Church Administration

The Right Way to Give a Christmas Bonus to your Pastor

An excerpt from Structuring Pastoral Compensation:

Over the years, I have received numerous gifts from our church. Some were for Christmas, others were for anniversaries, and others were just because they loved us.

In fact, I just celebrated my 10th anniversary as the lead pastor of our church. They were very kind to us, and surprised us with a party. Many people brought cards and notes thanking us for our ten years of service. It was touching, and we were so honored.

It has been my observation over the years that most churches love their pastors. While they may not yet have every component discussed in this book as a part of their pastor’s total compensation package, they do genuinely want to care and provide for their pastor in practical and monetary ways.

One of the most common ways this is done by many churches is through the giving of bonuses or gifts to pastors either on special occasions (i.e. an anniversary) or around holidays (i.e. Christmas).

While this can be a great way to love and care for your pastor, a few things need to be said about bonuses and gifts.

Source of Funds

Before giving a bonus or gift to your pastor, you must first determine where these funds will come from. You have two likely options.

Bonus/Gift from the Church’s General Fund

One option is to simply give the bonus or gift directly out of the church’s general fund. No special collection of funds would be taken for this. This is the simplest, and as you will see in a moment, best method for such gifts.

Bonus/Gift Collected by the Church

Unfortunately, the more common method for coming up with the funds for these kinds of gifts is by the church taking up a special collection or “love offering” specifically for the gift. People just write a check to the church and designate it towards the gift. What could be easier?

Maybe . . . money laundering? I say that, mostly, to get your attention, but understand that this is practically (and inadvertently) what ends up happening in many churches.

Any gift given to a church that is specifically designated as being for the personal enrichment of any individual is generally NOT considered a tax-deductible or charitable contribution. Many people and many churches do not know this . . . which causes the transaction to become, in effect, an example of religious “money laundering." I’m being a bit facetious, but I hope you get my point.

If a church really wants to take a collection for its pastor, it should first notify the congregation that all funds given will not be tax-deductible and will not appear on their annual giving statements at the end of the year.

For this reason, I believe that the best method for giving bonuses or gifts is simply to do so out of the church’s general fund.

Tax Considerations and Reporting

However, regardless of which method above is used, any bonus or gift given to an employee of the church must usually be reported as taxable income for the year.

For example, Pastor Bob has a total income of $50,000 of which he designates $25,000 as being his housing allowance. The church makes a 5% contribution to his SEP totaling $1,250. However, at Christmas, the church decides to give Pastor Bob a $2,000 Christmas bonus to show their appreciation for his service.

Two things will most likely now need to happen: A) because the $2,000 is considered salary, the church will likely need to make an extra $100 contribution to Pastor Bob’s SEP (5% x $2,000 = $100); and B) the church will likely need to show a total salary of $27,000 on Pastor Bob’s W2 at the end of the year.

What Does All of This Mean for You?

It means that churches have a responsibility to rightly handle these kinds of gifts, both in respect to your donors and to your pastors/employees. Do not engage in well-intentioned but, nonetheless, unethical practices.

However, I would encourage you to make it a regular feature of your church’s care for your pastors to give them these kinds of gifts. It shows the pastor and his family that the church cares for them in a very practical way.

Not all gifts have to be cash-based (though, if it is a gift that has a known, tangible value, the value will very likely still need to be reported as salary.) Again, I have found that what pastors want most is to be remembered, thought of, and appreciated.

I’ll never forget my five-year anniversary at our church. As the day arrived, I didn’t expect or hope for any kind of monetary or non-monetary gift. All I wanted was a hug and a “thank you.” Not because I felt that I deserved to be thanked . . . but just because I wanted to know that our people remembered me.

So, let me encourage you to remember your pastors – love them, show them you care, remind them often of what a blessing they are to you. You will never know how much that truly means.

 

Stacy Potts is a pastor, author, and consultant specializing in pastoral compensation and personal finance issues. He is the author of multiple personal finance books for pastors including How to Not Be a Broke Pastor and The Pastor's Guide to Wise Investing. He lives in Virginia Beach, VA, with his wife, Jamie, and their two children, Nathaniel and Hannah. Visit his website at www.brokepastor.com.


