13 Oct Helping Your Church Set Up Church Compensation Amounts
How does a church go about determining the amounts it should pay its ministers and other employees? Church boards, or those to whom they delegate, must determine what amounts to pay each staff position. The experience and competence of those making the decisions vary greatly from church to church.
Often churches have a history of underpaying their employees due to budgetary constraints, or beliefs that church workers should be willing to serve for minimal pay due to the charitable nature of their work.
Sometimes churches prevent their growth and development by getting into a continual cycle of underpaying employees due to budgetary limitations, leading to an inability to attract the most qualified employees, resulting in poor employee performance, causing the church to remain stuck without growth, and perpetuating those budgetary limitations. Paying market value for ministers and other employees may be the only realistic way to break this cycle.
On the other hand, some churches pay long-term, or highly qualified, employees compensation that is far beyond the average compensation paid by similarly-situated churches, and run risks associated with excessive compensation. Because most churches are nonprofit organizations that receive tax-exempt funding, they must use their funds in ways that are consistent with their non-profit purposes. This includes the ability to pay compensation to employees who execute the church’s non-profit purposes. However, the compensation must remain “reasonable” in order for it to be considered a legitimate use of the church’s funds since those funds were received as tax-exempt. So-called “excessive compensation” is payment that is beyond what the IRS considers reasonable.
The IRS looks at several factors to determine if compensation is reasonable, including compensation levels for similarly-situated churches, the cost of living of the church’s location, and the specific educational qualifications and professional experience of each employee.
There may be serious consequences for excessive compensation. Churches can lose their tax-exempt status. Employees who receive excessive compensation may be subject to strict tax penalties. The church leaders who approve excessive compensation may also be subject to significant financial penalties.
Church leaders can obtain data to help ensure staff compensation is within the bounds of what is reasonable. Several resources are available to show average church compensation for various staff roles, including variables such as the experience of the employee, the educational level of the employee, the size of the church, and the annual budget of the church. These figures can also be adjusted for the comparative cost of living for the geographical location where the church is located. Comparative cost of living information for specific geographic locations is readily available from several online resources.
When in doubt about excessive compensation, especially when it comes to highly compensated, executive-level employees, a church should retain a professional to conduct a compensation study before setting pay amounts. The compensation study provides evidence of the reasonableness of compensation amounts in the case of an audit.
This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.