A Guiding Philosophy for Compensating Church Employees

I have a philosophy that guides my thinking in relation to church employee compensation and benefits. Before I share it, notice that I included all church employees, not just pastors. This applies to any and every employee a church may hire. Here is my guiding philosophy for church employees:

The church of Jesus Christ should attempt to treat its employees as well as, if not better than, the best secular employers of our day.

I can hear the cynic respond, “Of course you’d say that! You’ve got a dog in the fight.” Well, you are correct. I do have a dog in the fight, but this philosophy is not driven by my own current employment status, but rather by my belief that the church is to be a city on a hill - a light in a very dark world - in every single aspect of its life and dealings before this broken world. And this can be nowhere more vividly and practically displayed than in the realm of employee care.

I grew up in circles where pastors and Christian workers of all types were viewed as having, effectively, taken a vow of poverty as a condition of their employment. I can think of dozens of faithful, Christian school teachers, for example, who were paid poverty-level wages (or likely below) in exchange for their service.

Even for pastors, too many churches act as if it is okay to give little, if any, thought to truly being a blessing to those whose responsibility it is to shepherd their souls.

This just should not be!

While my philosophy may be an ideal that few, if any, churches or ministries ever fully attain, it should at least be the guiding force behind every decision that is made.


What advice would someone like Warren Buffett give to pastors?


An excerpt from The Pastor's Guide to Wise Investing:

Almost everyone knows the name of Warren Buffett – maybe the greatest, most successful investor of our day. But very few people outside the world of professional investing know the name of his teacher, mentor, and friend – Benjamin Graham.

In 1950, when Buffett was just nineteen years old, he read Graham’s monumental work, The Intelligent Investor. Buffett said that, at the time, he thought it was the best book about investing ever written. Today, at eighty-six, he still believes the same thing.

Buffett writes:

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book [The Intelligent Investor] precisely and clearly prescribes the proper framework. You must supply the emotional discipline.

Did you notice the two components Buffett says are needed to be a successful investor? He said that you need a “sound intellectual framework” and “the ability to keep emotions from corroding that framework.”

In fact, he went further and said that you do not need “a stratospheric IQ, unusual business insights, or inside information.” You just need a “sound intellectual framework” and “the ability to keep emotions from corroding that framework.”

This is striking to me.

As I listen to most people talk about investing, it seems that there is a common belief that the biggest enemy facing most investors is some lack of one of the three things Buffett says we do not need. Yet, almost no one ever talks about the two things he says we do need. Is it just me, or does this seem backwards?

To learn more about The Pastor's Guide to Wise Investing, click here.

Video - Can a pastor who lives in a parsonage still receive a housing allowance?


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Are you struggling to understand the unique and challenging world of pastoral compensation? Are you maximizing the benefits that could be yours by simply being "wise as a serpent and innocent as a dove" when it comes to how you structure your pastoral pay? 

As a pastor, I get it. Not only can our compensation be confusing, but there are also so many different components that need to be balanced . . . it can be hard to put all the pieces together.

How to Not Be a Broke Pastor is written for pastors/ministers and is designed to make the complexities of clergy pay simple and easy to understand, and also to give you ideas as to how you can use your income to the greatest extent possible. We may not have entered the ministry to get rich, but that doesn't mean we should be broke. Let me help you understand AND maximize the benefits from your compensation today.

Healthcare.gov Open Enrollment Begins Today!

Open enrollment begins today for all of us who get our medical insurance through one of the Obamacare exchanges. For pastors and churches, this can be a great way to get excellent medical coverage at a very reasonable rate.

For example, I just enrolled, and for my family of four, our monthly premium will only be about $105, and our out-of-pocket limit will be $3600! That's pretty good.

If you enrolled today, I would love to hear what rates you received. Please leave a comment below or on my Facebook page.


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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.

Video - The Five Types of Housing Allowance Expenses


BUY YOUR COPY TODAY!

Are you struggling to understand the unique and challenging world of pastoral compensation? Are you maximizing the benefits that could be yours by simply being "wise as a serpent and innocent as a dove" when it comes to how you structure your pastoral pay? 

