As an Executive Pastor with over 15 years of experience creating church budgets, I know determining compensation can be controversial, confusing, and contentious. Issues arise like how much of the overall budget should go to compensation. Or understanding what a housing allowance is. Even deciding if pay increases fit into the budget are all critical pieces to the budget puzzle. Knowing what to include, exclude, and adjust in the church budget category of compensation can help to demystify some of these issues.
What to Include: Church Budget – Compensation
When building the annual compensation budget, keep this truth in mind – the laborer is worthy of his wages (Luke 10:7, 1Timothy 5:18).
- Salaries – This category should include all hourly (non-exempt) and salary (exempt) employees’ annual wages. When calculating these numbers, it is helpful to break them down by person for accuracy. (Helpful Tip: Use this guide from the IRS to help determine if someone working for your church is an employee or an independent contractor.)
- Housing Allowance – Ordained or licensed clergy are allowed to designate a portion of their ministerial income to a housing allowance. While the amount designated as housing is excludable from gross income for income tax purposes for the employee, it must show on the budget. (Helpful Tip: Learn more about housing allowance for pastors at Church Law and Tax.)
- Benefits – Each church determines the eligibility of benefits as well as the mix between the employer and employee portion differently. That makes this category more complex to calculate. When building the budget, be sure to include the employer portion for the following benefit sub-categories: medical, dental, vision, short-term disability, long-term disability, and life insurance.
- Workers Compensation – Regardless if your church uses State-funded Workers Compensation or provides private coverage, include this mandatory insurance as part of compensation on the church budget.
- Taxes – Include the employer portion of FICA (7.65%) for all salaries in the budget. It is important to note that the church does not pay FICA for any clergy deciding to use the housing allowance. They become dual-status employees, meaning they are deemed self-employed for FICA.
- Retirement – Churches need to do their part in caring for their staff. Providing a tax-sheltered retirement plan demonstrates the church is investing in its employee’s future. Most churches are registered 501(c)(3) non-profit organizations and can participate in 403(b) plans. Add the employer portion of the contribution to the church budget.
What to Exclude: Church Budget – Compensation
- Contractors – As long as the person hired to perform the contracted work fits the IRS guidance for a contractor (see Salaries), their payment should not show in the compensation portion of the budget.
- Vendors – Churches with smaller staff often hire vendors to perform tasks they cannot take care of, like landscaping or janitorial work. As long as the vendor does not fall under the IRS guidance as an employee, payment should not show in the compensation portion of the budget.
- Employee Portion of Taxes, Benefits, and Retirement – The employer pays 7.65% into FICA, and the employee also pays 7.65%. Do not include the employee’s portion of tax or any other benefit the employee contributes in the compensation category of the church budget.
What to Adjust: Church Budget – Compensation
Creating a church budget is a long process filled with adjustments based as much on attendance and giving as on mission, vision, and values. Here are a few ideas to help navigate when adjustments are necessary.
Cuts to the Budget
- Evaluate positions to avoid across-the-board reductions in compensation. Declining donations go hand in hand with reduced attendance. If that is the case, your church likely has positions that no longer require full-time staff. Stay focused on the mission, vision, and goals, even if it means making difficult decisions like reducing hours or eliminating employees.
- Assess adjusting the employer portion of the cost to benefits.
Increase to the Budget
- Apply COLA (Cost Of Living Adjustments) increases to retain valuable employees and avoid wage stagnation.
- Consider adding merit increases to staff that performed well based on performance evaluations.
- Determine if increasing the employer portion of the cost to benefits is a strategic and sustainable move.
- Evaluate adding needed positions to the team. Assess the cost of adding the staff (salary, benefits, workers compensation, and taxes) against the increase to the budget.
Compensation is typically the most expensive category in a church budget, ranging from 45%-55% of the entire budget. Calculating the cost of each compensation category within the budget is critical. I found that using a spreadsheet that includes each compensation category listed above for each employee ensures accuracy and makes adjustments easier. Following these steps provides the clarity required for the compensation portion of the church budget.
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