For the Rev. Elaine Murray-Dreeben, who asked.*
Clergy compensation packages are insanely complicated! Poor Elaine just Tweeted about it and I did a keyword search on this blog and see that I have written about the emotional stress of trying to figure it all out, but nothing practical for my pigeons.
Here’s the jist of it, dolls. Clergy compensation works slightly differently from denomination to denomination (for instance, some denominations have a pension plan for all ordained clergy that the congregation doesn’t contribute to, etc), but these are the big realities you need to attend to:
Work out your Total Compensation Package (TCP) with your governing board and then meet with your Church Treasurer before the church fiscal year starts to determine how it will all break down. Every year will be different, depending on your life circumstances and whether or not you get a raise or cut in salary or hours. REMEMBER that the church fiscal year and the tax year are two different things!! It is your responsibility to keep it straight, and if I can, you can.
You need to allot yourself a certain dollar amount for housing expenses (which are not-taxed) and for professional expenses (ditto). Those get their own separate line items.
If you live in a parsonage, your governing board needs to assess a fair rental value to the parsonage, which becomes part of your TCP. Don’t make the mistake of thinking you are going to be receiving this money as salary or housing in your paycheck. It is not an amount that is paid to you, it is there strictly for tax purposes. If you live in a parsonage with a $24,000 rental value in your community and your TCP is $74,000, know that your salary, benefits, pension contribution and professional expenses are all going to come out of the TCP LESS the fair rental value of your parsonage (so, $54,000).
Parsonage dwellers, try to work out an equity sharing agreement with your congregation. Having you live in the parsonage is a big financial break for your congregation as it saves them a considerable outlay of cash. Speak to your denominational finance officer about equity sharing models. I won’t get into any details about how congregations can help their pastor purchase a house, but certainly many ministers and churches work this out together, and you may be able to, too.
Housing expenses are everything, everything, everything related to keeping house. You can submit these receipts for reimbursement throughout the year, but submit them separately from your professional expenses. You’ve got to keep these two line items separate and distinct. Keep housing expense receipts clipped together and neatly compiled for your treasurer, and professional expenses neatly compiled in another pile. Hope to the great Jehovah that you get to work with amazing, supportive and super responsive church treasurers and bookkeepers who are understand and are willing to deal with this irritating detail, as I have been incredibly fortunate to have in my current congregation. If you find yourself in a “reimbursement war” with judgmental or controlling lay leaders who are holding purse strings, do not hesitate to call in a denominational advocate. I hear about this all too often and it infuriates me. When you submit receipts for professional expenses and/or housing, you should expect your expenses to be returned to you in a timely fashion and without argument. If you have questions about whether or not something counts as a legitimate professional expense, call your tax preparer or your denominational financial officer.
So, you have professional expenses and housing expenses as two separate line items coming out of your TCM. Also included in that sum will be social security contribution (a whopper of a sum since you are, according to the IRS, self-employed! The church will know this and often pay half), possibly your health insurance coverage (if you have it), pension or retirement contribution, and life/disability insurance.
Sit with someone you trust and determine the discretionary line items carefully. For instance, while you’re still paying off theological school debt, you may choose to put less into retirement. Make that up as soon as you can. When I was working on my doctorate, my professional expense line was huge (more tuition). Now I don’t have to allot so much to that line item. If you know you’re going to need to buy a new bed or couch this year, you can up your housing allowance line item or just save the money by doing more weddings or special services (that’s how I earned the money for my first furniture when I could barely make my student loan payments on my TCM).
Know that if you have significant pension savings in a non-profit retirment account, you can withdraw some of that without penalty for the purchase of a home.
For PCUSA and other folk who are required to estimate car and housing costs in advance of signing their yearly agreement, here’s how you do it:
1. Car: estimate how many miles you’ll drive this year. Multiply times .55, the current IRS dollar allowance for gas reimbursement. This is a helpful number for all clergy to know if you’re doing out-of-town weddings or memorial services and need to be reimbursed for mileage. Add estimated amounts for repairs and maintenance to the mileage amount. Car payments are not tax write-offs. I don’t know about leased vehicles.
