How to Project Total Compensation for a Church Budget

When calculating compensation for the church budget, it is vital to be as accurate as possible. After all, compensation typically makes up between 45%-55% of the entire church budget. That is why when determining compensation for employees, understanding the laws is critically important. Churches should strive to remain above reproach. In fact, in Matthew 21:15, Jesus is clear that His followers are to pay taxes. This post is not exhaustive when it comes to applying labor laws. The desire is to present some basic tools to help accurately project employee compensation for your church. It is up to you, the reader, to understand the laws and how they apply in your specific situation.

Know the Standards

The Department of Labor (DOL) uses the Fair Labor Standards Act (FLSA) to establish the federal minimum wage, overtime pay, recordkeeping, and youth employment standards. Some states increase the standard set by the DOL but cannot lower it. Be sure to check your state’s Department of Labor to see if your church is compliant.

Know the Pay Types

In general, there are two basic types of employees: exempt and non-exempt. For many, the question is, what does that mean? Those pay types reference the FLSA. In other words, is the employee exempt from the FLSA or non-exempt from the FLSA overtime provisions? It is so important for an employer to classify their employees correctly.

• Exempt – As a general rule, for an employee to be exempt from the FLSA, they must be classified as an executive, professional, administrative, or outside sales employee and meet the specific criteria for the exemption. Exempt employees receive the same salary week to week regardless of how many hours they work. Important – Check your state to find the minimum salary for an employee. For example, in California, the formula is to multiply the minimum wage by 2. Take the new rate, multiply it by 40 and then multiply that by 52. That means if the minimum wage is $15 per hour: (((15*2)*40)*52), then the minimum salary for an exempt employee is $62,400.
• Non-Exempt – An employee not exempt from the FLSA rules is considered non-exempt and is entitled to overtime pay. Per the FLSA, anyone working more than 40 hours in a workweek will receive overtime pay. Important – Check your state for any additional overtime provisions. For example, in California, overtime is anything over 8 hours in a day and 40 hours in a week. That means an employee can have overtime even if they worked less than 40 hours in a workweek.

Caution – Verify that employees are not misclassified as vendors or independent contractors. Clearly, there are advantages to hiring an independent contractor other than bringing in a professional to perform a task that the church staff may not have the skills or resources to accomplish. It lowers labor costs, reduces liability, and even provides some flexibility on the hire/fire front. But, an employer cannot claim that someone is an independent contractor if they are actually an employee. Doing so could result in costly legal consequences. To help make that determination, here are a few general guides to help make the distinction:

An Independent Contractor: 

• Operates under a business name 
• Has employees 
• Maintains a separate business checking account 
• Advertises their business’ services 
• Invoices for work completed 
• Has more than one client 
• Has their tools and sets their hours 
• Keeps business records 

An Employee:

• Performs duties dictated or controlled by others (employer)
• Is given training for work to be done

HR professionals reading this list are probably squirming and pointing out all the omissions and lack of intricacies. Remember, this post is staying at the 10,000-foot level regarding the human resources elements of labor laws and standards. Hopefully, it provides a basic enough understanding of the primary pay types and an overview of the standards to remain above reproach. The goal is to help project an accurate compensation total for the church budget and this requires the budget team to be armed with this information.

Projecting Exempt Employee Compensation

• Create a process to determine which employees meet the criteria and qualify as exempt from the overtime provisions of the FLSA and state.
• Verify that all salary amounts meet the minimum requirement in your state.
• List each employee and their current actual gross salary.
• Show the percent of the increase, like COLA (cost of living adjustment) or merit increase.
• Multiply the increase by the gross to determine the new gross salary.
• For all non-pastoral employees (and pastoral employees who are using a housing allowance), calculate the amount of the Federal Insurance Contributions Act (FICA) that the employer pays. Do this by multiplying the employee’s gross wages by 7.65%. Do not calculate FICA tax for pastors with a housing allowance; they are considered self-employed for FICA.
• Calculate the total amount of the employer portion of benefits for each employee. Be sure to include: medical, dental, vision, long-term & short-term disability, group life, workers compensation, etc.
• Calculate the total amount of the employer portion of retirement contributions.
• To get the annual compensation cost of each employee, add the gross wages, FICA, benefits, and retirement costs.

Here’s an example:

Projecting Non-Exempt

Once all non-exempt employees are accurately classified, verify that all hourly rates meet the minimum requirement of the FLSA and the state.

• List each employee and their hourly rate.
• Estimate each employee’s annual hours. In many cases, taking the average weekly hours of an employee and multiplying by 52 can provide an adequate estimate.
• Show the percent of the increase, like minimum wage, COLA (cost of living adjustment), or merit increase.
• Multiply the increase by the hourly rate to determine the new hourly rate.
• Multiply the annual estimated hours by the new hourly rate to determine the gross wages for each employee.
• Calculate the employer portion of the FICA for each employee by multiplying the gross wages by 7.65%.
• Calculate the total amount of the employer portion of benefits for each employee. Be sure to include: medical, dental, vision, long-term & short-term disability, group life, workers compensation, etc.
• To get the annual compensation cost of each non-exempt employee, add the gross wages, FICA, and benefit costs together.

Here’s an example:

Creating a Summary

After calculating the total exempt and non-exempt compensation totals for each employee, it is time to summarize the data. A summary of the compensation data provides the finance team with a report of total costs while maintaining the employee’s privacy and serves as a tool for data validation. A summary report should include exempt, non-exempt, taxes, workers compensation, disability, health insurance, vision insurance, dental insurance, retirement, and group life benefits totals. Here’s an example:

Accurately projecting compensation for a church budget is hard work. It requires knowing the minimum standards of the Federal and State requirements to classify each employee accurately. Only then can the calculations begin to estimate the total compensation cost of each employee. Considering that compensation is such a significant part of the church budget, taking time to get it right is always the correct approach.