The greatest privilege of my life was to pastor a local church. When I was younger, I never dreamed I would become a preacher. After graduating high school, I entered college to prepare for a long career in healthcare. I pursued those plans and worked in various positions for 14 years. Yet, God had a different plan for me.
I embraced God’s call. Although I thought I would never go back to college, I decided (with God’s leading) the best way to prepare for ministry was to go to Bible college and seminary. Once the biblical educational pursuit was complete, I was excited to put my hands to the plow and fulfill God’s calling on my life.
Even in the midst of the excitement and anticipation of preaching the gospel and shepherding God’s people, I admit to some anxiety as well. The anxiety centered around finances. While I wasn’t in it for the money, I knew adjustments to our budget would have to be made.
This transition proved easier and less stressful for my family because I was part of a church that took care of their pastor. The way the church structured my compensation package was a real blessing because it reduced my tax liability greatly.
With a little planning, churches can honor God and bless their pastors by allowing them to serve God and their church with less stress and more joy. The IRS code gives churches several opportunities to enhance a pastor’s compensation package, reducing a pastor’s tax liability and lessening his financial stress. Although not an exhaustive list, the following are ways a church can give the pastor a raise without increasing the budget.
Approve a Housing Allowance
One of the greatest financial and tax benefits a church can provide for the pastor is a housing allowance. Under current law, churches can designate a portion of the pastor’s salary as a parsonage or housing allowance, making it free from federal income taxes. While churches can request the pastor estimate housing expenses, the church must designate the amount of housing allowance it is going to provide in advance of payment and by official action of the church. (Find more information about the minister’s housing allowance here.)
Provide a Retirement Benefit
A key cornerstone for any compensation package is a retirement plan. Many pastors today are entering retirement unprepared. Churches can help alleviate the financial stress related to a pastor’s financial future by contributing to a solid retirement plan. This will not only help the pastor’s future financial prospects but their current one as well.
Through the Board of Retirement, Free Will Baptist churches can set up a retirement plan for the pastor and make tax-deferred contributions. Because employer contributions are tax-deferred, this does not increase the pastor’s taxable income or tax liability. Pastors also can make their own tax-deferred retirement contributions to further reduce their taxable income and tax liability. When tax-deferred contributions are made to a denominational retirement plan like the one offered by the Board of Retirement, pastors can utilize the housing allowance provision for their retirement withdrawals, which makes those withdrawals tax-free.
Set Up an Accountable Reimbursement Plan
From time to time, pastors need to purchase books or commentaries, attend conferences, take people to lunch, visit people in the hospital, host ministry events in their home, and much more. Many times, pastors must pay for these expenses out of their own pockets. Now that the IRS does not allow these types of expenses to be tax deductions, the cost of these ministry-related expenses is even higher.
To off-set these ministry-related expenses, churches can (and should) set up an accountable reimbursement plan. An accountable reimbursement plan is established in the budget and allows the church to reimburse pastors for ministry-related expenses (with proper receipts and documentation) up to the budgeted amount. Even better, this reimbursement is not taxable income for the pastor.
Pastors are God’s servants. Their ministry is not about making money but making disciples. Churches can help their pastors focus better on the latter when they meet their physical and financial needs well. The small benefits mentioned above will go a long way toward blessing pastors and reducing their financial stress. This is a win-win for both the pastor and the church.
For more information about these benefits and other ways to structure a pastor’s compensation package, contact the Board of Retirement at 877-767-7738. Looking for help with your taxes? Check out the FREE Minister’s Tax and Financial Guide.