Death, Taxes, Pastors, and your Church's 2023 Budget

Jim Capaldo

Regional President

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After the U.S. Constitution was completed, Benjamin Franklin famously wrote, "Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes." Death and taxes are two things that church budgets need to consider, especially when it comes to ministers.

THE CERTAINTY OF TAXES
Contrary to what many believe, most pastors pay a lot in taxes. Most licensed ministers pay a 12% Federal Income Tax (FI Tax) on their salary and taxable benefits, and the full 15.3% in Self-Employment Tax (SE Tax) on 92.35% of their combined salary, housing allowance, and taxable benefits such as medi-share health plans. I say the full 15.3% because if a pastor were to work a secular job, the employer would be legally required to pay 50% of the Self-Employment Tax. As such, our church-employed pastors often pay more taxes than other employed persons. The church budget benefits from this, but the pastoral family typically suffers this loss in silence. Having helped place scores of pastors, here is a realistic example of how the ministerial pay discussion goes down.

Let's say that a church gives its pastor a total of $60,000, then tells him to break it down as he sees fit. Often, individuals in the congregations feel and/or express that their pastor is getting a $60,000 salary, but nothing could be further from the truth!

EXAMPLE: $60,000 Pastoral Compensation & Benefit Breakdown. 

  • Salary: $25,604 (subject to FI & SE Taxes)
  • Housing Allowance:  $25,000 (subject to SE Tax)
  • Medishare Plan: $6,000 (taxed as salary)
  • Converge Pension 6%: $3,396 (pre-tax)
Here are the taxes that this pastor pays.
  • 12% Federal Income Tax:  $3,792
  • 15.3% Self-Employment Tax: $7,998 = (all taxable income x .9235) x .153
  • Total annual taxes paid by the pastor:  $11,790
The Pastor's Actual Annual Take-Home Pay:  $38,814
  • Take-home pay is $3,235 per month.
  • Take-home pay is $746 per week.
  • Take-home pay is about $15 per hour for a typical 45-50-hour pastoral work week.

In this season of inflation, it is doubtful that this example offers enough to adequately release your pastor or pastoral family for the work of the ministry without some degree of external income, government subsidies, or military benefits.  As a matter of fact, not adequately providing for pastoral compensation and benefits is a key reason why churches experience frequent pastoral turnover. What is the most you can do to release your pastor for the ministry? 

FOUR THINGS YOUR CHURCH CAN DO ABOUT THIS
Pastor Appreciation Month and year-end love gifts are valuable, important, and yet they are one-and-done encouragements. Why not cement pastoral appreciation into your year-round church budget? Here are four ways to do this.

  • Give Your Pastor a Self-Employment Tax Allowance: One common tactic is for churches to do what secular employers do by paying 50% of the pastor's Self Employment Tax. In the above example, this would be done by adding $4,000 to the pastor's income. Though it will appear as taxable salary on the pastor's W-2, it would be best to create a new church budgetary line item for
    "Pastor Self Employment Tax."

  • Prioritize Pastoral Compensation in your Church Budget: Churches cannot fund everything, but they need to financially release their pastor to authentically focus on the work of the ministry as best they can. Though this is hard to write due to my missionary background, you may need to scale back support to external ministries until your pastor is fully compensated. Such practices are the typical requirements for smaller churches utilizing the services of groups such as the Rural Home Missionary Association and Village Missions. A church may have a goal of transactionally giving 10% of its budget away to outreach & mission efforts, but if you cannot fully fund your pastor, please decrease external giving, step away from non-essential building projects, and prioritize your pastor's compensation.

  • Temporarily Tap into Your Reserves: Why does your church have reserves? Can you clearly define the purpose of your church's reserve funds? I have come across many churches that require the bi-vocational efforts of their pastors while having hundreds of thousands of dollars in financial reserves. Is your church insured? How much do you need for emergency building repairs? How much do you need for three months of ministry expense reserves? How much do you need to cover three months of compensation & benefits? What is left over after that? Using these reserves, commit to a pastoral compensation increase for a defined amount and time period. As your pastor fully focuses on the work of the ministry, he will be better able to shepherd the church toward spiritual, numeric, financial, and geographic growth.

  • Clarify Pastoral Compensation & Benefits in Your Church Budget:  From the above example, if congregation members mistakenly think that the pastor is getting a full $60,000 take-home-pay salary, it is likely because that is how it has been communicated in the church's budget.  This often works against congregational understanding and the affirmation of necessary pastoral compensation increases.  To the contrary, I have heard too many stories of hurtful and unjust pastoral compensation comparisons coming from misinformed church members.  To help your congregation understand clergy pay, break your pastor's compensation and benefits down into clarifying categories.  The following can work as general budget categories for solo pastors or multi-staff situations. 
    • Salary/Salaries:
    • Clergy Housing Allowance(s):
    • Self-Employment Tax Allowance(s): (at least 50% of SE Tax)
    • Health Benefis: (health, life, and disability plans and/or insurances)
    • Retirement Benefits: (pension, plus supplemental retirement contributions)
    • Other Benefits... (education, automobile, conferences, etc...)
    • TOTAL COMPENSATION & BENEFITS:
THE CERTAINTY OF DEATH
In closing, when the IRS initially allowed ministers to opt out of paying Self-Employment Tax, it was assumed that the minister had taken a vow of poverty and that the church would act as the minister's housing and "social security" until death. This may be true for Catholic clergy, but this is not at all true for Evangelical ministers! Does your church plan to fund your pastor's welfare until death? What about his spouse's welfare? If not, I urge you to compensate your pastor well enough to pay taxes, buy a house, provide for his family, be hospitable, prepare for retirement, develop personally, take a vacation, and say an appropriate "yes" to his family's needs and desires. 

Please contact Jim Capaldo to discuss your church budget and clergy compensation matters.

Jim Capaldo, Regional President

Jim Capaldo is Converge Heartland Regional President.

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