FINANCIAL SUPPORT FOR YOUR MINISTERS

QUESTIONS

Why pay a minister at all? This question may seem harsh, but it is one that occurs in every church at some level. If it is not spoken, then it is silently voiced by some. A minister serves a high calling from our Lord and a calling from the local church.

I Corinthians 9:14 (New International Version)

“In the same way, the Lord has commanded that those who preach the gospel should receive their living from the gospel."

Galatians 6:6 (New International Version)

“Anyone who receives instruction in the word must share all good things with his instructor.”

Luke 10:7 (New International Version)

“Stay in that house, eating and drinking whatever they give you, for the worker deserves his wages. Do not move around from house to house.”

The Bible clearly outlines that the ministers of the church should receive compensation from the church. The call to ministry is a Holy Spiritual call, but ministers have to eat and feed their family.

The second most common question that churches ask is, “What constitutes adequate financial support for our ministers?” The answer to that question is not an easy one because it differs from one part of the state to another, from rural setting to urban, tenure experience of the minister, and even from one size of church to another. What may be truly adequate for one setting may be less than adequate for another and the compensation amount is identical. An example of this would be to compare a salary of $60,000 a year for someone living in the southern or southwestern part of Virginia might be considered very adequate while that same $60,000 in the northern region near the D.C. area would not even be close to being adequate.

Another issue that formulates the answer to the question is the history or the paradigm the church uses to get at the answer. A paradigm is a way of thinking about a particular decision. When the thinking process does not match the needs, answers may be skewed and “seem” appropriate when in fact they are off-base. Let me share some paradigm statements that I have actually heard church members say which reveals their basis or deciding how to support their ministers.

“I have never met anyone that is worth more than $5 per hour.”

“God you keep them humble, and we will keep them poor.”

“Ministers are compensated by God. The church should not have to worry about paying them.”

“Ministers only work one hour a week anyway.”

“We supply a home, pay their utilities, and give them a little gas money; what else do they want?”

“Let’s give the new minister less money than the one leaving so we can give them a raise next year.”

“Every new minister should revert back to the minimum wage allotment that our church sets out, so we can increase their salary next year.”

“We give our ministers a lump sum of money, and they can do anything they want with it.”

Let us hope that a new paradigm sets in and can attempt to look at the situation with different filters on our lenses.

Why should a church be concerned with the compensation of their ministers and how that is set up?

• Clearly defined procedures and expectations keep down confusion and misunderstandings.
• Without proper arrangements, ministers may have to pay more taxes than they should.
• A clear guide gives the church confidence in their stewardship responsibilities toward each other, our Lord, and their ministers.
• A church grows and stabilizes with longer tenured pastors, and a good compensation approach will lead to more stable tenures.

NOTE: The following information is submitted as general knowledge but is not implied to be a ruling on the part of the Internal Revenue Service. Before a church changes their process, they should consult with a CPA or other financial expert. To the best of our knowledge, the following information falls within the suggested guidelines of the IRS.

The guiding principle is moving to the best way to provide for the ministerial staff of churches instead of just making it convenient for the churches' reporting process. Every church wants to be good stewards of the finances they receive but also good stewards of the personnel that God entrusts to them.

The real question should be, “How can we best provide for those God has called and has entrusted to us?”

 CHANGING LANDSCAPES

• IT COSTS MORE TO LIVE TODAY!

The landscape of the church setting is changing everyday and the area of financial support has and is changing. In the 1920s through the 1950s, churches provided for their ministers in a rather relaxed setting and for some the processes have not changed. Let me share a statement I heard from one church looking for a pastor. “We want a full time pastor. We supply the parsonage; pay a little on gas, and an additional $8,000 a year.” When I could not find such a person who could live on the “package,” the church search committee was offended. The problem is that the “package” they had put together was good for the 1920s, but the cost of living has increased and their budget had not.

• EMPLOYEE OR SELF-EMPLOYED?

In the early years churches found themselves in a very non-complicated pattern of providing for their ministers. Many church paid a single check that included everything and the minister had to devise their own method of reporting income for IRS. The next step in the evolution was to provide a 1099 form that included the amount paid during the year, then the minister reported to the IRS. With non-ministerial employees churches are required to provide a W2 Form and to withhold from the salary both the federal income tax and one half of the Social Security tax. The IRS has moved that 1099’s are only to be submitted for “contract labor” and not for the regular personnel. They have determined that if you require a regular set of hours and a regular set of duties that person is an employee not a contract labor. Contract labor people would be like the person who mows lawn but you do not require the specific hour and day that they come. IRS has moved, recent years, to strongly recommend that everyone else receive a W2 form for reporting income and the collection of taxes.

