Pastor or Prisoner-Your Choice

Avoiding the Potential Bondage of Personal Finance

James W. Rickard
Director of The Stewardship Services Foundation

In my 30 years working with pastors in the area of financial stewardship I know of more defaults

from ministry due to financial indiscretion than moral indiscretion. This workshop will focus on the

issues I believe important to preserving and protecting the pastor’s financial reputation in his church and

community.

I. The Church’s Responsibility to the Pastor

A. His Pay Package

B. Protecting His Integrity

II. The Pastor’s Responsibility to Model Stewardship

A. His Personal Finances

B. His Tax Obligation

C. His Teaching Opportunity

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SSF PASTOR’S SURVEY RESULTS

Not Reimbursed for Expenses by the Church 35.2%

Average Ministry Miles per Year 10,844

Exempt from Social Security 25.4%

Rent or Live in Church Owned Parsonage 42.5%

Don’t Own a Home and Exempt from Social Security 9.6%

Spouse Works 54.6%

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THE CHURCH’S RESPONSIBILITY TO THE PASTOR

LOVING YOUR PASTOR THROUGH HIS COMPENSATION PACKAGE

A. The housing/parsonage allowance issue. How and why?

B. Is owning his own home an important consideration? How can that be accomplished?

C. Paying salaries based on a fair and livable wage.

D. What should the tax free fringe benefits include?

E. Why does the church need to reimburse for all professional expenses?

F. How should the pastor’s self-employment tax be handled?

G. Why is it important for the pastor and his wife to attend other conferences?

H. What should the pastor’s vacation package look like?

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In the middle 1960’s as a young accountant I began helping my pastor prepare his state

and federal tax returns. Needless to say I was surprised at his meager salary, lack of fringe

benefits and his inability to provide for his future financially. His family lived in a church

owned parsonage totally controlled by the church; they couldn’t even paint a wall without

committee approval. It was a large farmhouse that was difficult to maintain and expensive to

heat. I can remember visiting that parsonage and finding his wife in tears over the frustration of

living under those conditions. I can remember thinking “this is not right”. Little did I know

how that experience would begin to sow the seeds

Pastors should have a cash
salary that meets the physical
needs of the family independent
of the wife having to work.
for the Stewardship Services Foundation ministry.
A ministry that would allow me to devote my
energies to counseling pastors regarding finances

and teach church boards how to structure the pastors’ salary packages staying within the limits

of IRS tax law. As a result, in 1977 the Stewardship Services Foundation ministry was born.

In this seminar I will attempt to discuss salary packages and their proper application in

the budget process. The most important issue when it comes to this subject is attitude, a proper

understanding by the board as it relates to the salary package issue including the desire to meet

the needs of the family in a fair and equitable way. When a church calls a pastor (e.g., youth,

music, visitation, senior, etc.) it is important to consider the following issues:

1. A cash salary to meet the physical needs of the family independent of the wife
having to work. A good starting point would be to review his personal budget and
build on it.
2. Full family medical plan that provides adequate health insurance and protects the
family and the church from a catastrophic illness or accident. (tax free fringe
benefit in most cases)
3. Disability Insurance – cash replacement that provides income and protects the
family and the church due to a disabling illness or accident. (tax free fringe
benefit)
4. Retirement Plan – coupled with Social Security an amount that would give the
pastor approximately 70% of his take home pay at retirement. If he has opted out
of Social Security the plan must be more aggressive to meet his needs. I
recommend the plan begin as early as possible with a minimum annual
contribution of $2,000, more if he starts the plan after 40 years of age. Pastors
should not be in IRA’s. They should be in a 403-b pension plan where the
deposits are made by the church which exempts the amount from the Social
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Security Tax and makes the distributions eligible for the housing allowance upon
retirement which would shelter it from Income Tax.
5. Life Insurance - $100,000 of term life insurance with the wife as beneficiary – this
protects the church and provides for the family upon
a premature death. The church can pay the I have advised
premiums on the policy but only the premium on the churches for over
first $50,000 is a tax-free fringe benefit. The pastor 22 years to get out
should provide his own additional life insurance as of the parsonage
needed. business
6. Professional Expense Reimbursement Fund –
Professional expenses incurred while performing his duties (automobile mileage,
conferences, entertainment, supplies, anything pertaining to his responsibilities)
should be paid by the church. In reality these expenses are incurred for the
benefit of the church not the pastor.
7. Housing/Parsonage Allowance – I have advised churches for over 25 years to get
out of the parsonage business. I think it is very important to get a pastor into his
own home as soon as possible for many reasons. Retirement – owning a home at
retirement is a key ingredient to retirement planning. Security – for his family
particularly his wife, privacy – they can decorate how they want – its home. I
think it tends to add to longevity – the family feels more attached to the
community because there’s a stronger sense of belonging. Tax purposes – income
tax law provides for generous benefits to the pastor who is buying his own home.
Federal and state income taxes are greatly reduced and sometimes eliminated due
to the housing allowance and double deduction for mortgage interest and real
estate taxes.
8. The self-employment tax is another issue that is often misunderstood – A pastor is
a dual status employee. He is an employee for income tax purposes and self-
employed for Social Security purposes. Instead of paying 7.65% for his Social
Security and his employer paying 7.65% as all other employees do, he must pay
15.3% (less a small credit). I recommend the church include in his salary an
amount that would cover the 7.65% that the church would normally pay if he
weren’t the pastor. Because he must pay taxes on the additional 7.65% a proper
increase would be 9.8%.

