Offering the Position!
Dr. David R. Fletcher
Hurray! You have found the perfect candidate for your church and your spiritual DNA. Now it is time to offer the job. Here are some considerations ...
What this page contains
- Compensation
- Salary
- Housing Allowance
- A FAQ from the IRS: About the Housing Allowance
- Social Security
- Opting Out of Social Security: What the Law Says
- A FAQ from the IRS: About Ministers and Social Security
- Employment Contracts & Job Descriptions
- Benefits
- Medical Insurance
- Dental Insurance
- Life Insurance
- Disability
- Retirement: 403b or defined benefits plans
- Extra compensation to pay the Employers portion of SECA
- Time Away and Vacation
- Church Budget items to consider
- Transitional Expenses
- Time Limit
- Explain the Offer by Phone or in Person
- Drafting the Letter
- Sample offer letter
Compensation
Salary
- Salary is normally a combination of the base salary and the housing allowance.
- The IRS allows for the pastor to set his own percentage of housing allowance (see the next item).
- If you are hiring a pastor, the church is not required to pay the employers portion of FICA, which is 7.65%. If you make no adjustment for this, then tell the candidate (and all others who will see the salary), that the salary is automatically 7.65% lower than that in all other businesses. This is because all employees must pay the employee portion of FICA, which is 7.65% and the employer matches that with another 7.65%. However, pastors for the purposes of Social Security tax are technically "self-employed" and so fall under SECA, which means they pay the entire 15% themselves. See below for how very few pastors can ethically opt out of Social Security.
"If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax unless you have requested and received an exemption."
—IRS Publication 517
Housing Allowance
- If you are offering $50,000 of total salary, then in most churches the pastor can set a percentage as a ministerial housing allowance. Suppose that the pastor sets, and the board agrees, on a $15,000 housing allowance; then that amount is not subject to Federal Income Tax. However, the entire amount of $50,000 is subject to Social Security Tax, unless the pastor has ethically opted out of Social security as noted below. If the church is offering a parsonage, then generally there is little or no housing allowance.
- Check the IRS guidelines for defining who a pastor is--you may have some workers who can be licensed or commissioned who will qualify for the housing allowance.
"Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes."
—IRS Publication 517
"A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister's services. A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly relating to providing a home."
—IRS Tax Topic 417
A FAQ from the IRS: About the Housing Allowance
A minister receives a salary plus a housing allowance. Is the housing allowance income? Where does the minister report it?
A minister's housing allowance, sometimes called a parsonage allowance or a rental allowance, is excludable from gross income for income tax purposes, but not for self-employment tax purposes.
If you are a minister and receive as part of your salary (as a minister) an amount officially designated as a rental allowance, you can exclude from gross income the amount that is used to provide or rent a home. However, the exclusion is limited to the lesser of the fair market rental value (including furnishing, utilities, garage, etc.) of the amount officially designated (in advance of payment) as a rental or housing allowance, or the actual amount used to provide a home, and cannot exceed what is reasonable pay for your services. The payments must be used in the year received.
If housing is furnished to you by your congregation as pay for your services as a minister, the exclusion cannot be more than what is reasonable pay for your services, and is limited to the fair market rental value (including furnishings, utilities, garage, etc.) of the home.
If you own your home and you receive a housing allowance as part of your pay, for your services as a minister, the exclusion cannot be more than the smaller of the following:
For additional information on housing allowance, refer to Publication 517, Social Security and Other Information for the Members of the Clergy and Religious Workers. For information on earnings for clergy and reporting of self-employment tax, refer to Tax Topic 417, Earnings for clergy.
- The amount actually used to provide a home,
- The amount officially designated (in advance of payment) as a rental or housing allowance,
- The fair market rental value of the home, including furnishings, utilities, garage, etc., or
- An amount which represents reasonable pay for your services as a minister.
- The amount of the allowance that cannot be excluded should be entered with you wages on line 7 of form 1040.
Social Security
- Some pastors opted out of Social Security years ago, before there were ethical requirements by the IRS for opting out.