Why every pastor should receive disability insurance from their church

While fairly standard in the secular workplace, disability insurance coverage does not seem to be as common amongst pastors and churches. Yet, the possibility of a pastor becoming disabled is no less than any other worker in any other profession, and churches should be ready to care for any pastor who becomes disabled - either directly or through the purchase of disability coverage.

Notice the two options I just gave for caring for a disabled pastor (I’m assuming that a church not providing care for a disabled pastor isn’t one of their options. How unloving, uncaring, and un-Christlike would that be?).

One option is for the church to care for a disabled pastor directly – meaning, the church is willing and able to keep that pastor on its payroll (at some level or another) indefinitely, regardless of work performed or services rendered. While this may save the church money on annual premium payments now, it places all of the long-term risk on the church – a commitment that may or may not be feasible in the present or future.

The second option - and the one I would highly recommend - for caring for a disabled pastor is through the purchase of disability insurance coverage. Yes, the church will incur an expense related to the annual premiums, but this is generally minimal – especially when you compare it to the idea of keeping a pastor on your payroll indefinitely should they become disabled. This way, the church transfers the long-term risk to the insurance provider, and everyone can have peace-of-mind knowing that the pastor will be cared for should the unthinkable happen.

Does your church offer disability insurance coverage to your pastor?


Four Professionals Every Pastor/Church Should Know

I believe that every church, and by extension, every pastor, should establish a relationship with an attorney, an accountant, a tax professional, and a financial planner.

Now, as I say this, I do not necessarily mean that every church needs to hire these four types of individuals. It just means that you need them. In our church, we have had various relationships with all four of these professions on either a paid or volunteer basis over the years.

Perhaps you have individuals within your church who work in these fields. Have you ever considered asking them for help? I have found that most people within the church, if asked, are more than willing to lend their own professional help whenever they can. If you have them in your church, you should ask them. What’s the worst that can happen . . . they might say “No”?

But if you don’t have these individuals in your church, you will need to hire them, as needed, either for consultation or for services rendered. Do not look at this as being an expense, but as an investment in the church! I can say that we have never once paid a single dollar to our attorney or our accountant that wasn’t worth ten more in money or trouble saved. They have helped us immeasurably over the years, and we are thankful for the relationships we’ve established.

So, if you don’t have these four professionals in your church, get some recommendations from other churches in your area (or, better yet, from business people you respect), and set up some meetings. One way or the other, you will eventually NEED their counsel and help.


Clergy Housing Allowance Ruled Unconstitutional - What You Need to Know!

As I'm sure many of you have heard, the clergy housing allowance was, once again, ruled to be unconstitutional by Judge Barbara Crabb of the United States District Court For the Western District of Wisconsin. Don't start panicking yet! This case will almost certainly be appealed, and we likely have several years to go before any final verdict is reached.

That said, pastors and church decision-makers need to be informed about this issue now. To help, I've put together a list of links that will enable you get up-to-speed on what has happened. Please share this with as many pastors and church-decision makers as you can.

Understanding Pastoral Compensation
For Pastors - How to Not Be a Broke Pastor
For Church Decision-Makers - Structuring Pastoral Compensation

What Has Happened?
The Judge's Actual Ruling
David Roach, Baptist Press
Chicago Tribune

Commentary on the Current Ruling
Peter J. Reilly, Forbes
William Thornton, SBC Voices

Commentary on the Original Ruling
Peter J. Reilly, Forbes

The History of the Clergy Housing Allowance
Explanation by Jesse Johnson of The Cripplegate
Explanation by Joe Carter of The Acton Institute
Explanation by Peter J. Reilly of Forbes

IRS Rules for Clergy
IRS Publication 517


How Our Church Saved Over $100,000 in Healthcare Costs

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It's true. As of the end of this year, our church will have saved more than $100,000 (over a three year period) in healthcare costs associated with providing medical insurance for our pastoral employees.

We did it by using the provisions of the Affordable Care Act (a.k.a Obamacare) to our advantage. Not only did it save our church a TON of money, but it provided amazing health insurance for our pastoral staff. To learn how, buy Benefitting from Obamacare today!

