How Much Should You Pay Your Pastor?

By Chaston Asbury

The day that a church decides to pay its pastor is a milestone. It can be an exciting time of growth and opportunity for the church and the pastor, but it can also come with many questions.

As a Phase 2 Specialist at StartCHURCH, I have multiple conversations with pastors about their church’s finances every week. When we get to the part of projecting compensation for the pastor, the pastor is often uncertain and, in turn, asks the question back to me. 

Many pastors may not have the slightest clue where to begin when talking about projecting compensation for themselves. There is a balancing act that must be considered regarding being a good steward of the church’s finances and the ability to adequately support their families.

There also seems to be some confusion as to what all pastoral compensation entails. In this blog, I hope to clarify any confusion you may have about what compensation is, and teach you how to create a reasonable compensation agreement in 3 easy steps.

The Definition of Compensation

Defining compensation for pastors may not be as straightforward as you think. Since churches are nonprofit organizations, there are various considerations that pastors and church boards must take into account when setting pastoral compensation. 

I have had countless consultations with clients who did not know how the IRS defines compensation. I have found that amongst pastors, there seem to be varying opinions about what is and what is not considered compensation.

IRC section 61(a) defines gross income as “all income from whatever source derived . . .” From our interpretation of the tax code, this means that compensation includes:

• Salary
• Housing Allowance
• Stipends
• Honorariums
• “Love Offerings”
• And even that $20 handshake that one of your church members gave to you last Sunday.

It is important to note that all forms of compensation must be considered for tax purposes and reported on one’s income tax return. If you have questions about filing your taxes the right way or want to make sure you are getting the most our of your tax benefits, give us a call today at 877-494-4655 or click the link below!

Reasonable Compensation

Now that we have a better understanding of what compensation includes, let’s explore a little deeper about what the IRS means by saying that compensation must be reasonable.

The IRS states that “reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances.” Yes, that is a very vague statement. 

Although the IRS does not explicitly define what constitutes reasonability, there is a hefty fine if a pastor’s compensation is deemed by the IRS to be in excess of “reasonable” compensation. The excess amount of compensation could be subject to a tax penalty of up to 225%. 

For this reason, you must have an accurate understanding of what constitutes compensation and how to make sure the amount set is “reasonable.”

How to Create a Reasonable Compensation Agreement in 3 Easy steps

Step 1: Consider the overall health and goals of your church.

To create a reasonable compensation agreement, you and your board of directors should ask yourselves these 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?

Truthfully answering these questions, along with 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 2: 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.

Here are five of the most common factors that you should consider when researching comparability data:

1. Organization income: Organization income is typically going to be the key factor when determining pastoral compensation. For example, if your church’s annual income is $50,000, it would not be considered reasonable to set a compensation amount of $100,000 per year for your pastor, even if he deserves every penny.
2. Geographic location: Your geographical location in the country influences reasonable compensation. The cost of living in Los Angeles, California will be significantly higher from the cost of living in a small town in Nebraska.
3. Organization size: Although similar in nature, the responsibilities of a 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 similar in size to your church should be considered.
4. Functionally equivalent position: When you collect salary comparability data for your pastor, also gather salary data from other similar pastoral positions. For instance, compensation of the full-time Senior Pastor at your church may differ from the compensation of the part-time Worship Pastor. 
5. Individual qualifications: Income in all sectors varies based on qualifications such as experience, education, relevant knowledge of the industry, and the recommendations/endorsements one receives. When determining how much to pay your pastor, you should consider these factors.

Step 3: Create the pastoral compensation agreement.

The process of creating an official compensation agreement too often gets overlooked in many churches today. The fact of the matter is that most pastors and church boards are unsure how to structure a compensation agreement correctly. 

The following list includes items to include in a pastoral compensation agreement. While this list is not exhaustive, it covers the more common things you will want to consider including in the compensation agreements you create:

- 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

- Home office deduction

- Time off (i.e., vacation, sick days, bereavement, etc.)

- Taxable fringe benefits

- Nontaxable fringe benefits

Comprehensive and Compliant

Developing a comprehensive and compliant compensation agreement can be a daunting task for a church to do on its own. Let us help you!

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 770-638-3444 or click on the link below!

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