Ministerial staff fall into a separate category since IRS determines that they are self-employed when it comes to Social Security but employees when it comes to federal income tax. IRS has determined that churches cannot withhold anything for Social Security taxes nor are they required by law to provide one half of that expense like the other employees. The total burden of Social Security must be born by the minister. The taxes can be paid on a quarterly basis and the burden again is on the minister to set aside an amount to cover the expense and to report that to the IRS quarterly.

Churches can withhold the federal income tax and can provide a W2. It is strongly suggested that churches move to providing a W2 form for reporting income and to withhold the proper taxes. There is a provision where churches can help their ministers in two ways with the providing of Social Security.

• Churches cannot withhold Social Security for ministerial staff but are required to withhold an amount equal to one half of the Social Security and match that amount for their other employees.
• Churches can report and withhold additional amounts, as determined by the minister, and report these on the W2.
• The amount would be listed under a line that is labeled, “other withholdings.”
• This amount can be the equivalent of what the Social Security taxes would be estimated for the year.
• If this method is used then the minister would not have to file a quarterly tax report and at the end of the year, and when the Income Tax form is filed the money would be available.
• Churches are not required to provide one half of the Social Security for ministerial staff as they are required to do for non-ministerial staff.
• IRS has a provision in which churches can provide the same but it is done is a separate way.
• A church can choose to provide the same amount (1/2 of the Social Security Tax) by providing a Social Security offset. It is an amount of funds that is reported as income but listed on a separate line item in the churches budget (separate from the salary line item).
• It can be include in salary check the minister receives and they must pay the federal income taxes on the amount.
• It is not treated as pre-tax income but it does provide a similar benefit as that of the other employees. It does help to offset the liability and moves to a more even treatment of all personnel.

This may sound like an added burden on the church but for the minister it makes facing April the 15th much easier when you know the funds have already been collected in small increments over the year. (Consult a tax advisor to verify the steps to move toward this provision before you do so.)

• PARSONAGE OR MINISTER OWNED HOME?

This question is one that every church is facing today. In the past a parsonage was something that was very normal for a church to have and provide for their ministers. This was especially true prior to the 1950’s and especially true in rural settings. In earlier years the parsonage idea had a great support mainly because churches had more resources to afford a parsonage than the incoming pastor. It also made it easier to call someone if a home was provided.

During this same era, churches were only beginning to deal with the issue of annuity and retirement for their ministers. A minister who retired in the “950s and had contributed to Social Security over the years had a chance of retiring but with inflation and the cost of living soaring that is not the case today. A minister who tries to retire based only on Social Security and not having a home to live in after retiring from a church will find retirement a step into poverty. The issue of annuity will be covered later.

Let’s look at the benefits of providing a housing allowance instead of a parsonage.

• The minister who owns their own home is building equity in their retirement future.
• The minister who owns their own home will have a sense of privacy that does not occur in a parsonage.
• The minister who owns their own home can choose to change, paint, or move anything in the home without the approval of a committee.
• The down side of the minister owning their on home is maintaining and repairs that must be born personally.
• Another down side is that younger ministers may not have the down payment necessary to acquire a mortgage. This can be overcome when a church has the means to help with a upfront lump down payment as part of the calling and may come in the form of a initial gift or a tenured gift, ie., a percentage of the amount forgiven based on the number of years that the person serves.

Let’s look at the benefits of providing a parsonage.

• A church in a rural setting may find it easier to call a pastor if there is housing available near the field of service. If homes in the area are not being sold on a regular basis the church probably should consider a parsonage, but also consider how to help with the retirement need also.
• A church may be in better financial shape to provide a nice parsonage.

A negative side of providing a parsonage can be heard in the voice of the pastor who says, “I could retire but I don’t have a home to live and Social Security is not enough to rent or purchase one in today’s market.”

There are places and circumstances that a parsonage may be a good choice but each church should consider the long term needs of the church and their ministers as they make a decision.

Are there ways to provide for the need if a church does have a parsonage?