How to Determine Projected Giving for Next Year's Budget?

One of the hardest aspects of creating an operating budget for the upcoming fiscal year is determining how much giving the church should project/expect next year. I know that, in our case, this is something we wrestle with each and every year.

Over time, we have developed five questions to help us make this crucial determination:

  1. What is the total YTD actual giving for the current fiscal year?
  2. Based on current average weekly giving, what is the projected annual giving for the current fiscal year?
  3. How does the projected annual giving for the current fiscal year match up to the prior year's projection?
  4. Does recent giving (rolling 3 month and 6 month totals) appear to be trending up, down, or steady?
  5. How does YTD actual giving for the current fiscal year compare to the same time period in the prior fiscal year?

What is the total YTD actual giving for the current fiscal year? This allows us to see where we're at today.

Based on current average weekly giving, what is the projected annual giving for the current fiscal year? This is where we take whatever we've received YTD and divide it by the current number of weeks in the fiscal year. For example, if we have received $200,000 YTD and there have been 40 weeks of giving, then our average weekly giving is $5,000. With 12 remaining weeks of giving left in the year, our projected annual giving for the current fiscal year would be $260,000 ($200,000 actual + $5,000 times 12 weeks = $260,000).

How does the projected annual giving for the current fiscal year match up to the prior year's projection? If, last year, we projected that we would receive $250,000 in giving this year, and our projection for EOY is $260,000, then we are on track. If, however, we projected $300,000, then where did our projection go wrong? What happened? This step acts as a quality control feature in our overall thinking and planning.

Does recent giving (rolling 3 month and 6 month totals) appear to be trending up, down, or steady? So, at this point, we compare three numbers. First, we determine our YTD average weekly giving. Second, we take the the last 26 weeks of giving and determine the average weekly giving from that time period. Finally, we take the last 13 weeks of giving and determine the average weekly giving from that time period. After comparing those three numbers, do we find an increase in giving, a decrease in giving, or no change in giving? This gives us an idea of what to expect going forward.

How does YTD actual giving for the current fiscal year compare to the same time period in the prior fiscal year? Are we seeing more or less giving than we were 12 months ago at this same time? Again, this gives us a sense on what to expect going forward.

If, after reviewing these factors, the projected giving for the upcoming fiscal year is less than the current year’s projections, then we have to adjust our budget accordingly.

On the other hand, If, after reviewing these factors, the projected giving for the upcoming fiscal year is greater than the current year’s projections . . . then we have to determine how much extra to project. This is the particularly tricky part.

In general, we have tried to tie increases in projected giving to any actual increases in annual giving over the previous 5 year period.

For example, If the projected giving for the current year is $260,000, AND if, after reviewing the factors listed above, we believe that the projected giving for the upcoming fiscal year should be greater than the current year’s projections, AND if the average year-over-year increase in actual giving for the past five years equals 3%, THEN the projection for the upcoming year’s giving should equal 103% of the current year’s projections, i.e. $267,800. 

As you can see, this is about 50% art and 50% science. It's our attempt to be both conservative and factual in making this very important projection.

How does your church make this projection? Leave a comment below, or follow me on Facebook and leave a comment there.


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BENEFITTING FROM OBAMACARE

Over the past three years, our church has saved over $100,000 in health insurance premiums by using the provisions of the Affordable Care Act (a.k.a Obamacare) to our advantage - $100,000 that we have used to hire additional staff, send one of our members into foreign missions, and pay down our church's mortgage!

Written for both pastors and church decision makers, Benefitting from Obamacare is the story of how we did that, the challenges we faced, the things we had to consider, and what we have experienced since.

What is the Best Way to Report Reimbursable Expenses?

If your church has an accountable reimbursement plan - and I sure hope it does - then your employees need a way to report their reimbursable expenses. There are two basic methods.

First, you can always have them turn in their physical receipts. This is the most common and low-tech option available to you. Normally, you would have a form of some sort that they would complete and attach the receipt to in order to be reimbursed.

However, and I have no business relationship with this company, a far more efficient way to do it would be to use a service like Expensify. This is what our church uses, and we LOVE it. The service comes with an app that you can download onto your phone that allows you to take pictures of your receipts for instant submittal. It even reads the receipt for you and fills out much of the information automatically. 