As a pastor, I get it. Not only can our compensation be confusing, but there are also so many different components that need to be balanced . . . it can be hard to put all the pieces together.

How to Not Be a Broke Pastor is written for pastors/ministers and is designed to make the complexities of clergy pay simple and easy to understand, and also to give you ideas as to how you can use your income to the greatest extent possible. We may not have entered the ministry to get rich, but that doesn't mean we should be broke. Let me help you understand AND maximize the benefits from your compensation today.

Best of the Web: How can a young man work towards the qualifications of a pastor?

Here are some good thoughts from 9Marks.


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HOW TO NOT BE A BROKE PASTOR

Are you struggling to understand the unique and challenging world of pastoral compensation? Are you maximizing the benefits that could be yours by simply being "wise as a serpent and innocent as a dove" when it comes to how you structure your pastoral pay? 

As a pastor, I get it. Not only can our compensation be confusing, but there are also so many different components that need to be balanced . . . it can be hard to put all the pieces together.

How to Not Be a Broke Pastor is written for pastors/ministers and is designed to make the complexities of clergy pay simple and easy to understand, and also to give you ideas as to how you can use your income to the greatest extent possible. We may not have entered the ministry to get rich, but that doesn't mean we should be broke. Let me help you understand and maximize the benefits of your compensation today.

Should Churches use a SEP IRA?

Of the three main options available to most churches for establishing retirement plans for their pastors - SIMPLE IRA, 403(b), and SEP IRA - my favorite option is the SEP IRA. The most obvious difference between a SEP and either a SIMPLE or a 403(b) is that employees are not allowed to make contributions to a SEP. Only the employer can contribute.

In my experience, this isn’t an issue for most pastors since most pastors probably don’t have a ton of money to contribute out of their own budgets towards retirement anyway; and even if they do, they can usually still do so through making contributions to their own personal Traditional or Roth IRA.

The biggest thing I like about the SEP IRA is that the church can choose to contribute up to 25% of the pastor’s salary towards his retirement. As with SIMPLE plans, please note that this only applies to the pastor’s actual salary, not their total income. If a pastor has a total income of $50,000, but designates $25,000 of that as being housing allowance, the church can only contribute up to $6,250 ($25,000 x 25% = $6,250).

This provides both the pastor and the church with a multitude of options regarding how to best care for the pastor and his family.

As for what I don’t like about SEPs . . . yeah, I can’t think of anything. They’re easy to setup and operate. They provide a way for the church to be as generous as it can afford to be to all employees. There really is no downside that I can see.

Obviously, a lot more could be said about the intricacies of and requirements surrounding SEPs. As I have said in the past, I am not an accountant, tax professional, or certified financial planner, and you should definitely seek counsel from one or more of these individuals before deciding on which plan is best for you and your church.

For a nice overview of SEP IRAs, click here.

What do you think? Leave a comment below, or follow me on Facebook and leave a comment there.


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THE PASTOR'S GUIDE TO WISE INVESTING

Pastors are so good at so many difficult things - preaching/teaching, counseling, discipling, caring - but can very often be completely clueless when it comes to handling their money wisely. This can be true of their day-to-day finances, but is often more true in regards to their retirement planning.

The Pastor's Guide to Wise Investing takes the, often, confusing world of investing and makes it simple and easy to understand by compiling and condensing the best advice from the best investors of our day into one simple, easy-to-read guide.

Best of the Web: The Cheap Way to Bless Your Pastor

I love it when I find other people saying EXACTLY what I say. Read this article from Kevin DeYoung to see what it is. Hint: this is what I talk about in chapters 5 and 9 of Structuring Pastoral Compensation!


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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.

Should Churches use a 403(b)?

The non-profit equivalent of a 401(k) account is called a 403(b) account. If you have ever had a 401(k), then you know how it works. Unless your church is very large, I can almost guarantee that this will not be the best choice for you.