• A drastic step could be to sell the parsonage and place the funds into an account where the church can help an incoming minister or existing minister to purchase a home.
• One way to accomplish this is to provide a lump sum for a down payment on a home with the understanding that when the new home is sold the original down payment would be returned to the church.
• Some churches that have done this have also chosen to enter into a forgiving process based upon tenure. In this process a percentage of the down payment is forgiven based on the number of years. For instance, if the original down payment is $10,000 then $1,000 per year is considered “forgiven” and therefore not retuned to the church. If the pastor stays 10 years the whole amount is forgiven.
• A less drastic step could be to live in the parsonage but provide an annual amount, again based upon tenure, which would be deposited into an account that would become the pastors when he leaves.
• This would be an equity sharing process where the church allows the pastor to build equity in a home while still living in the parsonage.
• The amount could be figured much like the first process or determined based upon the general rule of thumb of equity growth in housing surrounding the church field.

RETIREMENT AND ANNUITY

For many years the recommended portions that a church was encouraged to contribute toward a minister’s retirement was $33 a month. This was based on retirement predictions that have long since been outdated and the cost of living has outdistanced. The current recommendation is a minimum of 10% of the salary and housing provisions. The annuity issues will be covered in greater detail in the benefits section.

LUMP SUM PACKAGES VERSES LINE ITEMS

An older and very common practice was to provide a lump sum package and allow the minister to “divide it anyway they wanted.” Along with this practice was the practice of not providing any end of the year documents or withholding of any taxes. This approach has been outdated and is not adequate for several reasons.

• It can cause the minister to pay more taxes than the IRS requires.
• It can give the illusion that a church is adequately supporting a minister when it may not be doing so. This is an issue of comparison. If a church considers a secular job that offers $20,000 a year and their church’s lump sum of $20,000 a year as the same compensation they may be comparing differing sets of numbers. Almost every secular position provides benefits support that does not diminish the annual figure. One automatic support is one half of the Social Security contributions where the minister has to reduce the annual figure for that. Others items such as company provided health insurance, retirement matching or contributions, use of a company vehicle when driving is required, and other related items. A secular situation knows that to employ a person at an annual salary of $20,000 may indeed cost the company as much as $25,000 annually. A church that provides only the annual lump sum is in actuality only paying the minister $15,000 because the others items by comparison remain at the same level of cost.
• Allowing a minister to choose where they want the funds allocated places a difficult decision upon the minister. Sometimes the choice, especially if they are new to the ministry, may be a choice of providing for a potential retirement and feeding the children or repairing the car. Some choices should be made by the congregation in behalf of their ministers. Two critical issues are providing annuity and health insurance.

 TACIT OR WRITTEN EXPECTATIONS?

In some settings, churches operate out of a set of expectations that are not clear and not written but thought to be known in every detail by everyone else. Often this leads to confusion, conflict, and even struggle as these unwritten or tacit expectations are not carried out. The only way to avoid this confusion is to have clearly written guidelines. A church cannot know if the staff is moving in the same direction without written guidelines. In many churches the only written form is the Constitution and Bylaws which are broad and do not cover other daily or monthly operating issues.

The same principle is observed in the area of finances. Every church needs a clearly written and approved BUDGET, but it is surprising how many churches don’t have one. Financial stewardship is enhanced with the written budget.

When it comes to the ministerial staff, several things should be included in the clearly written guidelines. Guidelines should include the financially support broken down into categories, vacation time, sick leave, Sabbatical leave, issues on calling a minister and the changing of ministers, office hours, pay periods, and position descriptions.

 GuideStone Financial Resources of the Southern Baptist Convention offers the following recommendations concerning written policies.

 Establish written financial support policies

 Whatever can be done to reduce conflict in the church should be done. Misinformation, confusion and personal interpretation are some of the elements that feed misunderstanding and division. Church committees often experience this kind of conflict when new members rotate in and others leave for other service opportunities in the church. The newly-formed committee may or may not do its work in the same way the previous committee did. It is this inconsistency that often fuels conflict. Written policies reduce the conflict caused by the personal interpretation of previous committee actions. These policies form an objective standard for the committee’s current and future actions,

regardless of who may come or go from the committee.

 Your church should have written policies that cover at least the following four areas:

 1. Ministry-related expenses

 The policy should clearly explain:

  What the church considers allowable business expenses. These should be consistent with IRS rules.

