The Church Budgeting basics series provides the basic steps to demystify an essential part of operating the church – the budget. Lesson 103 covered how to project upcoming annual expenses. While lesson 103 provided steps to project ongoing costs, it also covered how to estimate costs for the new initiatives and goals in ministry and operational areas. However, lesson 103 purposely omitted how to project compensation. Please notice the intentional use of the term compensation vs. salary. Compensation covers salary and benefits. Accurately projecting compensation costs may be the most essential part of the budget. For most healthy churches, compensation costs typically consume about 45%-55% of the total budget – that’s huge. So huge, in fact, estimating compensation is broken up into separate lessons. A word of caution, compensation is very personal, be discrete when establishing who has access to information related to individual salary. But remain above reproach and provide appropriate levels of accountability to avoid the appearance of any impropriety.
What’s Not Covered
Since this is a budgeting series, this lesson avoids any attempt at clarifying the Department of Labor Standards (DOL) Fair Labor Standards Act (FLSA). Meaning it’s up to the church to know the minimum wage, overtime calculations, and other laws related to paying employees in your area. In addition, it’s paramount that each church understands how the housing allowance benefit works for qualified, licensed or ordained pastors. Finally, there are assumptions throughout this lesson that the church understands and accurately classifies exempt vs. non-exempt employees, covered in the DOL website.
Projecting Compensation for Exempt Employees
The process of estimating annual compensation costs should begin with exempt employees. Exempt employees are often referred to as salaried employees, as they are exempt from the FLSA guidance for overtime. While zero-based budgeting is always preferred, starting with the current payroll information is best when projecting compensation for the next fiscal year. Once the current compensation data is available, follow these steps:
- Create a spreadsheet page for Benefits: Start with a column header for each exempt employee and then add a column header for each benefit to which the church makes a financial contribution, like Medical, Dental, Vision, Long-term Disability, Short-term Disability, Life Insurance, etc. Then, list each employee and the church’s annual contribution using the rows of the spreadsheet. Adjust for projected increases in the benefits for the upcoming fiscal year. Helpful Tip: If your benefits plan does not mirror the church’s fiscal year, contact the vendor for projected rate increases. (Example Chart 1)
- Create a spreadsheet page for Retirement: This is listed separately from the other benefits to highlight the need for churches to do their part to provide a tax-sheltered retirement plan for exempt employees. If your church does not have a retirement plan, find a qualified vendor to set one up and then start by offering a matching percentage for the employees. To build the spreadsheet page, begin with a column header for each exempt employee and a column header for retirement. Then list each employee and the church’s annual contribution to their retirement plan. Adjust for projected increases in the benefits for the upcoming fiscal year. (Example Chart 2)
- Create a spreadsheet page for Compensation: This page will serve as the main page showing all aspects of the exempt employee’s compensation. Start with these column headers: Employee Name, Gross Salary, Housing, % of Change, New Total, FICA, Benefits, Retirement, Total Compensation. Then list each employee and fill in the appropriate information in each column. The total of your spreadsheet should match your current payroll information for exempt employees. Add the new employees included in the upcoming budget at this time. (Example Chart 3)
- Link the Benefits and Retirement pages to the Compensation spreadsheet: Link the totals from the benefits and the retirement pages on the Compensation spreadsheet for the exempt employees.
- Input Cost of Living Adjustment (COLA) and merit increases: With the Compensation spreadsheet for exempt employees’ current data complete, enter the COLA or merit increases to arrive at the annual projection.
Create a Summary of Exempt Employee Compensation for the Church Budget
After creating a detailed breakdown for exempt employees, it’s time to provide the budget team with a summary of the compensation costs for the upcoming fiscal year. The summary report should include the following totals: Exempt Salary, FICA, Worker’s Compensation, Short-term Disability, Long-term Disability, Medical Insurance, Dental Insurance, Vision Insurance, Group Life, Retirement, and Total Compensation. (Example Chart 4)
Once the church completes estimating the total compensation for exempt employees, move to lesson 103 N, as it covers how to project the compensation costs for Non-Exempt Employees. The combination of lessons 103 E and 103 N provides the basics to create an accurate estimate of total compensation costs for the upcoming fiscal year.
|Employee||Salary||Housing||% Change||New Salary||FICA||Benefits||Retirement||Total|
|Disability (LTD + STD)||$1,100|
|Workers Compensation Insurance||$1,100|