2. Housing: add rent or mortgage (see parsonage info above if that applies). Set yourself a budget for ALL housing costs, including furnishings and cleaning supplies, kitty litter (seriously, I don’t know why, but it is). Curtains, lightbulbs, all expenses associated with keeping house. I don’t know anyone who reimburses themselves for all household expenses (I err on the side of caution, myself), but knock yourself out. When you’re thinking, “Wow, this is a heckuva deal!” remember how many times you open your door to church crisis and know that you deserve it. And buy yourself a nice tea tray, a sugar bowl and creamer and a set of coffee cups. You’re going to use them 1,000 times for parishioners.
Now, Elaine my dear, I know you’re going to want to have a big glass of wine after reading all this. I promise you that it isn’t that bad once you get the hang of it, and the most important thing is to work with smart, nice bookkeepers who will use fancy software to input all your numbers on the computer and be able to write you reimbursement checks on a regular basis (my bookkeeper keeps my housing receipts and professional receipts separately but includes both dollar amounts in one check, writing how much for each line item in the memo line of the check). Your nice bookkeeper will also keep track of how much money you’re spending and how much you have left. If you have any money left in your professional or housing expenses at the end of the CHURCH fiscal year, you should get that in a check that gets reported as TAXABLE income.
I keep my own housing receipts while the church keeps my professional expense receipts in a file. If I am ever audited, I know where everything is, and so should you. Keep good records, keep your receipts organized, and hire a good accountant who KNOWS CLERGY COMPENSATION to do your taxes. Best money you’ll ever spend.
Blessings, dear lady. Thanks for asking.
*Elaine sent out her Tweet late at night and I wrote this post fast and late. It is not meant to be a definitive, expert opinion but a quick-n’-dirty breakdown of how clergy compensation works for me. Definitely read the comments and above all, CONSULT WITH AN EXPERT! – PB
Such a good and comprehensive post. One of the differences in my tradition is that the regular paycheck that I receive includes my salary and housing allowance. I keep track of all of my housing related expenses and receipts and at tax time, those are matched up against my housing allowance. Any excess allowance is then considered by my CPA as income and subject to income tax. And if my expenses exceed my allowance, I should recalculate my allowance for the next year. Keeps the church out of the “She spent HOW much on that couch?” Also, the allocation of housing allowance must be approved by the church council (though it is not subject to negotiation) annually or through a continuing resolution.
Maybe it varies by denominational guidelines, but the materials I got from the UMC explicitly named “paid household help” (like a housekeeper) as a non-approved expense for the housing exclusion. My husband and I consider our monthly house keeper to be an investment in our marriage, just like all the money we spent on pre-marital counseling 🙂
Would you share your thoughts about how you (or recommend that others) charge for presentations, workshops, adult forums, sermons, etc.outside of your primary congregation?
[Well, my denomination has a Minister’s Association set of guidelines for pulpit supply and special services for non-members, and 90% of my workshops, presentations and consultations with UUs has been on a volunteer basis, or stipendiary (ie, hardly enough to cover gas). So I’m not much help there. My colleagues and I do a lot of checking in about this question, though, as it’s hard to value our work highly enough. I think Alban Institute consultants get $1200 for a full day and $600 for a “unit.” I should have mentioned that all of those fees and stipends and gifts should be reported as taxable income if they’re over a certain amount — maybe $2000 a year? – PB]
You’re right that this is important stuff for pastors to understand. Housing allowance in particular is an incredible benefit if used well. But I’m a little concerned about a few things that you say here, PB. I’m not an accountant, but I’ve been helping pastors with tax questions for twenty years, and here’s some of what I’ve learned.
Your housing allowance isn’t something that you can just agree on with your treasurer.Your governing board or the congregation must take an official action to set it (using the number you provide, of course). It has to be set at the beginning of the year and can’t be changed retroactively.
Maybe this is just a denominational quirk, but I’ve never seen housing expenses treated as a reimbursement. I can imagine real privacy issues here, if the treasurer doesn’t like how much you’re spending on Egyptian cotton sheets. There’s no reason to be reimbursed for your housing expenses—as long as the congregation sets an allowance and you can document the expenses, it can be included in your regular paycheck and is not subject to federal income tax. Remember, however, that housing allowance is subject to self-employment tax (what clergy pay instead of Social Security). Not paying that tax is illegal and may also penalize you in the end because your social security benefit (and perhaps your pension) ultimately is based on your income, which you will be under-reporting if you’re leaving out the housing amount.
