How Much Should Churches Pay Pastors?

By Raul Rivera

When a pastor is about to begin receiving a salary from his church, we often hear the question - “How much can my church pay me?”

This is a very logical question to ask since many pastors who recently started their churches have no idea where to begin when it comes to setting salary. Most pastors simply want to make sure that when it comes to pastoral compensation their church is doing it right.

Additionally, for many pastors there exists an internal dichotomous tug-o-war with regards to being a good steward with the church’s finances and the ability to adequately support their families.

So, how much should your church pay its pastors? How do you know what is considered a fair salary amount that blesses the pastor and also maintains the best interest of the church? What does the IRS have to say about pastoral compensation?

These are all valid questions that will be addressed in this blog.

What you need to know about setting pastoral compensation

One might think that setting pastoral compensation should be pretty straight forward and easy. While that’s not totally untrue, it’s not totally true either.

In actuality, because churches are nonprofit organizations, there are various considerations that pastors and church boards must take into account when setting pastoral compensation.

For example, 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 that no one wants to face. For this reason it is important that you have an accurate understanding of what constitutes compensation and how to make sure the amount set is “reasonable.”

With that in mind I will provide you with four steps that will help you establish reasonable compensation for pastors.

How to pay pastors a reasonable compensation

Step 1 - Know what is considered compensation

The first step in the process of setting pastoral compensation may seem trivial, but it is important nonetheless.

Oftentimes, when we speak with pastors about compensation there seems to be varying opinions about what is and what is not considered compensation.

In short, IRC section 61(a) defines gross income as “all income from whatever source derived . . .”

Therefore, if you receive a salary, an honorarium, a stipend, a housing allowance, a “$20 handshake”, or whatever you may call it, it is going to be considered compensation, and it must be properly approved and accounted for.

It is important to note that all forms of compensation must be considered for tax purposes and reported on one’s income tax return.

(Recommended reading: "Do I Report the Housing Allowance on my Tax Return?")

Step 2 - Consider the overall health and goals of your church

Now that you have a better understanding of pastoral compensation, the next step in establishing reasonable compensation is to look at the big picture.

Ask yourself the following questions:

• What are the goals of your church?
• What does your church’s budget look like?
• How healthy is your church’s budget?
• What is a realistic amount your church can afford to pay the pastor without negatively affecting church operations?
• What is the cost of living in and around the community in which your church is located?

Answering these questions and looking at the data gathered from your church budget and financial trends will help you to develop a better idea of how much to pay your pastor.

Step 3 - Research comparable pastoral salaries

Treasury Regulation 53.4958-6(c)(2) talks about the necessity of having appropriate salary comparability data when nonprofit organizations are setting compensation amounts.

Therefore, salary comparability data is needed when churches establish pastoral compensation agreements.

So, what all should you consider and gather in order to obtain salary comparability data? Below are the most common factors you should consider:

• Organization income - Organization income is typically going to be the key factor when determining pastoral compensation. In fact, your church’s income will dictate how much you will be able to pay your pastor. For example, if your church’s annual income is $30,000, it would not be considered reasonable to set a compensation amount of $40,000 per year for your pastor, even if he deserves every penny.
• Geographic location - In other words, it matters where your church is located. The cost of living in California is going to be significantly different from the cost of living in Georgia. For this reason where you are located in the country influences reasonable compensation.
• Organization size - Although similar in nature, the responsibilities of pastor who leads a church of 1,000 members and a pastor who leads a church of 100 members will differ. Therefore, when gathering salary comparability data, churches that are similar in size to your church should be considered.
• Functionally equivalent position - When you are collecting salary comparability data for your pastor, gather salary data from other similar pastoral positions. For instance, if you are attempting to set a salary for your senior pastor, then you will want to investigate what other senior pastors in similar size churches, with similar size congregations, and in the same or similar geographic location are earning for comparison purposes.
• Individual qualifications - Income in all sectors varies based on one’s qualifications such as years of experience, education and training, applicable knowledge of industry, and the recommendations/endorsements one receives. When determining how much to pay your pastor, such qualifications should be considered.

Step 4 - Create a pastoral compensation agreement

All too often this is the part of the process of establishing pastoral compensation that is overlooked.

It’s not that pastors and church boards don’t want to create compensation agreements, but rather, most pastors and church boards are unaware of how to structure a compensation agreement.

The following list of what to include in a pastoral compensation agreement is not exhaustive, but it covers the more common items you will want to consider including in the compensation agreements you create.

• A job description.
• Term and termination of the employee/compensation agreement.
• Insurance (i.e., medical, dental, vision, life).
• Salary and taxes (this includes housing allowance and self-employment tax exemption).
• Pastoral discretionary funds (for more information about pastoral discretionary funds click here).
• Home office deduction (you can read more about the home office deduction here).
• Time off (i.e., vacation, sick days, bereavement, etc.).
• Taxable fringe benefits.
• Nontaxable fringe benefits.

One last thing to consider when establishing pastoral compensation

Understanding the intricacies and nuances of establishing reasonable pastoral compensation can be overwhelming. For this reason there is one more step you need to consider.

Don’t be afraid to get the help you need!

If you have questions about pastoral compensation or you are just not sure where to begin, then consider utilizing our minister’s compensation service. To find out more just give us a call at 877-494-4655 or simply click on the link below.

Recommended blogs for you:

• "Does the Tax Reform Affect Ministers' Taxes?"
• "What My Church Did Every January and February"
• "How to Make the Dreams for Your Church Reality"

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