.com spoke with Josephson to explore how crowdfunding can work for churches.
What Is Crowdfunding?
Crowdfunding involves raising smaller amounts of money from a variety of donors through an online platform, such as GoFundMe.com, CrowdRise.com, or FundRazr.com. These platforms typically feature tools like funding thermometers, timelines, and social sharing options to encourage participation.
Pros and Cons of Crowdfunding
Pros
Technology and functionality are managed by the platform, saving time and effort for the church.
Easy setup and immediate launch of fundraising appeals.
Tangible goals and timelines create urgency and focus.
Social sharing expands reach and visibility.
Cons
Campaign promotion still requires effort to attract donors.
Costs range from 3% to 7%, slightly higher than managing donations in-house.
Lack of donor information can hinder follow-up and relationship-building.
When Does Crowdfunding Work Best?
Crowdfunding is most effective for specific, tangible projects where donors can easily see their impact. Keep these tips in mind:
Be clear about the problem and how donations will solve it.
Set realistic financial goals—average online donations are around $70.
Focus on smaller, achievable targets rather than overwhelming amounts.
Potential Drawbacks
Impact on Other Fundraising Efforts
Crowdfunding can sometimes draw attention away from ongoing needs or sustainable support. Donors may feel connected to specific projects but less engaged with the broader mission of the organization.
Risks of Crowdfunding
While security risks are minimal on major platforms, smaller or lesser-known sites may be less reliable. Most large platforms are well-secured, often outperforming nonprofit websites in terms of security.
Deciding If Crowdfunding Is Right for Your Church
Consider crowdfunding if your church:
Doesn’t currently engage in online fundraising and wants to test its effectiveness.
Has a specific project with a clear goal and timeline.
Needs a low-cost, low-risk way to start online fundraising.
Crowdfunding democratizes giving and fundraising, offering a simple way for churches to raise money for specific needs. However, long-term success lies in building ongoing support and fostering deeper relationships with donors.
FAQs About Crowdfunding for Churches
What types of projects work best for crowdfunding? Specific, tangible projects with clear outcomes and achievable goals work best. Are crowdfunding platforms secure? Most major platforms are secure and reliable, offering better security than many nonprofit websites. How much does crowdfunding cost? Fees typically range from 3% to 7% of the donation amount, covering platform and processing costs. Can crowdfunding replace traditional fundraising methods? Crowdfunding is a useful supplement to traditional methods but shouldn’t replace efforts to build ongoing support.
What would happen to your ministry if one of your key church leaders dies? Or who would be prepared to step in if one of the pastoral staff gets into a serious car accident and becomes disabled? Are you ready to deal with these occurrences?
Emergency preparation is geared toward anticipating issues that could occur and having plans and people in place to respond to them. The goal is to be able to adequately respond to a situation that does occur, despite carrying out your best prevention practices. There are three areas that a church should concern itself with when thinking about emergencies.
Internal Emergencies. These are threats that specifically affect your church or church members directly. These include accidents, medical emergencies, fires, thefts, arrests, deaths, or natural perils. Upon having an internal emergency, an immediate, planned response gives the best opportunity to be a part of the solution instead of adding to the problem.
Local or Regional Emergencies. These are dangers that occur in your church’s local surroundings, though the church may not be directly impacted. These emergencies include floods, chemical spills, tornados, or anything involving mass injuries or deaths. As a caring congregation, you will want to respond effectively.
National Emergencies. These events may impact thousands. Examples include hurricanes, earthquakes, wildfires, and events like September 11, 2001. You may choose to offer aid, but you will want to do this safely, and without overexposing your ministry to liabilities.
You may go years without being involved in tragedies or incidents that affect your congregation. But churches that have emergency plans in place have a much better chance of minimizing damages—and they are faster to recover when danger strikes.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Q: We are planning the launch of our first multisite campus, including a central accounting hub. Is there anything we need to know? Let’s explore best practices for accounting for multisite churches.
How Should Donations Be Tracked Across Campuses?
Tracking donations by campus is essential. This creates “cost centers” for generating financial health reports for each location. However, it’s crucial to address how to handle mailed-in checks without campus preference and ensure donors can update their campus affiliation. Robust software can help prevent reporting errors caused by donor transitions.
What Are the Implications of Donor-Restricted Funds?