What I like about 403(b) accounts is that there is a lot more flexibility for increased contributions from both the pastor and the church. What I hate about 403(b) accounts is that they are MUCH more complicated to operate and administrate than either a SIMPLE IRA or a SEP IRA, and I would not recommend creating such a plan without the direct help of both an accountant and a tax professional. Personally, I think that most churches (particularly small and medium sized churches) have a better option.

A lot more could be said about the intricacies of and requirements surrounding 403(b)s. Since I am not an accountant, tax professional, or certified financial planner, you should definitely seek counsel from one or more of these individuals before deciding on which plan is best for you and your church.

For a nice overview of 403(b)s, click here.

What do you think? Leave a comment below, or follow me on Facebook and leave a comment there.


BUY YOUR COPY TODAY!

THE PASTOR'S GUIDE TO WISE INVESTING

Pastors are so good at so many difficult things - preaching/teaching, counseling, discipling, caring - but can very often be completely clueless when it comes to handling their money wisely. This can be true of their day-to-day finances, but is often more true in regards to their retirement planning.

The Pastor's Guide to Wise Investing takes the, often, confusing world of investing and makes it simple and easy to understand by compiling and condensing the best advice from the best investors of our day into one simple, easy-to-read guide.

What Would Actually Happen If Pastors Lost Their Housing Allowance?

Please share this post with as many pastors as you can.

Ever since Judge Crabb’s ruling last week declaring the clergy housing allowance to be unconstitutional, I have seen a LOT of discussion and hypothesizing online about what would happen if this ruling were to be finally and fully upheld by the courts. Some of these hypotheses have been good and reasonable; some of them have not. In light of these various discussions, I thought I’d take a stab at thinking through and analyzing what would happen . . . not because I think my hypotheses are any better than anyone else’s, but to try to help provide a framework for our thinking and discussions going forward.

Two Related, Foundational Issues

I think we have to begin this journey by reminding ourselves of the two big issues connected to this discussion – A) the dual-status nature of a pastor’s employment, and B) the pastor’s ability to opt-out of Social Security/Medicare.

Let’s start with the dual-status nature of a pastor’s employment. For those of you who are not aware, pastors are, I believe, unique amongst all American tax payers in that they are classified by the IRS as being both common-law employees and self-employed contractors at the same time and for the same job. For the purposes of federal income tax, pastors are considered to be common-law employees just like any other employee. However, for the purposes of Social Security and Medicare taxes, they are considered to be self-employed contractors.

The Housing Allowance (HA) is directly tied to this dual-status classification. In our current setup, pastors must only pay federal income tax on the non-HA portion of their income. So, for example, if a pastor makes $50,000/year in income, but designates $20,000/year as HA, he only has to pay federal income tax on $30,000.

But when it comes to Social Security and Medicare taxes, due to the pastor being considered a self-employed contractor for these areas, he has to pay 15.3% of his full income in SECA taxes. For example, if a pastor makes $50,000/year, he must pay $7,650 in SECA taxes regardless of his HA designation.

The above examples assumed that the pastor did not live in a church-provided home (i.e. parsonage), but the same principles apply when a pastor does live in such a home. For example, if a pastor makes $30,000/year in income and lives in a parsonage with a fair-market rental value of $20,000/year, he will only have to pay federal income taxes on his $30,000/year income, but will have to pay SECA taxes (15.3%) on the value of his income AND the parsonage - $50,000 x 15.3% = $7,650. As you can see, it works the same either way.

The second issue we must consider is the pastor’s ability to opt-out of paying Social Security and Medicare taxes. Again, in our current setup, pastors may request to be exempted from paying SECA taxes by filing Form 4361 with the IRS affirming that they have an honest, religiously-based objection to contributing to Social Security or Medicare out of their ministerial income.

For example, if a pastor who has opted out of SECA makes $50,000/year, and designates $20,000/year of his income as being HA, he will only have to pay federal income taxes on $30,000 and will not have to pay SECA on any of his income. The same would apply to pastors who live in parsonages.