• What is expected of an employee in terms of recordkeeping, and submission of expense account forms.
• The rate the church will use to reimburse miles driven for church business.
• Expenses related to conferences and conventions.
• The purchase of books, periodicals, software, etc. Will the ministerial employee own these items if the church reimburses for the purchase?
• The tax implications of an accountable reimbursement arrangement.
• Business use of personal wireless/cell phones and computers.

 If you have questions about these issues that are not addressed in our annual Ministers Tax Guide, please consult a tax advisor.

 2. Employee benefits

 The policy should clearly define the following:

  What levels of coverage the church will provide for medical, life and disability coverage for church employees and their families.

• What retirement contribution the church will provide for its employees.
• Information about Social Security. Churches must pay their share and withhold a non-ministerial employee’s share of Social Security taxes (often called FICA). However, ministers pay SECA taxes on their ministerial income. The church may

provide additional taxable income to ministers to lighten this burden. The additional income may be called a “Social Security offset”.

• Limits and types of educational expenses the church will reimburse.

 3. Personal income

 The church must not think of money designated by the church for ministry-related expenses and employee benefits as personal income. The church must be keenly aware

that personal income is the amount of money the employee will have to financially provide for himself and his family.

 The policy should clearly explain:

  Total amount that may be divided between cash salary and housing allowance. Let the minister help you with this division.

• Whether the church will withhold taxes at a minister’s request.
• How the church will designate housing allowance for eligible ministers living in a church-owned home or their own homes.
• Considerations for future personnel reviews and pay increases.

 4. Other personnel policies

 There are other policies the church should consider for its employees, including the following:

 • Vacation.

• Sick leave.

• Sabbatical leave.

• Hiring issues.

• Employee classifications.

• Work hours.

• Pay periods.

 These materials and others can be viewed and downloaded from GuideStone Financial Resources of the SBC (formerly the Annuity Board), at http://www.GuideStone.org.

MINISTRY RELATED EXPENSES

What are ministry related expenses and how should they be viewed from the perspective of the church? A ministry related expense is anything that causes the minister to have an outlay of funds to provide the particular need. The IRS has set criteria as allowable expenses and the church should abide by these. The greater question is how and who makes reports or submissions for the expenses. Churches should be very careful in how they designate the expenses and especially careful in how they are dispersed and reported.

Expenses related to business travel automobile mileage.

This ministry expense is in connection with the expectations of the minister. If a church expects the minister to visit the hospital, make home visits, or attend local association meetings they should not expect that the cost of that would come out of the minister’s pocket. If you are hired to work or a secular position where travel is a vital and necessary part of doing your job, such as a Frito Lay distributor, you would feel pressed upon if the employer said, “We will pay you $6.00 per hour and you must purchase a large truck to carry the product and pay for the gas as you deliver them.” I use this illustration because my neighbor across the street works for Frito Lay and it was on my mind at the time. This illustration depicts the standard in the secular field that the travel and means of travel is a cost of doing business and not a reduction in the salary level of the employ. Travel in ministry related fields is also a cost of doing ministry and the minister should not be expected to bear that cost from their salary. They should be view as necessary and as important and the burden should be carried by the church. These expenses fall into the same category of the cost of heating or cooling the building, providing a telephone for people to contact the church, and providing electricity to light the building. This is not a burden that the ministers should carry but rather an expense that the church incurs in the normal cost of doing ministry.

How does a church approach this issue and how does she budget for them? The first step is to recognize them as a church expense rather than part of the ministers “salary package.” They should be clarified and written so they become included in the annual budget that the church approves so that everyone in the congregation is informed. Many printed budgets include the automobile expenses underneath or lumped into the total compensation figure but this implies that they are the responsibility of the minister. A better approach is to report those expenses in a place other than the line item that refers to the minister’s compensation.

Another question arises as to whether the church provides an “automobile allowance” or an “automobile reimbursement.” The IRS recognizes the legitimate cost of travel is necessary but they have determined what can be used as expenses. As a general rule of thumb any travel in the normal process of doing ministry is a legitimate expense.

