Here are some things that a Pastor dreams of hearing in his church.
- “I love it when we sing hymns I’ve never heard before!”
- “I was so enthralled, I never noticed your sermon went 25 minutes over time.”
- “Personally I find witnessing much more enjoyable than golf.”
- “Since we’re all here, let’s start the service early.”
- “I volunteer to be the permanent teacher for the Junior High Sunday School class.”
- “I couldn’t find space to park outside. Praise God!”
- “Hey! It’s my turn to sit in the front pew.”
- “I’ve decided to give our church the $500 a month I used to send to TV evangelists.”
- “Pastor, we’d like to send you to this Bible seminar in the Bahamas.”
- “Nothing inspires me and strengthens my commitment like our annual stewardship campaign!”
- “Forget the denominational minimum salary, let’s pay our pastor so he can live like we do.”
In reality, many Pastors are able to make ends meet, and only a few are able to exceed what their “needs” are for them and their family today, and to provide for their retirement/redeployment years. Ministry, specifically Pastoral ministry, in the truest sense in the local “down the street” church is not a profession for those that want to live life with lots of extras and a plentiful retirement package.
So how does a Pastor’s salary and benefits package come together? Also, what are some of the ways that a Pastor can make ends meet in even better ways with the various blessings for them found in the US tax code?
Two Audiences for this Episode
We acknowledge that we have 2 audiences, thinking about this episode…
- Pastors/Elders/Church Leaders – You need to know and understand some of the important items you can take advantage of to make the most of your financial stewardship. Surprisingly, the U.S. Government still has many benefits in place for clergy.
- Lay People – Every year, there is some kind of discussion about Pastoral compensation. You need to know some of the ways Pastors get paid, and the nuances of Pastors compensation, in order to rightly understand the discussion and pay your Pastors fairly. (see 1 Tim 5:18)
Differences Between Being “Ordained” and “Licensed”
- Ordination permits the minister to perform church rites and sacraments, such as baptisms, legal marriages and funerals.
- Licensed ministers, on the other hand, are usually authorized to perform some ministerial functions, but may be required by the terms of their license to only act as clergy in the context of a local congregation (Chron).
- Ordination is a one-time event for the Pastor.
- Licensed ministers may only be valid for a specific period of time, and it is good for a Church, when they do “License” a Pastor, to put a specific time-frame in the documents of licensure and have a record in the Elder minutes.
- For tax purposes, the IRS recognizes both licensed and ordained ministers as clergy, although it may apply additional standards when determining whether a clergyperson is subject to special tax rules for ministers.
- While many religious organizations give licensed ministers the authority to officiate at weddings, state laws may restrict the role of officiant to ordained clergy. Licensed ministers should confirm that they are legally permitted to perform weddings in their state” (Chron).
- Another thought is when it comes to retirement income benefits (403b tax advantage for Clergy, which we will explain later on in this episode) most likely a “licensed” minister will not be able to have the same tax privileges as ordained ministers do.
Pastor Compensation: What Comes to Mind?
1. Should Pastors Opt-out of Social Security? Probably not…
This has direct implications on Pastoral compensation. How they are paid is determined whether or not they have opted in or our of Social Security. In our experience, most Pastors have opted to stay in. Those who have opted out have significant stewardship and planning challenges.
- Why have some opted out of Social Security?
- “At the time, I was highly under the influence of Ron Paul. I was under the conviction that the Fed was an illegal and immoral organization…”
- “I think I would do better stewarding that money than the government…”
- “Social Security is COMMUNISM!”
- “A minister must certify opposition on the basis of religious principles to acceptance of public insurance. That includes payments for death, disability, retirement or medical care. Ministers must certify that they have informed their ordaining body of their opposition to accepting public insurance benefits on the basis of religious principles. Few ministers will be able to meet these requirements.” (Guidestone)
- Who can opt out?
- Any ordained, commissioned, or licensed minister of a church.
- Why is it dangerous to opt out?
- Health insurance when you are 65+ years old can be hard to access.
- You need to have a conviction to save a lot of money over time to make up for what you lose without social security. Unfortunately, we find that many Pastors lack follow through and are unable to save as much as they need to.
- For Pastors that have opted out:
- Save at least 15% of your pay specifically for retirement. 25% is recommended.
- Funding for retirement should go into Roth IRA. If needed above and beyond that, consider a 403(b).
- While not often, the IRS sometimes creates an open window for ministers to opt back in to Social Security. For many, this would be wise.
It would be prudent to have a conversation with a Financial Professional to make sure you are on the right track. Consider a Personal Stewardship Review.
Elements of Pastor Compensation
- Salary – Actual amount being paid to the Pastor.
- Housing Allowance – Mortgage or rent payments, taxes, repairs, insurance, furnishings, utilities, gas for the mower, television, renovations, etc. Anything you don’t eat, wear, or drive can be deducted on your federal income taxes.
- Needs to be documented in January of each year, in the minutes of the Church meetings. A copy should go to the Pastor and the payroll service. This has no impact on the church. It has everything to do with the Pastor’s taxes. A Pastor can change their housing allowance amount once per year.
- It is okay to overestimate your housing allowance, but know that any remaining income will be taxed as ordinary income.
- “There are incredible double deductions for certain ministerial housing expenses. A minister may claim as part of his housing allowance expenses related to mortgage payments, including property taxes, interest paid, and many of the closing costs associated with refinancing a mortgage or taking out a new loan. However, the deductions do not stop there. The minister may also claim many of these same expenses as itemized deductions on Schedule A of his income tax return. Itemized deductions can include the same property taxes, interest, and many of the same mortgage closing costs. Pretty neat!”(Dr. Keith Hamilton)
- Benefits Package
- Health Insurance – talk to a tax professional to figure out whether this is taxable or not.