The reason I bring these two other issues up is because both are connected to the HA, and in all of the talk surrounding the court case, I’ve yet to see much, if any, discussion about how changes to the HA would affect either of these issues or vice versa.

That said, should the HA be fully and finally ruled unconstitutional (for both cash HAs and parsonages), I suspect that both of these items may also be in jeopardy. So, now that we understand these two foundational issues, let’s think through five possible scenarios.

Scenario #1 - Housing allowance ends . . . pastors are still dual-status employees AND can continue to opt-out of SECA

If the HA were to come to an end, but pastors are still considered to be dual-status employees and can still opt-out of SECA, the only thing that would change would be that pastors would now have to pay federal income tax on their full income.

Let’s consider four examples using "Pastor Bob." For each example, we’ll assume that Pastor Bob is married, has two children, and only claims the standard deduction on his 1040 (nothing else).

Example #1: Pastor Bob receives $50,000/year in cash income, does not live in a parsonage, and has not opted out of SECA. In his case, the only change for him is that he will now have to pay more in federal income taxes. Under the current tax rules, he would pay $8,570 in federal income taxes and SECA – leaving him with a net income of $41,430. In our hypothetical example, he would pay $11,097.50 in federal income taxes and SECA – leaving him with a net income of $38,902.50. This would result in a net loss of $2,527.50/year for Pastor Bob.

Example #2: Pastor Bob receives $50,000/year in cash income, does not live in a parsonage, and has opted out of SECA. In his case, the only change for him is that he will now have to pay more in federal income taxes. He would still be exempt from SECA. Under the current tax rules, he would pay $920 in federal income taxes – leaving him with a net income of $49,080. In our hypothetical example, he would pay $3,447.50 in federal income taxes – leaving him with a net income of $46,552.50. This would result in a net loss of $2,527.50/year for Pastor Bob.

Example #3: Pastor Bob receives $30,000/year in cash income, lives in a parsonage with a fair-market rental value of $20,000/year, and has not opted out of SECA. In his case, the only change for him is that he will now have to pay more in federal income taxes. He would continue to pay 15.3% of his total income (including the fair-market rental value of the parsonage) in SECA. Under the current tax rules, he would pay $8,570 in federal income taxes and SECA – leaving him with a net income of $21,430. In our hypothetical example, he would pay $11,097.50 in federal income taxes and SECA – leaving him with a net income of $18,902.50. This would result in a net loss of $2,527.50/year for Pastor Bob.

Example #4: Pastor Bob receives $30,000/year in cash income, lives in a parsonage with a fair-market rental value of $20,000/year, and has opted out of SECA. In his case, the only change for him is that he will now have to pay more in federal income taxes. He would still be exempt from SECA. Under the current tax rules, he would pay $920 in federal income taxes – leaving him with a net income of $29,080. In our hypothetical example, he would pay $3,447.50 in federal income taxes – leaving him with a net income of $26,552.50. This would result in a net loss of $2,527.50/year for Pastor Bob.

NOTE: Please note that, in all of these examples, I am not calculating the effect that any above-the-line deductions (e.g. one-half of SECA, traditional IRA contributions, etc.) or any below-the-line deductions other than the standard deduction would have on these numbers. Most pastors will have both above-the-line and below-the-line deductions that will reduce the impact of any these hypothetical situations on their personal taxes. Consider these to be over-simplified, "worst case" scenarios for illustration and example purposes ONLY.

Scenario #2 - Housing allowance ends . . . pastors are still dual-status employees BUT can no longer opt-out of SECA

If the HA were to come to an end, and pastors are still considered to be dual-status employees BUT can no longer opt-out of SECA, a number of things would change.

Let’s consider four examples using "Pastor Bob." For each example, we’ll assume that Pastor Bob is married, has two children, and only claims the standard deduction on his 1040 (nothing else).