Rule of Thumbs

• The IRS has determined that what cannot be identified as an expense is the travel from a minister’s home to their normal office location. Now if you leave the home to visit a hospital that is considered and expense.
• The IRS has also determined that automobile expenses must include very specific information in order to be considered. The information must include the beginning speedometer mileage and the ending reading for each episode. The differences between those reading are then tallied as the actual business mileage. These figures must be included in the Income Tax filing of the year. The simple reporting of the total miles per month will not be accepted if the IRS ever audits.
• A suggested form that can be used for this recording is listed on or web page under “resources”.
• The IRS recognizes the validity of the expenses but in order to pass an audit, of the minister or the church, the expenses that are given to the minister should be a separate check and not simply lumped into a single check.

AUTOMOBILE ALLOWANCE: This term was used as a church sets aside an amount of funds that they provide to the minister during the course of the year to cover the travel expenses. It is a line item budgeted designation and usually is include in the regular pay cycle, whether it be weekly or monthly. The amount must be determined at the beginning of the year and clearly written in order for the IRS to recognize them. The Income Tax reporting then becomes the responsibility of the minister. To pass a potential audit the record system must include the beginning mileage and the ending mileage for business expenses and be made available in the minister’s yearly tax records. With an allowance the IRS becomes the recipient of the mileage log.

One disadvantage in this process is that in a year where the need for travel is exceptional the amount of the allowance may not be change to a higher amount. The limit is set by the budgeted amount. If it goes over then the minister can report the overage as non-reimbursed amount on their income tax form, but they must be able to clearly distinguish those actual in a written form. On the other side of this, if the need is less that the budgeted amount the church cannot decide to pay the difference without subjecting itself to an IRS dilemma.

AUTOMOBILE REIMBURSEMENT: This term refers to a different process of accomplishing the same provision. The main difference is who receives the mileage log. IRS has determined that a church may use a reimbursement and if it meets the requirements they set aside then the reporting can be turned into the church and not included in the Income Tax reporting of the individual minister. What does not change is the IRS recommendation on what must be included in the reporting of mileage. The IRS also sets a standard mileage rate and churches would not go wrong by using that rate.

The reimbursement works this way;

• The minister keeps an accurate record of business miles used during the month and turns a written reflection of those miles into the church.
• The church then cuts a separate check for the reimbursed miles and files the keeps the record.
• Once this step is accomplished IRS considers it a completed action and no one has to report to them, since it is not considered income.
• The church must maintain the record of the submissions in the event the IRS ever audits them.

Any expense that is incurred and reimbursed by a church is treated by the IRS as expenses and not income. As long as it is transacted in a way that a bill or expense is submitted with documentation (receipts) and the amount is reimbursed then IRS recognizes it as an expense and no further reporting is required.

An advantage to the reimbursement process is that it is tied to the miles used rather than a set amount and may fluctuate up or down. The budgeting process is a figure used to predict the need but set at a rate based on the actual miles driven. This allows the church to carry the burden of fully and totally providing or the expenses in a way that the IRS not only recognizes but suggests as a proper way.

OTHER MINISTRY RELATED EXPENSES

GuideStone offers this:

If your church has a building, then your annual budget also includes a line item for utility expenses. You can’t have one without the other. In the same way, it takes more than just providing a salary to have a minister.

Ministry-related expenses of your pastor should be thought of as the “utility” costs of having a minister. These expenses include, but are not limited to:

The expense of operating a vehicle for church business.

• Money to participate in denominational meetings, workshops and other appropriate conferences.
• Books, periodicals, software and tapes to enhance ministry.
• Continuing education opportunities.
• Provisions for hospitality in the course of ministry.

Just as a business pays for paper clips, computer software and work-related mileage of its employees, it is the church’s responsibility to provide money for ministry-related expenses and supplies. These expenses should not come out of an employee’s pocket or be included in a “package” amount given to your minister. They should be provided by the church, and in a separate budget line from salary.

EMPLOYEE BENEFITS

A benefit is something offered to an employee that is not part of the salary. Most businesses offer benefits for several reasons. It makes it easier to hire and keep competent employees if they offer benefits. Businesses have discovered that a person can concentrate on the job task if their and their families well being is provided for. It is good business practices to keep care of their employees. And, it also demonstrates to the person who works that they are important and their work is appreciated. It is simply good stewardship to provide for those who fall within your responsibility. The IRS does not require the providing of any benefit but it does recognize them and allows for ways of reducing the tax burden through the provision of benefits.

