In my experience, I have known few pastors who would ever broach the subject of their salaries or related compensation. Traditionally, this seems to always show up on the taboo list. But the pastor and his pay is a legitimate item of discussion.
One of the great disservices done to the local pastor is for the church to compensate him with a “package approach.” By this I mean they pay the pastor a “lump sum” salary package, and it falls to him to divide it between his car expense, health insurance, retirement contribution, business expenses and salary. This arrangement forces the pastor to pay considerably more in taxes than he may legally owe. For example, by wisely using the “salary and benefits approach” rather than the “package approach,” the church can use tax savings on a $40,000 total package to effectively increase their pastor’s cash salary by $2,100 annually, net of taxes, without even giving a monetary raise.
| Package approach | Salary and benefits approach |
|---|---|
| Cash salary, net of housing allowance ($12,000) | Cash salary, net of housing allowance ($12,000) |
| Housing allowance ($10,000) | Housing allowance ($10,000) |
| Medical, life and disability insurance premiums paid by pastor ($9,750) | Medical, life and disability insurance premiums paid by church ($9,750) |
| Church Retirement Plan contributions ($4,000) | Church Retirement Plan contributions ($4,000) |
| Car expenses under a nonaccountable plan ($2,000) | Car expenses using an accountable plan ($2,000) |
| Business and travel expenses under a nonaccountable plan ($250) | Business and travel expenses using an accountable plan ($250) |
| Continuing educational expenses under a nonaccountable plan ($500) | Continuing educational expenses using an accountable plan ($500) |
| Tax impact of package approach | Tax impact of salary and benefits approach |
|---|---|
| $26,000 subject to tax (all items except housing allowance and Church Retirement Plan contributions) | $12,000 subject to tax (only cash salary) |
| Assuming 15% tax rate, $3,900 tax liability (without taking into account SECA | Assuming 15% tax rate, $1,800 tax liability (without taking into account SECA) |
| Tax liability reduces the minister's cash salary, net of taxes, to $8,100 | Tax savings effectively increases the minister's cash salary, net of taxes, by $2,100 ($10,200) which is a 25.9% increase |
One of the biggest tax advantages for the pastor is for the church to take his health, life and disability insurance premiums out of his total compensation and make these an additional benefit. The church should do all it possibly can to financially protect the pastors who serve in the local congregation. All this simply goes to say that the “laborer is worthy of his wages” (Luke 10:7), and it is the church’s sacred duty and responsibility to “share in all good things with him who teaches” (Gal. 6:6).
As you graduate from seminary and interview with potential church homes, consider how your salary and benefits will be packaged. Many pastors serve in places where leadership does not intentionally fail to meet his financial needs and obligations, but they simply do not give it thought for whatever reason. Many pastors are in need of an advocate at this point. We at GuideStone will be happy to write a letter to your leadership and enclose our Compensation Planning Guide which can guide them as to how to best structure the compensation package and challenge them to do the right thing for their pastor.
Blessings on you as you continue your studies,
O.S. Hawkins
President Emeritus
GuideStone
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