Example #1: Pastor Bob receives $50,000/year in cash income, does not live in a parsonage, and has never opted out of SECA. In his case, the only change for him is that he will now have to pay more in federal income taxes. He would continue to pay 15.3% of his total income in SECA. Under the current tax rules, he would pay $8,570 in federal income taxes and SECA – leaving him with a net income of $41,430. In our hypothetical example, he would pay $11,097.50 in federal income taxes and SECA – leaving him with a net income of $38,902.50. This would result in a net loss of $2,527.50/year for Pastor Bob.

Example #2: Pastor Bob receives $50,000/year in cash income, does not live in a parsonage, and has opted out of SECA. In his case, not only will he now have to pay more in federal income taxes, but he will have to begin paying 15.3% of his total income in SECA. Under the current tax rules, he would only pay $920 in federal income taxes – leaving him with a net income of $49,080. In our hypothetical example, he would now pay $11,097.50 in federal income taxes and SECA – leaving him with a net income of $38,902.50. This would result in a net loss of $10,177.50/year for Pastor Bob.

Example #3: Pastor Bob receives $30,000/year in cash income, lives in a parsonage with a fair-market rental value of $20,000/year, and has not opted out of SECA. In his case, the only change for him is that he will now have to pay more in federal income taxes. He would continue to pay 15.3% of his total income (including the fair-market rental value of the parsonage) in SECA. Under the current tax rules, he would pay $8,570 in federal income taxes and SECA – leaving him with a net income of $21,430. In our hypothetical example, he would pay $11,097.50 in federal income taxes and SECA – leaving him with a net income of $18,902.50. This would result in a net loss of $2,527.50/year for Pastor Bob.

Example #4: Pastor Bob receives $30,000/year in cash income, lives in a parsonage with a fair-market rental value of $20,000/year, and has opted out of SECA. In his case, not only will he now have to pay more in federal income taxes, but he will have to begin paying 15.3% of his total income in SECA taxes. Under the current tax rules, he would pay $920 in federal income taxes – leaving him with a net income of $29,080. In our hypothetical example, he would pay $11,097.50 in federal income taxes and SECA – leaving him with a net income of $18,902.50. This would result in a net loss of $10,177.50/year for Pastor Bob.

NOTE: Please note that, in all of these examples, I am not calculating the effect that any above-the-line deductions (e.g. one-half of SECA, traditional IRA contributions, etc.) or any below-the-line deductions other than the standard deduction would have on these numbers. Most pastors will have both above-the-line and below-the-line deductions that will reduce the impact of any these hypothetical situations on their personal taxes. Consider these to be over-simplified, "worst case" scenarios for illustration and example purposes ONLY.

Scenario #3 - Housing allowance ends . . . pastors are now considered self-employed contractors AND can continue to opt-out of SECA

If pastors are only viewed as self-employed contractors but are still given the ability to opt-out of SECA, then I would assume that the results would be the same as Scenario #1 above.

Scenario #4 - Housing allowance ends . . . pastors are now considered self-employed contractors BUT can no longer opt-out of SECA

If pastors are only viewed as self-employed contractors but are no longer given the ability to opt-out of SECA, then I would assume that the results would be the same as Scenario #2 above.

Scenario #5 - Housing allowance ends . . . pastors are now considered common-law employees

This is one of the more interesting possible outcomes. If the HA were to come to an end, and pastors are no longer considered to be dual-status employees but are now considered to be common-law employees, they would no longer be required to pay SECA, but would pay FICA like any other employee (which means that the church and the pastor would split the cost of FICA taxes). I would also assume that Congress would not pass a law allowing pastors to opt-out of FICA in this hypothetical scenario.

Let’s consider four examples using "Pastor Bob." For each example, we’ll assume that Pastor Bob is married, has two children, and only claims the standard deduction on his 1040 (nothing else).

Example #1: Pastor Bob receives $50,000/year in cash income, does not live in a parsonage, and has never opted out of SECA. In his case, he will now have to pay more in federal income taxes, but will pay less in FICA than he used to pay in SECA. Under the current tax rules, he would pay $8,570 in federal income taxes and SECA – leaving him with a net income of $41,430. In our hypothetical example, he would pay $7,272.50 in federal income taxes and FICA – leaving him with a net income of $42,727.50. This would result in a net gain of $1,297.50/year for Pastor Bob.