A good procedure is to assign two board members to review the needs of the staff annually

and make recommendations to the full board for consideration. When it comes to our pastors we

should take I Corinthians 9:14 and I Timothy 5:17 very seriously. Addressing all of the above

issues at one time may be difficult but by prayer, planning and proper stewardship all the issues

can be addressed.
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THE PASTOR’S RESPONSIBILITY TO MODEL STEWARDSHIP

HIS PERSONAL FINANCES

1. Give God a chance first.

2. Learn to be a saver.

3. Learn to spend less than you earn.

4. Have cash in an emergency fund.

5. Credit Cards:
1 trillion dollar business
20% pay-off every 30 days
Average = 17.93% interest

6. Have adequate life insurance ($400,000).

7. Have retirement plan in progress by age 40.

8. Own your home by age 65 or retirement.

9. Be self-insured for life insurance by age 65 or retirement.

10. Have a workable budget - key discipline and control.

11. Don’t finance pleasure items.

12. There is a difference between debt and obligations.

13. Understand the TAX law as it applies to you.

14. Have a will or estate plan that includes a will.

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AUTOMOBILE PURCHASE
2 - 4 - JUNK

Purchase a 2-year-old auto for $11,000 with $2,000 down and financed at 10% for 3 years.
Maximum mileage 25,000 with 2 year or 24,000 mile warranty.

First Time - First Year

Total payment - Down Payment $ 2,000

Finance at $290.41/month times 36 months 10,455
TOTAL $12,455

Pay 4th year into savings - $290.41 x 12 $ 3,485

Interest 100
Sell auto at end of the 4th year 4,400
TOTAL CASH AVAILABLE $ 7,985

Second Time - Fifth Year

Purchase 2-year-old auto for $ 13,000

Less - Down Payment 7,985
Amount to finance $ 5,015
Finance $5,015 at 10% for 1 ½ years = $300.29/month
NOW
Save $300.00/mo for 2 1/2 years - 30 mo x $300.18 = $ 9,000
Interest 250
Sell auto at the end of the 4th year 5,200
TOTAL CASH AVAILABLE $ 14,450

Third Time – Ninth Year

Purchase 2-year-old auto for $14,450 CASH

Continue to save at $300/month
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HIS TAX OBLIGATION

PASTOR'S ARE EMPLOYEES FOR INCOME TAX AND SELF-EMPLOYED FOR SOCIAL SECURITY TAX (SECA)

1. Churches must issue a W-2 to their ministers.

2. Even though the church must report income on the W-2, the minister still has a choice on whether he will
continue to pay his taxes quarterly on Form 1040ES or whether the church is to withhold the proper
amount.
3. The church must file the 941 quarterly tax report to the IRS.
4. All professional expenses including travel expenses related to the minister's W-2 income must be reported
on Schedule 2106 of Form 1040. They then transfer to Schedule A Miscellaneous and are subject to the
2% limitation UNLESS REIMBURSED.
5. Income and expenses related to funerals, baptisms, marriages, other speaking engagements, etc. are still
reported on Schedule C of Form 1040.
SAMPLE BENEFIT PACKAGE Annual Amount Taxable For Included in W-2
Base Salary $24,600 FIT & SECA Block 1
Church Paid Social Security 2,900 FIT & SECA Block 1
Housing Allowance 14,500 SECA Block 14
Medical Insurance 4,200 Not Taxable No
Group Term Life Insurance 300 Not Taxable No
Disability Insurance 1,600 Not Taxable No
Retirement Plan (403b) 2,000 Not Taxable Block 13
Professional Reimbursement 4,000 Not Taxable No
Total $ 54,100
This information is being furnished to the Internal Revenue Service. If you are
a Control Number required to file a tax return, a negligence penalty or other sanction may be
OMB No. 1545-0008 imposed on you if this income is taxable and you fail to report it.

b Employer's identification number 1 Wages, tips, other compensation 2 Federal income tax withheld
35-6529841 27,500 NONE

