Projecting Non-Exempt Employee Compensation for the Upcoming Church Budget

Church budgets are beautiful works of art that reveal the commitment to allocate every dollar donated to accomplish the mission. The budget mosaic includes the mission, vision, goals, and dreams. It also includes math, trends, ongoing operational expenses, supporting ministries, and paying employees. Constructing an effective budget mandates churches exists in the tension of utilizing the financial resources God entrusts to accomplish the mission through funding ministries and operations. For many churches, this tension often appears when paying their employees. Churches without a method for accurately determining the cost of non-exempt workers can easily misestimate one of the largest expenses in a church budget—compensation. But before entering a number into the compensation spreadsheet, church financial leaders must know the minimum wage in their area, correctly identify the worker’s pay type, and then create the projection.

Minimum Wage

The Department of Labor’s (DOL) Fair Standards Labor Act (FSLA) sets the federal minimum wage, overtime rules, record keeping, and youth employment standards for the United States. More than half of all states exceed the federal minimum wage, so it is imperative to check with the local DOL for the minimum wage in your church’s location. Whenever possible and appropriate, make every effort to exceed the minimum wage. Remember Paul’s advice to his young protege Timothy, “You shall not muzzle an ox while it treads out the grain,” and, “The laborer is worthy of his wages.” 1 Timothy 5:18

Pay Classification

In addition to researching the minimum wage for your church’s area, each church must determine the proper pay classification for each employee. The vast majority of workers will fall into one of two categories: exempt or non-exempt, and it’s crucial to understand the FSLA definitions.

Exempt: Often referred to as a salaried employee, an exempt classification means the worker is “exempt” from the FSLA hourly rules. An exempt employee (yes, even at a church) must be an executive, professional, administrative, or outside sales employee and meet other defined criteria for this classification. An exempt employee must also receive the minimum annual salary set by the DOL or state.

Non-Exempt: Often referred to as an hourly employee, a non-exempt worker is not exempt from the FSLA rules like overtime and double-time.   

A word about Independent Contractors: Churches unsure if a worker is an employee or independent contractor receiving a 1099 can apply the DOL’s six factors in their guide to determine their status:

1. opportunity for profit or loss depending on managerial skill
2. investments by the worker and the potential employer
3. degree of permanence of the work relationship
4. nature and degree of control
5. extent to which the work performed is an integral part of the potential employer’s business
6. skill and initiative.

Creating the Non-Exempt Budget Projection

After determining each employee’s wage and classification, it’s finally time to create the budget projection. Because compensation consumes such a large portion of the budget (45%- 55% for healthy churches), it’s important to calculate the total accurately. Here’s a simple method using a spreadsheet like Excel to determine the non-exempt totals:

• Set up a spreadsheet with nine columns using these headings: Employee Name, Hourly Rate, % of Increase, Adj. Rate, Annual Hours (est.), Annual Gross (est.), FICA, Benefits, Total Compensation (est.).
• List each non-exempt employee in the Employee Name column.
• Enter the corresponding hourly rate for each employee in the Hourly Rate column.
• Enter the percentage of increase for any employees receiving an increase for the upcoming year.
• Use a formula (Excel example =((B2*C2)+B2) ) to calculate the new hourly rate in the Adj. Rate.
• Determine the worker’s annual hours. For example, if Joe averages 20 hours a week, then Joe’s estimated annual hours are 1,040 (=20*52).
• Use a formula to calculate the employee’s gross wages in the Annual Gross column. (Excel example: =D2*E2)
• Calculate the total in the FICA column for Social Security and Medicare tax of 7.65%. (Excel example: =F2*0.0765)
• Enter the amount, if any, the church (employer) spends on the employee’s benefits (retirement, health insurance, etc.)
• Use a formula to calculate the Total Compensation in the final column. (Excel example: =SUM(F2:H2))

It looks something like this:

Like any work of art, a church budget takes time to create a masterpiece. It requires knowledge of the established minimum wage and accurately determining the pay classification for each employee. After completing the research, it’s time to start creating the spreadsheet and determine the estimated cost of each employee for the upcoming year—a significant component of a successful church budget.