Example #2: Pastor Bob receives $50,000/year in cash income, does not live in a parsonage, and has opted out of SECA. In his case, not only will he now have to pay more in federal income taxes, but he will have to begin paying 7.65% of his total income in FICA taxes. Under the current tax rules, he would only pay $920 in federal income taxes – leaving him with a net income of $49,080. In our hypothetical example, he would now pay $7,272.50 in federal income taxes and FICA – leaving him with a net income of $42,727.50. This would result in a net loss of $6,352.50/year for Pastor Bob.

Example #3: Pastor Bob receives $30,000/year in cash income, lives in a parsonage with a fair-market rental value of $20,000/year, and has not opted out of SECA. In his case, he will now have to pay more in federal income taxes, but will pay less in FICA than he used to pay in SECA. Under the current tax rules, he would pay $8,570 in federal income taxes and SECA – leaving him with a net income of $21,430. In our hypothetical example, he would pay $7,272.50 in federal income taxes and FICA – leaving him with a net income of $22,727.50. This would result in a net gain of $1,297.50/year for Pastor Bob.

Example #4: Pastor Bob receives $30,000/year in cash income, lives in a parsonage with a fair-market rental value of $20,000/year, and has opted out of SECA. In his case, not only will he now have to pay more in federal income taxes, but he will have to begin paying 7.65% of his total income in FICA taxes. Under the current tax rules, he would pay $920 in federal income taxes – leaving him with a net income of $29,080. In our hypothetical example, he would pay $7,272.50 in federal income taxes and FICA – leaving him with a net income of $22,727.50. This would result in a net loss of $6,352.50/year for Pastor Bob.

NOTE: Please note that, in all of these examples, I am not calculating the effect that any above-the-line deductions (e.g. one-half of SECA, traditional IRA contributions, etc.) or any below-the-line deductions other than the standard deduction would have on these numbers. Most pastors will have both above-the-line and below-the-line deductions that will reduce the impact of any these hypothetical situations on their personal taxes. Consider these to be over-simplified, "worst case" scenarios for illustration and example purposes ONLY.

Final Results

As you can see, the only winners from any of these scenarios would be the pastors in Scenario #5 who did not opt of SECA (a net gain of $1,297.50/year). The biggest losers would be the pastors in Scenario $2 who did opt out of SECA (a net loss of $10,177.50/year).

Other Affected Areas

As you can see above, I only focused on the effect that losing the HA would have on income, Social Security, and Medicare taxes. There would be other negative ramifications – smaller tax refunds for many pastors, higher monthly premiums for pastors who get their health insurance through one of the Obamacare exchanges, and smaller churches having to reduce a pastor’s salary to cover the church’s portion of FICA taxes. I’m sure more could be listed in time.

How Should Pastors/Churches Prepare Now?

This is the most important question for today. As it stands, the recent ruling by Judge Crabb will be appealed, and that process could take a couple of years. If the appellate court were to affirm her decision, I have no doubt the case would be appealed to the Supreme Court. One commentator suggested that the absolute soonest pastors and churches could be affected is 2020. Wisdom, though, would suggest that the time to prepare is now.

First, pastors and churches need to stay informed. To see a listing of various articles dealing with this topic, click here.

Second, pastors and churches should not panic, but should begin considering their options now so that they are not caught off-guard 3-4 years from now. Remember, planning prevents panic!

Third, both pastors and churches should consider how they structure their current pastoral compensation so as to ensure pastors are properly cared for - particularly in light of these issues.

For pastors, they need to learn how to balance their salary and housing allowance properly. My book, How to Not Be a Broke Pastor is written exclusively for pastors/ministers and is designed to make the complexities of clergy pay simple and easy to understand, and also to give you ideas as to how you can use your income to the greatest extent possible.

For churches, they need to learn how to structure their pastor’s compensation packages so as to help them receive the maximum possible benefit. My book, 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.