On the back end, you can customize the service to fit your church's specific budgetary categories, and can set rules in place to determine when an expense needs to be reviewed by an administrator and when it doesn't (e.g. expenses under $25 don't need to be reviewed, but anything more than that does).

One way or the other, you need to provide a way for employees to submit receipts for reimbursable expenses. Leave a comment below to share how your church does this, or follow me on Facebook and leave a comment there.


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The Accountable Expense Reimbursement Plan for Employees policy template is designed to provide churches, ministries, or other religious entities with a ready-to-customize policy to help them address the necessary components of administering an accountable reimbursement plan.

How much cash should a church keep in reserve?

When it comes to personal finances, most experts agree that every person/family should have somewhere between 3 and 6 months worth of living expenses in an emergency fund. But what about a church?

Based on what I've heard and observed (both directly and by talking to CPAs who work with churches), I don't believe that too many churches follow that same advice when it comes to their own cash reserves. In fact, my non-verifiable opinion, based solely on what I have seen and heard, is that many churches operate on less than one month's worth of average giving.

In other words, let's say that Grace Church has an annual budget of $240,000. Assuming that they did not budget above what they believed they would actually receive in the course of the year, that means that they expect to average $20,000/month in giving. If they are like many of the churches I have seen and heard about, this means that they would have less than $20,000 in the bank at any given moment.

You know what that is, right? That's the church equivalent of living "paycheck to paycheck."

May I humbly suggest that this is not a wise approach when it comes to managing a church's finances? Just like an individual or family should have 3-6 months worth of living expenses in an emergency fund (separated from their normal checking account, by the way), so a church should have 3-6 months worth of average giving in an emergency fund - separate from their normal operating funds.

At our church, we have a number of different cash accounts. The two largest are our operating fund and our contingency fund. Our operating fund is our normal, monthly checking account. This is where weekly giving goes in, and this is where all bills are paid from. Separate from that, we have a contingency fund (which is what we call our emergency fund). In this fund, we keep three full months of average giving as nothing more than a cash reserve. This is here to protect us from any number of things (e.g. major, unforeseen expense; extended downturns in giving; loosing 2-3 weeks of giving due to a hurricane; etc.).

Why did we pick three months instead of six, you ask? Well, to me, it all comes down to size. We began maintaining a three month contingency fund back when our annual budget was around $120,000. Today, our current annual budget is approaching $400,000. Personally, I think we have about another $100,000 of budget growth before we would need to consider increasing our contingency fund to 4 months. It seems to me that, the larger a church is, the more it should consider adding to its cash reserves. For us, this is the schedule I would follow:

  • $0-$499,000 - 3 months
  • $500,000-$999,999 - 4 months
  • $1,000,000-$1,999,999 - 5 months
  • $2,000,000 and up - 6 months

Obviously, your specific circumstances might dictate a different schedule, but at least this will get you thinking. The reality is that the vast majority of churches will fall within that first tier, and will likely never have more than 3 months' worth of average giving in reserve . . . and that is okay.

Regardless, if your church does not have a sufficiently funded cash reserve, let me challenge you to talk with the leaders of your church about this need and to begin working towards that as soon as possible.

What do you think? Leave a comment below to share how your church handles this. Or, follow me on Facebook and leave a comment there.


COMING SOON!

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STRUCTURING PASTORAL COMPENSATION

Is your church structuring its pastoral compensation package in a way that truly blesses your pastor? Is your church doing all it can and should to financially provide for the pastors who keep watch over your souls?

The fact of the matter is that most churches have never given any thought to what a pastoral compensation package should look like, and much less to how they should structure it so that their pastor receives the maximum benefit.

Structuring Pastoral Compensation is written for church decision makers (Elders, Deacons, Trustees, Committee Members, etc.) to help them understand what should be included in their pastor's compensation and how to best implement the various pieces so that their pastor will be truly blessed.

Church Budgets: When to Begin Preparing

It's September. Do you know what that means? It means that I'm on the verge of beginning another loosing season of Fantasy Football.

