Can Churches Give Bonuses to Pastors?

By Raul Rivera

To the average churchgoer and to one looking in from the outside, the pastorate may appear to be one of glamor. Typically, these individuals only see what pastors do on Sunday mornings.

However, pastors, and those who work closely with pastors, know that the responsibility of being a pastor is far from glamorous.

Pastors often work long hours that include a variety of tasks from managing church finances, visiting church members who are ill or in the hospital, and making connections in the community in order to help grow the church. And this is all on top of preparing during the week for his/her sermon.

As a result, many churches want to bless their pastors with a bonus as a token of appreciation for all his/her tireless effort and unmatched dedication to the church and its members.

The questions that must be answered, however, are, “Can a church legally give its pastor a bonus?” And, “If so, how should the bonus be given to the pastor?”

What to know about bonuses paid to pastors.

The short answer to the question of whether or not a church can legally give its pastor a bonus is yes.

There is nothing in the tax code or from the IRS that says otherwise.

The main thing your church needs to keep in mind about giving the pastor a bonus is that the bonus needs to be included as part of the pastor’s total compensation, and the total compensation must be “reasonable.”

If a pastor’s compensation is deemed by the IRS to be in excess of “reasonable” compensation, then the excess amount of compensation could be subject to a tax penalty of up to 225% depending on the facts and circumstances.

That is a hefty penalty no one wants to face.

I recently wrote about several steps churches can take to help ensure they are paying their pastors a reasonable compensation.

You can click here to read that blog.

How to set up a bonus plan for pastors

Before your church decides to provide the pastor with a bonus, it is important that you establish a bonus plan structure.

While there is no formal law or rule that says your church has to have a structured bonus plan, it is best practice and good stewardship to do so.

Below are two things your church should consider when establishing a bonus plan.

1. Determine bonus guidelines

When establishing a bonus plan for your pastor, or even other church employees, the board of directors should determine the merits of a bonus, when a bonus will be paid, and how the bonus will be paid.

In addition to determining why a bonus may be given, it should also be determined why a bonus may not be given.

If the pastor still receives a bonus even though he/she did not meet the standards or requirements, a justifiable reason should be given by the board of directors, and it should be documented.

(Recommended reading: "Should Ministers Report Their Housing Allowance?")

2. Set limitations on the bonus

The purpose of setting limitations to a bonus is to ensure the pastor’s compensation does not become excessive or unreasonable.

This is especially so if the bonus is established on a percentage base.

For instance, let’s say a church’s bonus plan is based on a percentage of the amount of income the church receives that exceeds its projected or needed income for the year.

During that year the church experiences unexpected growth in membership which in-turn contributes to a large increase in giving thus allowing the church to easily exceed its projected or needed income for the year.

As a result, the pastor’s bonus, which is percentage based in the scenario, has the potential to be astronomically higher than initially intended, and, if paid as is, could cause the pastor’s compensation to be considered unreasonable by the IRS and subject to the penalties briefly mentioned earlier in this blog.

For this reason, a sound bonus plan approved by the board of directors should set a limit to the bonus plan as a safeguard against compensation being deemed unreasonable.

Responsibility of the board members in creating a bonus plan

When creating and implementing a bonus plan, your church’s board of directors will play a vital role in ensuring it is compliant and in ensuring the pastor’s compensation remains reasonable.

Board members have a fiduciary responsibility to the church or ministry of which they serve.

In other words, the decisions and actions of the board of directors should be made with the best interest of the church in mind, and not for themselves or any particular individual.

Fiduciary responsibilities of board members include:

• Actively participating in church planning and decision making.
• Placing the interests of the church before any personal or professional concerns and avoiding potential conflicts of interest.
• Ensuring the church complies with all applicable federal, state, and local laws and regulations, and that the church remains committed to its established purpose and mission.
• Maintaining oversight of the church’s finances.This includes the handling of donations, approving budgets and major purchases, maintaining all compensation agreements on an annual basis, and ensuring all compensation is considered reasonable.

One last consideration regarding church bonus plans for pastors

Understanding the intricacies and nuances of establishing church bonus plans and reasonable pastoral compensation can be overwhelming. For this reason, there is one more thing to consider.

Don’t be too proud to ask for help!

We have helped churches and pastors all across the country in establishing pastoral compensation packages that are compliant with IRS regulations. Our knowledgable consultants will help walk you through the process and guidelines of establishing reasonable compensation for your pastor.

To learn more about our invaluable Minister’s Compensation Package Service, give us a call at 877-494-4655 or just click on the link below.

Recommended blogs for you:

• "Do Ministers Have to Pay Estimated Taxes?"
• "How to Start a Church the Right Way"
• "Why Bylaws are Important, And How to Make Yours Better"

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