- Retirement Benefits – 403(b) contributions that are deducted from the pastors pay are subject to Social Security tax if they are in Social Security. Consider taking a pay cut and have the church make extra employer contributions. If you do this, there needs to be great clarity in communication with your finance team and the Pastor(s). It cannot be an obligation, rather, it’s a mutual understanding.
- Accountable Reimbursement Plan
- Study materials, office supplies, continued education, meals, memberships, miles, etc…
Pastors & Dual-Status Employment
While ministers are employees for federal income tax reporting purposes, they are self-employed for Social Security purposes with respect to services they perform in the exercise of their ministry. This “dual status” means they are not subject to withholding requirements for the employee’s share of Social Security and Medicare taxes. Instead, they pay a Self-Employment Contributions Act (SECA) tax. Churches are not permitted to pay the SECA tax for their ministers; however, churches can assist ministers by providing them with a Social Security Allowance of at least 50% of the SECA tax. This provides an equivalent of Social Security/Medicare (FICA) taxes that the church would pay on behalf of a non-clergy employee (Clergy Financial).
The Pastor is a ‘dual status’ employee.
- They are self-employed when it comes to Social Security (Rather than the 7.65% most employees pay, they have to pay about 15.3% in social security tax).
- If you are a church leader, this would be a good conversation to have to consider ways to relieve the social security tax burden on your Pastor.
- They are employees when it comes to their salary.
Often Overlooked Tax Deductions for Pastors
- Deduct those business miles from your home
- For pastors that do not have a self-employment tax exemption, this is the next best thing. Did you know that if you meet certain requirements, you are able to deduct your miles from your home to the church office? This is one of the most overlooked deductions that many pastors do not know exists!
- In Revenue Ruling 99-7, the IRS ruled that travel between your home office and the church office (or other church/ministry-related travel) is a deductible expense.
- When 100% of all your miles from your home office to your church office are deductible, it can substantially lower the Pastor’s self-employment tax (StartChurch).
- If you are a Pastor and are not sure if this deduction is for you, consider speaking to a Tax Professional sooner than later for you may be able to work the numbers to take this claim for this last year before you file.
In addition to travel and transportation expenses and housing allowance, there are other professional expenses that can be tax deductible for ministers if they are not paid for by the church or reimbursed by the church.
- Gifts – Ministers can deduct up to $25 per donee for business gifts to any number of individuals every year. The gifts must be ministry related. These usually include church staff gifts, gifts for graduating seniors in the church, and wedding gifts for attendees of the church.
- Clothing – The cost of clothing for ministers is deductible or reimbursable if the church or officiating body requires the clothes and they are not suitable as normal wearing apparel. This means that the cost of a regular suit worn for Sunday morning services cannot be deducted or reimbursed. However, the costs of vestments are deductible and reimbursable.
- Education – The cost of education incurred by ministers can be deducted if the education was needed to meet the requirements of the church or officiating body in order to keep their positions or if it maintains or improves their present employment. No education deductions can be taken if the education wasn’t required to meet the minimum educational standards of the church or officiating body or if the education was to qualify the minister for a new occupation.
- Entertainment – Fifty percent of the cost of meals and entertainment are deductible if they are ordinary and necessary and are directly related to ministry or church business. Ministers must keep a log of all entertainment expenses, documenting the date, name(s) of guests, occasion, place of entertainment, ministry purpose, and costs. Non-logged expenses should not be deducted.
- Computers and cell phones – The cost of personal computers, cellular telephones, and the expense of using the cellular phone can be depreciated as five-year recovery property or deducted under Section 179 up to an annual limit (See IRS website for details.) on a joint return if they are used at least 50 percent for church and ministry. To confirm that a certain amount can be deducted, it is wise for ministers to use a log to record the use of their computers and cellular telephones.
- Subscriptions and publications – Subscriptions to ministry-related periodicals are generally deductible. Books related to ministry with a useful life of one year or less can be deducted.
How to Get Pastor Taxes Right
If you are good with record keeping, and good with numbers, you could get away with using a tax software. Once the software knows that your profession is “clergy”, it structures things a little differently. However, this is not recommended, as there is still a lot of room for error.
TALK TO A PROFESSIONAL THAT KNOWS AND UNDERSTANDS CLERGY TAX LAW.
- Not all tax professionals know and understand Pastors’ taxes. They just treat it as normal income tax, and Pastors can potentially lose or miss a lot of the tax breaks and benefits.
- You need to consult a tax firm or professional that knows and understands how to get Pastors’ taxes right.
- If you need direction, reach out to us.
We covered a lot of information pertaining to a Pastor’s compensation and also the blessings of certain tax benefits specifically in the tax code for Pastors. One of the key things that a pastor needs to know is this: Proverbs 27:23 – “Know your flocks and herds….” Pastors who choose to be relaxed and non-engaged with their income, expenses along with recording of expenses, well, they are literally giving away a huge monetary donation to Uncle Sam…each and every year!
Intentional record keeping and a high level knowledge of the US tax code as it applies to Pastors, allows you to take advantage of all the unique deductions and credits allowed to those who are serving the church full time, both today, and also in your Pastoral retirement years
Pastor, we want to encourage you to either begin, or continue in good stewardship. One of the best ways that this can happen for you is having someone do a financial, investment, insurance and retirement review.
- Take advantage of our free personal stewardship reviews so you can take your next steps to being a better steward.
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