You can find lists of what can and cannot be included as a housing expense, and there’s some room for debate. The IRS pretty consistently says that “servants” are not a legitimate expense, so most list will say that a housekeeper can’t be included. On the other hand, the IRS has no trouble with you paying someone to mow your lawn. Since Chem Lawn and Merry Maids are the same company, I don’t see the difference myself.
Professional expenses can (and should) be reimbursed, and that reimbursement is not taxable. However, you can’t set aside a portion of salary for that reimbursement and then get the unused portion as a taxable amount at the end of the year. That’s called “salary restructuring,” and it is not acceptable to the IRS and could make the whole amount taxable.
The same is true for auto expenses. (And don’t add amounts for repairs and maintenance to the $.55/mile rate. You can use either the per mile rate or actual expenses, not both.)
Whew! Bottom line—at least at first, find someone who really knows this stuff, or you could miss out on major benefits or even get in serious trouble. [YES YES YES!! I wrote this fast at 1AM, and your points are all great and helpful. Thanks. – PB]
I’m not a clergy person nor do I give a lick about my public image but I love your blog and HAVE MISSED YOU! Your 10 day absence was noticed and, although I totally accept that you needed a vacation/time off/relaxation I HAVE BEEN WORRIED. Thanks for coming back…even though it was about a topic that I couldn’t be less concerned about. Did I just end a sentence in a preposition? Sorry.
I’ve been ordained for 10 months, and this summer I found a clergy tax accountant who came highly recommended. I wanted to make sure I was paying enough quarterly self-employment (I was so worried I’d miscalculated and would end up needing to pay more), and it was really helpful to have him walk me through the ins and outs of clergy taxes. Very much worth the money to me.
Thanks for the great post!
Ummm, sweetie? $74,000 minus $24,000 is $50,000, not $54,000. Wish it were different, but alas, that’s God’s own truth.
I have a system – several systems – depending on whether it’s Episcopal Church culture, black church culture (Black Episcopal Church culture is a whole other thing). And my academic presentations are processed on a completely different scale. I hate when someone asked me how much it will cost for me to do something because there really isn’t a set price, it’s going to depend on how much prep time and how much face time and what kind of community they are. (An endowed lecture at a seminary can offer of thousands of dollars while a congregation might offer a couple hundred dollars.) It’s difficult and sometimes frustrating particularly when I have to negotiate with someone.
I have also been blessed to be in a couple of churches where I have been able to structure my package so that it is the best tax benefit for me. I know best that I am going to spend more next year on Con Ed due to a really great conference. . .and for next year I can reduce my salary (or put the bulk of my COLA) into that line. In the frank conversations I have been able to have with the personnel committees, they have welcomed the fact that I have thought about these things, that there are even certain things I do which will lessen their Pension responsibilities, and that I am receiving a “tax break” due to some thoughtful planning. And never leave that end of the year money on the table. . . figure out how to rightfully use it all!
(and talk with colleagues about how to do all these things. . . .I was blessed to have a “family member” who did taxes for Block. . .and always took the refresher courses. . .he set me on the right path!)
Any fees, stipends, honorariums and such are considered income to the recipient. Against that income expenses are deducted. Unreimbursed expenses such as travel expenses, lodging, and/or mileage as well as supplies needed for a presentation are some possible expenses. All of that goes on Sch C. The net of that flows to the 1040 form and also flows to the S/E tax calculation. At least that’s what I did when I prepared clergy tax returns and how I do it for myself now. Just because someone calls the money a ‘thank offering’ does not mean that it is esxcluded from income. The IRS would see that as money received for serices performed.
Any of you who are more involved in taxes please correct me if I have misstated anything. It has been a bit since I was a tax preparer.
Thank you, thank you, THANK YOU for fostering this discussion on your blog! These points are so helpful to keep in mind as something preparing to start out in ministry. I have never been witness to such a frank discussion on how clergy salary and taxes work, and am so grateful to see it here. [Thanks for letting me know how helpful this is. Blessings to you, dear. – PB]