Designating gifts to specific campuses creates donor-restricted funds. By law, these funds must be used exclusively for the designated campus. Using funds for other purposes could result in legal violations. Communicate clearly that all gifts go to the church’s general fund and campus preference is used for reporting only.
What Communication Strategies Should We Use?
Ensure your team, including preachers and communications staff, delivers consistent messages. For example: “All gifts support the church’s general fund. Campus preference helps us understand financial health.” Monitor language on websites and publications to avoid unintended donor restrictions.
How Can Multisite Churches Maintain Compliance?
Develop clear policies for tracking donations and expenses by campus.
Inspect financial reports regularly to ensure accuracy.
Train staff on legal requirements for donor-restricted funds.
FAQs
1. Why is tracking donations by campus important?
It provides insights into financial health and allows each campus to work toward self-sustainability.
2. Can donor-restricted funds be reallocated?
No. Legally, funds must be used for their designated purpose. Reallocating them violates donor intent and the law.
3. What are cost centers in accounting?
Cost centers track income and expenses for specific locations, enabling detailed financial reporting.
4. How can software improve campus accounting?
Advanced accounting software can accurately allocate donations and provide detailed reports by campus.
Final Thoughts
Multisite churches face unique accounting challenges. By tracking donations accurately, complying with donor restrictions, and communicating clearly, you can ensure financial health and legal compliance. For more resources, visit Church Law & Tax.
David Fletcher has more than 35 years of experience as a pastoral leader in churches. In 2003, he founded XPastor, a resource website for executive pastors, and XP-Seminar, an annual church leadership conference.
Image: Breno Assis / Unsplash
Can a Retired Minister Receive a Housing Allowance?
Discover how retired ministers can receive housing allowances and navigate IRS rules for maximum benefit.
Can a retired minister receive a housing allowance? This is a common question, and the answer depends on specific IRS regulations and definitions. Let’s explore the guidelines and considerations related to housing allowances for retired ministers.
What Does the Tax Code Say About Housing Allowances?
According to Treas. Reg. 1.107-1(b), “The term rental allowance means an amount paid to a minister to rent or provide a home, if such amount is designated as a rental or a housing allowance pursuant to official action taken in advance of such payment by the employing church or other qualified organization.”
Note: The IRS uses the term “rental allowance,” but it applies to both rented and owned housing. For simplicity, this article uses “housing allowance” to encompass both scenarios.
Can Denominational Pension Plans Declare Housing Allowances?
Yes, denominational pension plans can designate housing allowances for retired ministers under Revenue Ruling 75-22. The IRS recognizes denominational pension plans as “other qualified organizations,” allowing them to declare a portion—or all—of retirement benefits as a housing allowance. This is permissible as long as the retired minister has severed their relationship with the local church.
What About 401(k) or 403(b) Plans?
For secular 401(k) or 403(b) plans, or 403(b) plans established by a local church, clarity is limited. However, if the plan was developed by the employing church, it likely qualifies under the IRS regulation’s reference to “the employing church.” Consult detailed guidance, such as the Church & Clergy Tax Guide, for further insights.
Can Spouses of Deceased Clergy Receive Housing Allowances?
No, spouses of deceased clergy cannot receive housing allowances. To qualify for a housing allowance, the recipient must meet two criteria:
They must be a credentialed minister.
The allowance must represent compensation earned from ministerial duties.
A spouse who later becomes a credentialed minister would need to earn compensation from their own ministerial duties to qualify for a housing allowance.
How Does the Housing Allowance Apply to Assisted Living?
The IRS provides specific guidance regarding assisted living arrangements:
If a lump sum fee is paid to enroll in an assisted living facility, the housing allowance can only be applied to the payment in the year it was made.
If annual fees are paid instead of a lump sum, the housing allowance can apply to the fees, provided they are connected to housing-related expenses (e.g., rent or utilities).
Expenses for food, housekeeping, medical care, or other non-housing-related services are not eligible for the housing allowance.
Financially, annual fee structures often provide more flexibility for applying the housing allowance compared to lump sum payments.
FAQs About Housing Allowances for Retired Ministers
What is a housing allowance?
A housing allowance is a portion of a minister’s compensation designated for housing-related expenses, including rent, mortgage, utilities, and furnishings.
Can retired ministers receive a housing allowance?
Yes, retired ministers can receive a housing allowance if it is designated by their employing church or a qualified denominational pension plan.
Do housing allowances apply to spouses of deceased clergy?