Churches who want to be good stewards of the funds and personnel that God has entrusted to them will want to provide benefits. The two main arenas for benefits are insurance and annuity. The cost of these items are growing each year and becoming more of a burden on both ministerial staff and churches.

It is not a benefit if the cost of the item goes up and the salary is reduced by that amount. A benefit is a true benefit when the church carries the responsibility of the benefit if it increases.

INSURANCE

The insurance needs fall into several categories; medical insurance, life insurance, dental coverage, eye care provision, and accident and disability coverage. Each of these is important for the well being of any person but medical insurance is critically important. Churches would do well to move toward providing health insurance for their ministers and their family.

If a church pays for the health insurance directly then IRS considers that amount as non-taxable income for the minister. If the church simply lets the minister buy their own insurance then the amount is considered as taxable income by the IRS and they have to pay both federal income tax and social security taxes on the amount. This is not simply a matter of who writes the check but rather who will provide for the insurance, the church or the minister.

GuideStone Financial Services is a broad based service for ministers and staff of churches that are part of the Southern Baptist Convention. They offer a lot of help as well as providing Health Insurance, Life Insurance, and other coverage. Each of these services comes with a cost factor that churches must consider.

GuideStone Financial Services offers this:

“Saves taxes

The law allows your church to pay for medical coverage (for an employee and dependents) and disability and group term life insurance for your employee. When a church pays for this coverage directly, the money is not reported as taxable income, although group term life insurance above $50,000 for employees is taxable. A church can also make tax-sheltered contributions to a minister’s or employee’s 403(b) retirement account.

These tax-saving ideas are not “loopholes.” They represent wise use of tax laws to help your minister and employees pay the least amount of tax that is legally owed. Again, it is a matter of good stewardship.”

Everyone knows that Insurance costs are ever increasing and can become a burden on both the individual and the churches. The question about the increases is who bears the cost for them? Another way of addressing that question is, “Does the church offer insurance as a benefit or does the church allow the minister to purchase their own?”

How does a church know the difference between the two approaches? It is not a benefit if the cost of the item goes up and the salary is reduced by that amount. A benefit is a true benefit when the church carries the responsibility of the benefit if it increases.

RETIREMENT

Most businesses today provide some form of building retirement into the life of their employees. Sometimes it is accomplished through a company provided pension plan. The funds that go into the pension plan are available to the employee at retirement and are designed to supplement Social Security. Social Security was never intended to be the sole provider of retirement resources.

Churches have chosen to provide for their personnel through annuity plans and GuideStone offers a lot of choices and helps in the area of annuity. The recommended amount to provide for retirement is a minimum figure that is 10% of the salary/housing. Churches are encouraged to contribute to that fund in behalf of their ministerial staff. The money that is contributed is not considered taxable for income tax purposes until the individual withdraws them for retirement. If they are invested in a program like one of programs like those provide through GuideStone they accrue interest and dividends over the life of the annuity. GuideStone can manage these funds in different investments funds that the participant chooses and over the years can add up to a retirement.

The minimum recommendation is 10% of the salary and housing but not limited to that. The individual can designate more contributions, within the IRS allocation and direction, and even can contribute on their own behalf. If a church is contributing 10% as a benefit the minister could also contribute an additional amount to be deducted from their salary. Another way that a church can contribute to the stewardship responsibility of caring for their servants is to have a "matching amount" in addition to the minimum 10%. A church may choose to match an additional amount (within reason, usually 5%) in the minister chooses to set aside the matching portion.

PERSONAL INCOME

Several factors should be considered when you begin to figure how much to offer as support. As a church begins or reviews their process of determining the figure it should take special care and do so from a strategic process on an annual basis. The following suggestions are helpful in the process.