But apart from that, it also means that our church's annual budget season is upon us. At our church, our fiscal year matches the calendar year . . . which means that we are only four months away from needing to have a new, approved annual budget. In order to have our budget ready to go on January 1, we begin the process on September 1.

Now, we didn't pick that date arbitrarily. We arrived at it by "reverse engineering" our budget process. Let me explain.

Since we know we need to have an approved budget ready to go on January 1, and since our annual church budget must be approved by our members, we know that we have to have them vote on it during our Q4 Members' Meeting - normally held on either the first or second Sunday of December (depending on how the calendar looks in a given year).

In order to have them vote on it at that meeting, we must make it publicly available for review at least two weeks prior. This means that we normally have to have it completely finished and ready to go by mid-November.

Since our Elder board has to approve it before it is made public to our members, the Elder board wants to have a month to review, discuss, and tweak it . . . which means they need to have the first draft from our finance committee by mid-October.

In order for our finance committee to have it's recommended draft budget to the Elder board by mid-October, they need two things. First, they need to receive YTD budget reports along with a few specific, year-end financial projections from our financial secretary and Executive Pastor by the last week of September. Second, they need next-year's budget requests from all of the various ministry leaders within our church by the last week of September as well.

And, over time, we've learned that both of those things take a few weeks to get. So, to make sure everything works as it is supposed to, we begin preparing our new budget on September 1.

Obviously, that process is specific to our church and our setup, but regardless of how your church operates, I think there's wisdom in "reverse engineering" your budget process so that you can begin in a timely manner and complete your budget without too much stress.

Leave a comment below to share how your church handles this. Or, follow me on Facebook and leave a comment there.

Why I LOVE Direct Deposit

I'm not aware of any research that would indicate how most churches handle their payroll, but my guess is (just from personal experience) that most churches pay their pastors using a physical check. That's how our church operated for years. I was paid once a month, at the end of the month, by physical check for six years.

Most of the time, that process worked fine. Some months, I might get paid a couple of days before the end of the month; other months, I would get paid on the last day. However, on more than one occasion, I was paid late.

I remember one time in particular when our financial secretary had an emergency in the family right at the end of the month. She immediately left to be with her family and did not come back for a week. Since nobody else in our church at the time knew how to process payroll, what that meant for me was that I did not get paid until the 5th of the new month!

The uncertainty of this method eventually led me to begin looking into direct deposit options for our church staff. Since we use Quickbooks for our bookkeeping, we decided to use Intuit Payroll's direct deposit service. At only $1.75/paycheck deposited, it is an affordable and easy-to-use solution for churches of any size.

Now, payroll is a breeze, and we always get paid on schedule. I LOVE it.

Payroll: What Schedule Should Churches Follow?

How often should churches pay their employees? Weekly? Every two weeks? Bi-monthly? Monthly?

I don't think that there is, necessarily, a right or wrong answer to this question. It's more a matter of what is convenient and/or helpful for the employees and the church.

At our church, all employees are paid monthly on the 28th day of the month. This practice of issuing payroll at the end of the month began before I became the pastor, and so, I cannot explain why we did it this way originally. Having come from the private sector where I was paid every two weeks, it was a bit difficult to make that initial transition into a monthly pay schedule, but now that I've done it that way for ten years, I don't even think about it.

Since our church uses direct deposit to issue paychecks, I like the monthly schedule because it keeps our processing costs as low as possible. The cost to the church to use direct deposit is $1.75/paycheck. Since we have five employees, we pay $8.75/month or $105/year for this service. If we issued paychecks every two weeks, those costs would be approximately $17.50/month or $227.50/year. So, as you can see, the savings we get from paying monthly are not insignificant.

Whatever schedule your church uses, the most important thing is that you are consistent in following that pattern. As I said above, we issues paychecks on the 28th of each month. If the 28th falls on a Saturday, checks are issued on the 27th. If the 28th falls on a Sunday, we issue them on the 29th. All of our staff knows this and can plan accordingly.

This wasn't always the case at our church, and in a future post, I'll share some of that story so that you can understand why consistency in payroll scheduling is so important AND why I am such a big fan of direct deposit for church employees.

I'd love to hear what schedule your church follows for payroll. Leave a comment below or on the Brokepastor.com Facebook page.