No, spouses of deceased clergy are not eligible for housing allowances unless they are credentialed ministers earning compensation for ministerial duties.
Can a housing allowance cover assisted living expenses?
Yes, but only for housing-related expenses. Lump sum payments can be applied in the year they are made, while annual fees may qualify if tied to housing costs.
Conclusion
Retired ministers can benefit from housing allowances when properly designated by their employing church or denominational pension plan. Understanding IRS guidelines ensures compliance and maximizes benefits. Always consult resources like the Church & Clergy Tax Guide for detailed advice.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: AdobeStock/Roman
Who Is a Minister for Federal Tax Reporting Purposes?
Understand the IRS’s five-factor test to determine ministerial status for federal tax reporting.
Q:We have someone on staff we call our pastor of education, but some members on our board aren’t sure she qualifies as a minister when reporting income taxes. How can we know for sure?
In deciding if a person is a minister for federal income tax reporting, the following five factors must be considered:
ordained, commissioned, or licensed status (required);
administration of sacraments;
conduct of religious worship;
management responsibilities in the local church or a parent denomination; and
whether the person is considered a religious leader by the church or parent denomination.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Guiding Bivocational Ministers Through the Tax Maze
Key tax tips for bivocational pastors to manage dual roles and stay compliant.
Vince Stover left a full-time pastor’s job and moved 250 miles with his wife, Katie, to a city where the couple didn’t know a soul. He found a job in insurance sales and planted Bible Pathway Baptist Church in Lexington, Kentucky. The couple started a family, welcoming sons Brett and Camden.
Yet it was the prospect of filing his annual tax return—for the first time as a bivocational pastor—that kept him awake some nights.
“I was scared to death,” said Stover, who still pastors Bible Pathway but now sells advertising and programming time for a local radio station. “I had been a pastor before, and we did our taxes ourselves. But I knew there was a lot more involved now.”
Stover sought help from a qualified accountant, a smart move for many bivocational pastors facing complex tax issues. Here’s how others in similar situations can navigate the challenges of tax preparation while serving both in ministry and secular work.
Understanding the Growing Role of Bivocational Pastors
About one-third of pastors hold a secular job alongside their ministry, according to a survey by the National Association of Evangelicals. As churches shrink or budgets tighten, bivocational ministry is becoming more common. Yet, for many, the associated tax complexities can feel overwhelming.
Frank Sommerville, CPA and senior editorial advisor for Church Law & Tax, highlights a common issue: “You have all these additional problems created especially in smaller churches where the treasurer may have no formal training to do all these things.”
A Daunting, Complex Task
Tax law compliance for bivocational pastors is often daunting. Both the church and the pastor must understand their respective roles, including managing housing allowances, reimbursements, and income reporting. Sommerville advises seeking expert guidance early.
Seeking Professional Guidance
Many pastors turn to professionals for assistance. CPA Elaine Sommerville suggests asking tax preparers about their experience with ministers’ returns and their understanding of the housing allowance. A professional well-versed in ministerial taxes can help avoid costly mistakes.
Key Questions to Ask Your Tax Professional
How many ministers’ tax returns do you handle annually?
What do you do to stay current on tax laws affecting ministers?
What is your understanding of the ministerial housing allowance?
The Importance of Record-Keeping
For bivocational pastors, detailed record-keeping is critical. Mileage logs, receipts, and documentation of expenses should be maintained consistently to avoid missed deductions. Elaine Sommerville emphasizes using tools like phone apps or notebooks to log mileage at the time it is driven.
Tips for Effective Record-Keeping
Track all mileage driven for ministry purposes.
Save receipts for church-related expenses.
Use apps or spreadsheets to maintain organized records.
Tax Savings Strategies
Understanding the Housing Allowance
The ministerial housing allowance is one of the most significant tax benefits for pastors. Up to 100% of a minister’s salary can be allocated to a housing allowance, providing substantial tax savings. However, it is still subject to self-employment tax.
Accountable Expense Reimbursement Plans
Switching from taxable allowances to accountable reimbursement plans can lower tax liability. These plans reimburse expenses like mileage tax-free, but they require detailed records.