• The size and strength of the congregation should be considered.
  Smaller congregations cannot offer the same amout as that of larger congregations but smaller congregations should determine a fair representations.
• The geographical location of the congregation is another factor to consider. Churches in high inflation areas would be remise if they offered the same as those in economy settings that are not inflated.
  One issue to consider is that churches cannot determine or lower the inflation of the field by lowering or refusing to consider the inflation factor for their ministerial staff. Inflation is determined by many factors of which the ministerial staff personal income level is not one.
• The responsibility expectations of the ministerial staff should be considered. Whether the position is full time or part time is a major consideration but there are others such as the number of responsibilities as the number of people that fall within that responsibility. One mistake churches make is how they determine what "full time" means. Simply wanting to have a minister on the church field for a full work week does not mean they are "full time." The determining factor is whether the personal income portion constitues an adequate support for the family. If a church expects the spouse of a staff person to work in order for the family to survive, that is not full time service for the staff member.
• The education background of the individual is a consideration when determining the personal income of a staff member. Those who have dedicated themselved to training should be looked at differently than those who are eithering entering the service field or beginnning their education adventure.
• The experience of the staff member should also be considered. A ministerial staff person who has been in the ministry for a number of years should not be treated as the person who is entering the ministerial environment. One mistake a church makes is to look at each incoming minister as "beggining" anew when they come to their field of service.
• Inflation is a major factor to consider and one in which many churches make a mistake. Inflation simply means that it costs more today to purchase anything today. The income levels of yesterday will not provide an adequate purchasing level for today.
  • Churches who have not kept up with inflation may soon find it harder and harder to attract good staff.
  • The most frequent mistake is to look at the present time frame with a past time frame mentality. A salary that was good in the 1920's is not any where near sufficient for the present day needs.
  • Another frequent mistake is to assume that the retirement personal income level, since many who make these decisions are on retirement, is sufficient for those who are active in the profession today.
  • The way to deal with inflation is to systematically instill in the personal income level steps that will keep up with need. This is done through increasing the personal income level to match inflation. This is refered to as Cost of Living Raises. It is not an increase in income bases on anything other than the cost of living.
  • If a church does not provide this inflation will eat at their level of support.
  • If a church does so in incremental levels the burden on the church will not be so intense.
• Recognizing service advancements is an important part of the process. This is often referred to as Merit Increases. Another term used but has a different connotation is performance raises. The merit raises are a way to recongnize growing service that goes above the standard expectations.
• Merit raises are based upon a Biblical instruction, "The elders who direct the affairs of the church well are worthy of double honor, especially those who work is preaching and teaching." (I Timothy 5:17).
• Merit raises recognize effort beyond the normal expectation and honors those who endure to strife in additional service.

HOUSING ALLOWANCE

One avenue that a church can use to lesson the tax burden of their minister is the Housing Allowance. The housing allowance is not subject to INCOME TAX but is subject to SOCIAL SECURITY TAX. This is a something that IRS allows and recognizes as a legitimate tax exclusion. It is a tremendouse benefit for the ministeral staff but must be undertaken by the church in very clearly written actions.

• A church may choose to provide a housing allowance for the minister who owns their own home. This amount can be the actual cost of the mortgage, property taxes, insurance costs, repairs, improvements as the expenses related to utilities and upkeep.
• A church that provides a parsonage may also set aside a housing allowance but the amount is limited to expenses related to utilities and upkeep that the minister would incure but not those expenses that the church would normally incure.

NOTE: Churches who supply a parsonage need to remember that the IRS treats the value of the parsonage provision as income and the minister must pay Social Security taxes on that value. The value is referred to as the "fair market value" and the amount must be determined by someone. Churches should take the responsibility to set that value for the minister so as not to create an undue reporting problem for their minister. Fair market value does not mean that a church can choose to inflate their value so as to be perceived as providing a much larger salary package that reality but also does not mean that a church can undervalue the provision. The average rental value of existing homes surrounging the area of service is the best place to start.

THINGS REQUIRED WHEN A CHURCH DESIGNATES A HOUSING ALLOWANCE.

1. The minister must provide a form that is the estimate of expenses for the coming year.
2. The church must annually designate an amount for the housing allowance that has to be officially approved in the budgeting process and business meeting.

These two forms should be presented each year and kept on file by both the minister and the church.

Two suggested forms are provide on the WEB PAGE. They may be downloaded and used if a church decides to use them or they may choose to provide their own. The two forms are labeled ESTIMATE OF HOUSING EXPENSES FORM and ANNUAL HOUSING ALLOWANCE FORM.

LIMITATIONS TO HOUSING ALLOWANCES

1. You are not allowed to designate the total personal income as Housing Allowance.
2. You cannot change the amount of the designation mid-year.
3. You can over estimate the amount and what is not used is treated as normal income but you can never deduct more that what has been approved at the beginning of the year.

With any of the recommendations listed above a church should consult with a CPA or other tax person before making any changes in how they report or provide for their ministers.