The key takeaway here is: Don’t wait. Think through your current setup and be aware of what changes could come. Structure your compensation correctly now so that you are ready no matter what happens next.

Stacy Potts is a pastor, author, and consultant specializing in pastoral compensation and church finance issues. He lives in Virginia Beach, VA, with his wife, Jamie, and their two children, Nathaniel and Hannah. Visit his website at www.brokepastor.com.



This content is designed to provide competent and reliable information regarding the subject matter covered. However, it is offered with the understanding that the author and publisher are not engaged in rendering legal, accounting, financial, or other professional advice. Laws and practices often vary state to state and country to country, and if legal or other expert assistance is required, the services of a competent professional person should be sought. The author and publisher specifically disclaim any liability that is incurred from the use or application of the contents of this post. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

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

BUY YOUR COPY TODAY!

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.

Should Churches use a SIMPLE IRA?

As the name suggests, SIMPLE IRAs are extremely simple for churches to operate. SIMPLE plans can be setup as either matching or non-matching plans. If a church chooses to use the matching approach, they can match, dollar-for-dollar, each employee’s retirement contributions up to 3% of the pastor's total salary (ONLY their salary and NOT their housing allowance). They can do less than 3%, but no more. In this setup, employees can also contribute up to $12,500 towards their SIMPLE plan as of 2017.

If the church chooses to use the non-matching approach, they must contribute 2% of every employee’s salary towards their respective SIMPLE plans regardless of whether or not the employee makes any contribution.

What I like about SIMPLE plans is that they are, well, simple. They are extremely easy to set up and administrate. What I hate about SIMPLE plans is that the church can only contribute a very small amount towards the pastor’s retirement account.

Obviously, a lot more could be said about the intricacies of and requirements surrounding SIMPLE IRAs. I am not an accountant, tax professional, or certified financial planner, and you should definitely seek counsel from one or more of these individuals before deciding on which plan is best for you and your church.

However, while it is definitely better than nothing, my non-credentialed belief is that you can do a lot better than a SIMPLE IRA for your pastors.

For a nice overview of SIMPLE IRAs, click here.

What do you think? Leave a comment below, or follow me on Facebook and leave a comment there.


Coming Soon!

THE PASTOR'S GUIDE TO WISE INVESTING

Pastors are so good at so many difficult things - preaching/teaching, counseling, discipling, caring - but can very often be completely clueless when it comes to handling their money wisely. This can be true of their day-to-day finances, but is often more true in regards to their retirement planning.

The Pastor's Guide to Wise Investing takes the, often, confusing world of investing and makes it simple and easy to understand by compiling and condensing the best advice from the best investors of our day into one simple, easy-to-read guide.

Should I Opt-Out of Social Security?

Well . . . I'll give you the short answer first and the long answer second.

Short Answer: Only you can answer that question.

Long Answer: Only you can answer that question because your decision has to be based on your own conscience or Biblical/religious convictions. Let me explain.

In order to opt-out of Social Security, pastors must file Form 4361 (titled, “Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners”) affirming the following statement:

I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. (Public insurance includes insurance systems established by the Social Security Act.)

I certify that as a duly ordained, commissioned, or licensed minister of a church or a member of a religious order not under a vow of poverty, I have informed the ordaining, commissioning, or licensing body of my church or order that I am conscientiously opposed to, or because of religious principles, I am opposed to the acceptance (for services I perform as a minister or as a member of a religious order) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care, including the benefits of any insurance system established by the Social Security Act.

I certify that I have never filed Form 2031 to revoke a previous exemption from social security coverage on earnings as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner.

I request to be exempted from paying self-employment tax on my earnings from services as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner, under section 1402(e) of the Internal Revenue Code. I understand that the exemption, if granted, will apply only to these earnings. Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief, it is true and correct.

What this means is that you must have an honest, religiously-based objection to contributing to Social Security or Medicare out of your ministerial income. Financial/political/personal objections do not count and cannot be honestly used. Your objection must be based on either your conscience or on some Biblical principle.

Obviously, only you can say whether or not you have this kind of religiously-based objection.