FAQs About Bivocational Pastors and Taxes
What is the biggest tax mistake bivocational pastors make? Failing to withhold taxes or properly estimate self-employment taxes, leading to unexpected liabilities. Can a pastor allocate their entire salary as a housing allowance? Yes, but it remains subject to self-employment tax. Proper documentation is essential. What if my tax preparer doesn’t understand ministerial taxes? Seek a professional with expertise in this area. Ask specific questions to ensure they are qualified. How can churches support bivocational pastors? Provide training for treasurers and adopt accountable reimbursement plans to help minimize tax burdens.
Conclusion
Bivocational pastors like Vince Stover demonstrate resilience and dedication. By seeking professional advice, maintaining detailed records, and leveraging available tax benefits, they can navigate the complexities of their dual roles with greater confidence.
Image: AdobeStock/ BCFC
Should a Church Own or Rent Vehicles?
Two church leaders weigh in on this question.
Bobby Ross Jr.
First Evangelical Free Church of Fullerton, California—known as EvFree Fullerton—has wrestled a lot with the question of whether to buy or own.
Right now, EvFree, which averages a combined 2,500 people at its three Sunday services, has made the decision to own a variety of vans and buses.
“We don’t really drive our big bus a ton—maybe 10 times a year,” said John Schaefer, assistant executive pastor for discipleship and care. “So when finances are [tight], saying I’m going to spend $20,000 on tires for that bus is tough. But if you’re going to have them, you need to maintain them.”
It’s no surprise, then, that concerns about owning vehicles come up fairly often at EvFree.
“A part of the conversation that we have with our staff, probably every six months, is, ‘Do we really want to be in the vehicle business? Or is it more cost effective to rent a bus?’” said Schaefer.
One possibility would be to charter a bus with professional drivers, he added. But one reason the church decides to avoid that route is the lack of flexibility. For example, the church couldn’t decide at the last minute to take a ministry trip.
If the church suddenly didn’t own its vehicles, explained Schaefer, “it would really change how we do certain ministries.”
John Trotter, elder and administrator for the Edmond Church of Christ in Edmond, Oklahoma, said the 1,200-member congregation rents from a reputable dealer with a high standard of vehicle maintenance.
“When a van gets to about 50,000 miles, they put it up for auction and get a new one,” Trotter said. “For short-term trips, I would highly recommend renting as opposed to owning because of maintenance.”
If a church is going to use a vehicle infrequently, it might make more sense to rent rather than buy, Trotter added. He explained that doing so allows the church to rely on the rental company to provide proper maintenance, and often it will mean the use of newer vehicles.
Tips for handling this critical area of risk-management.
Interview with attorney Frank Sommerville by Bobby Ross Jr.
To help churches better understand some of the issues involved with volunteer drivers, we talked with Frank Sommerville. He is an attorney and editorial advisor for ChurchLawAndTax.com.
What should you know before allowing volunteers to drive on behalf of the church?
You should ask for their driver’s license number and check their driving record, and then you need to ask for confirmation of insurance. The higher the limits, the better is my philosophy. But you want to make sure that they have at least the minimum coverage the state requires.
In your experience, are churches generally aware of the need to protect themselves when someone is driving a personal vehicle on the church’s behalf?
Many churches assume that if it’s not a church-owned vehicle, then the church has no responsibility. And that’s just a falsehood. Anytime somebody is driving on church business, even as a volunteer, the church has some responsibility. That’s what they don’t realize.
Are their special vehicle licenses volunteers and staff need in order to drive the church van or bus?
No, unless it’s a vehicle larger than a 15-passenger van. Buses require a commercial license. The 15-passenger van is so popular because it’s the largest vehicle that can be driven without a special license. But I would caution against using 15-passenger vans. There are too many risks. They are just too unstable on the road. It’s worth mentioning that federal law prohibits school districts from using them.
What other advice would you give churches when it comes to volunteers who drive for the church?
It’s a good idea to have a transportation policy that covers expectations when it comes to your drivers—both staff and volunteers. Further, if you have volunteers who are going to be driving, say, on a church mission trip, they have to be cleared through the church office beforehand. Again, you’ll run the driver’s license, check on their driving record, and verify their insurance.
What about rented vehicles? Are churches covered through their own insurance plan or through the rental company’s plan?
Some insurance companies have a rider—or add-on provision—that covers driving a rental on church business. But that needs to be verified with your insurance company. Generally, it’s a whole lot more expensive to purchase insurance through the rental agency. So, I don’t recommend doing so, just because I’m not sure that it’s a good financial decision. Again, a church must verify that it is fully covered by its insurance company.