2 Employers name, address, and ZIP code 3 Social security wages 4 Social security tax withheld
NONE NONE
FIRST BAPTIST CHURCH
1860 MAIN STREET 5 Medicare wages and tips 6 Medicare tax withheld
NONE NONE
NEWHALL CA 91321
7 Social security tips 8 Allocated tips

d Employee's social security number 9 Advance EIC payment 10 Dependent care benefits

e Employee's name (first, initial, last) 11 Nonqualified plans 12a See instructions for box12
C
TOM F JONES O
D
E 2,000
e

Statutory Retirement Third-party

12b
826 BRIAR STREET 13 employee plan Sick pay
C
O
D
NEWHALL CA 91321 e

14 Other 12c
C
o
D
MINISTER HOUSING e
ALLOWANCE $14,500
12d
C
O
D
e

f, Employee’s Address and ZIP Code

15 State Employer's state I.D. No. 16 State wages, tips, etc. 17 State income tax 18 Locality name 19 Local wages, tips 20 Locality name
etc.

CA 27,500 NONE
W-2 Wage and Tax Statement Department of the Treasury-Internal Revenue Service
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PARSONAGE ALLOWANCE/HOUSING ALLOWANCE/MANSE

ALLOWANCE = SAME TERM

HOW THE PARSONAGE EXCLUSION BENEFITS CLERGY?

The Internal Revenue Code provides clergy with an exclusion from gross income commonly
known as the "parsonage exclusion." Section 107 of the Internal Revenue Code reads as
follows:

In the case of a minister of the gospel, gross income does not include:

1. the rental value of a home furnished to him as part of his compensation; or

2. the rental allowance paid to him as part of his compensation, to the extent used by
him to rent or provide a home.

WHO MAY QUALIFY FOR THE PARSONAGE ALLOWANCE EXCLUSION?

To qualify, a minister or religious worker must be duly ordained, commissioned or licensed

and authorized to perform duties of a minister of the gospel.

1. The board votes the allowance prior to the first pay period of the year in question.

2. Overestimate the allowance.

3. You may amend the allowance during the year if needed, but never retroactively.

4. Keep accurate records.

WHAT DOES THE PARSONAGE ALLOWANCE EXCLUSION INCLUDE?

1. Rent, purchase of a home or major improvements, not to exceed fair market rental value
*(FMRV) costs included in this category are down payment, legal fees, mortgage
payments, interest, taxes, insurance.

2. Furniture, appliances, curtains, rugs, vacuum sweepers, washing machines, dryers, etc.

3. Utilities: heat, electric, telephone, water, sewer charge, etc.

4. Cleaning supplies, brooms, light bulbs.

5. Miscellaneous repairs.

* Fair Market Rental Value (FMRV) varies by location and by house. A general rule of
thumb for FMRV is - 1% of appraised value per month. Example if appraisal equals
$100,000 the monthly FMRV would be $1,000. The annual FMRV would be $1,000 x 12
equals $12,000. Items 2-5 are in addition to FMRV.
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PROFESSIONAL EXPENSES

Professional expenses include: Automobile ($.36 per mile), books, periodicals, entertainment,
equipment, wedding and graduation gifts, Christmas cards, postage, dues, conferences,
educational, office supplies, and telephone expenses for professional calls. NOTE - THE
HOUSING ALLOWANCE IS NOT A PROFESSIONAL EXPENSE.

PROFESSIONAL REIMBURSEMENT FUND

Pastors may now be targets for IRS audits on professional expenses. The IRS regulations state
that an employee must be accountable for professional expenses either to the IRS through
Schedules 2106 and Schedules A miscellaneous or to their employers by reimbursement. We
recommend the reimbursement method. HOW DOES IT WORK? You can set us this fund
by establishing an expense category in the church budget for professional expenses (ex.-travel
@ $.36 per mile, entertainment, books, periodicals, conferences, business telephone, etc.). You
would then submit the receipts and records to the church on a monthly basis and get
reimbursed for these expenses. WHAT DOES IT DO? It will prevent an audit by the IRS for
those areas now targets – you eliminate Schedules 2106 and a Miscellaneous from your tax
return. It will also save taxes as a portion of expenses listed on your 1040 will be subject to
limitations. They are not subject to limitations if reimbursed. You do not report the
reimbursed amount on the Pastor’s W-2. It is not income.

SELF-EMPLOYMENT TAX RATE (SOCIAL SECURITY)

2003. . . . . . . . .15.3%

HOW LONG TO KEEP RECORDS

Generally speaking, 6 years. Exceptions include records on home purchase and any major
improvements over the year plus other investment transactions such as land and stock. If
you fail to report more than 25% of income the IRS has 6 years to come after you.

A PASTOR’S OPTION IN PAYING TAXES DURING THE YEAR ARE:

1. Your treasurer can withhold enough FIT for FIT & SECA taxes.
2. Your treasurer can withhold FIT and you can file SECA quarterly on Form
1040ES.
3. You can file quarterly on 1040ES for all taxes.

Penalties are now being assessed to those who do not prepay their tax obligations. Interest is
charged if the payments are made after the due date.
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