Have you made a decision about opting out of Social Security? If so, leave a comment below, or visit me on Facebook and leave a comment there.


COMING SOON!

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HOW TO NOT BE A BROKE PASTOR

Are you struggling to understand the unique and challenging world of pastoral compensation? Are you maximizing the benefits that could be yours by simply being "wise as a serpent and innocent as a dove" when it comes to how you structure your pastoral pay? 

As a pastor, I get it. Not only can our compensation be confusing, but there are also so many different components that need to be balanced . . . it can be hard to put all the pieces together.

How to Not Be a Broke Pastor is written for pastors/ministers and is designed to make the complexities of clergy pay simple and easy to understand, and also to give you ideas as to how you can use your income to the greatest extent possible. We may not have entered the ministry to get rich, but that doesn't mean we should be broke. Let me help you understand and maximize the benefits of your compensation today.

Best of the Web: Ten Unfair Expectations of Pastors' Wives

This is a great article from Thom Rainer. I know my wife has experienced some of these in the past. Check it out.

What do you think? Leave a comment below, or follow me on Facebook and leave a comment there.


COMING SOON!

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THE PASTOR'S GUIDE TO WISE INVESTING

Pastors are so good at so many difficult things - preaching/teaching, counseling, discipling, caring - but can very often be completely clueless when it comes to handling their money wisely. This can be true of their day-to-day finances, but is often more true in regards to their retirement planning.

The Pastor's Guide to Wise Investing takes the, often, confusing world of investing and makes it simple and easy to understand by compiling and condensing the best advice from the best investors of our day into one simple, easy-to-read guide.

Cashing in our 401(k)

After about a year of pinching every penny we could and living off of what little savings we had, the money ran out. We had completely drained our emergency fund (such as it was). Sure, our tax return that year had helped a lot, but it was not going to cover us for the remainder of the year. We needed more cash. Unfortunately, the only other cash we had on hand was a small 401(k) that I had contributed to with a previous employer.

During seminary, I had gotten a job with a London-based bank known as HSBC. They had an office in Chesapeake, VA, that included an internal debt collection department for their US credit card portfolio. I could spend a month of Sundays telling you stories about the people I talked to during that time. In fact, I used to joke that I learned more about the depravity of man from trying to collect on credit card debt than I ever learned in seminary.

Regardless, it really was a great job, and HSBC was a great company to work for at the time. One of the many reasons why I loved working there was the great 401(k) matching plan they had. We didn't have a lot of money to spare, but we contributed what we could in order to get some of the company's matching grant. Again, we couldn't contribute much, and by the time I left in 2007, our total balance in the 401(k) was around $8,000.

Well, that money was now needed elsewhere! I had to cash it in to make sure we would could pay our monthly bills . . . but it hurt me to do it.

First, it hurt my financial sense. This was our entire "nest egg" at the time. I was about to sacrifice it so that I wouldn't have to lose my home. That alone was difficult to take. Even worse, I had to pay a 10% penalty tax for taking it out early. I was just throwing money away, and I hated it.

But more than that, it hurt my pride. Was this what I had come to? Even as I did it, I knew it was only a band-aid. Eventually, that money would run out too . . . and what was I going to do then? This was the last line of defense, and I was crossing it.

Our situation was about to come to a head.


COMING SOON!

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HOW TO NOT BE A BROKE PASTOR

Are you struggling to understand the unique and challenging world of pastoral compensation? Are you maximizing the benefits that could be yours by simply being "wise as a serpent and innocent as a dove" when it comes to how you structure your pastoral pay? 

As a pastor, I get it. Not only can our compensation be confusing, but there are also so many different components that need to be balanced . . . it can be hard to put all the pieces together.

How to Not Be a Broke Pastor is written for pastors/ministers and is designed to make the complexities of clergy pay simple and easy to understand, and also to give you ideas as to how you can use your income to the greatest extent possible. We may not have entered the ministry to get rich, but that doesn't mean we should be broke. Let me help you understand and maximize the benefits of your compensation today.

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.