- Since about 1985, the requirements to opt out are, a contentientious religious objection to church salary being taxed by Social Security. This means that you can't opt out for financial reasons, only religious.
- Note that if you do opt out, that you can't receive any benefits of Social Security on your church income. This includes retirement compensation as well as Medicare.
- Talk to a CPA who is knowledgeable about ministers and Social Security Issues.
"Common-law employee. Depending on all the facts and circumstances, under common law rules you are considered either an employee or a self-employed person. Generally, you are an employee if your employer has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. If you are employed by a congregation for a salary, you are generally a common-law employee and income from the exercise of your ministry is considered wages for income tax purposes. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are considered self-employment income."
—IRS Publication 517
Opting out of Social Security: what the law says
"I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. (Public insurance includes insurance systems established by the Social Security Act.)"
"I certify that as a duly ordained, commissioned, or licensed minister of a church or a member of a religious order not under a vow of poverty, I have informed the ordaining, commissioning, or licensing body of my church or order that I am conscientiously opposed to, or because of religious principles, I am opposed to the acceptance (for services I perform as a minister or as a member of a religious order) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care, including the benefits of any insurance system established by the Social Security Act."
"I certify that I have never filed Form 2031 to revoke a previous exemption from social security coverage on earnings as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner."
"I request to be exempted from paying self-employment tax on my earnings from services as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner, under section 1402(e) of the Internal Revenue Code. I understand that the exemption, if granted, will apply only to these earnings. Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief, it is true and correct."
—IRS Form 4361
A FAQ from the IRS: About Ministers and Social Security
Are all ministers treated as self-employed for social security purposes?
Services that a duly ordained, commissioned or licensed minister performs in the exercise of his or her ministry are covered under the Self-Employment Contributions Act (SECA). That means they are exempt from Social Security and Medicare withholding, but they are responsible for paying self-employment tax on their net earnings from self-employment.
There are some members of religious orders, ministers, and Christian Science practitioners who have requested and been granted exemption from self-employment tax. There are also members of religious orders who have taken a vow of poverty and ministers who are covered solely by the social security laws of another country under a social security agreement between the United States and that other country.
See Form 4361 (PDF), Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners
Employment Contracts & Job Descriptions
- Are you going to have the person sign an employment contract or agreement? Some churches do this, some don't. If you do a contract, are you going to include a clause for a separation agreement? Bummer to think about, but some churches do ...
- When will the person be first reviewed, in 90 or 180 days? Do you want to spell this out in writing or give it verbally, either is good just pick one!
- Have you worked through the job description? Are you going to have the person sign it (again it is fine whether you do or don't, just decide how "stiff and formal" you want your H/R process to be).
- You have done a criminal background check, right?
- Has the candidate seen your employee policy manual?
- Have you mentioned any special things about your church? Do you have special views on alcohol or tobacco? Do you have a "covenant of fellowship" in your church or construction? If so, let your candidate see it.
Benefits
Medical Insurance
- What level of medical insurance are you going to offer? You can segregate employees by classes, such as pastors and support staff. Yet, you must be consistent with the classes of employees and can't make special exceptions.
- In your classes of employees, you can can include spouses and children in one class and not in another. Are you going to provide health insurance for the family as well?
- Are you going to make the employee pay a part of your medical insurance? If you didn't cover their spouse or family, can they "buy into" your program by paying it themselves?
Dental Insurance
- Same issues as medical insurance
Life Insurance
- You can provide up to $50,000 of free life insurance to employees (check this number as it can change each year). Again, you can have classes of employees. You may choose not to provide life insurance for support staff but provide it for your pastors.
- Are you going to provide more insurance for the pastors, such as 2x or 3x salary? Any amount over $50,000 is considered as taxable income. But, generally, buying your live insurance for an entire group makes it pretty cheap.
Disability
- Are you going to provide any long or short term disability insurance. Say they fall off of a ladder while trimming a tree, who is going to pay their salary?
Retirement: 403b or defined benefits plans
- How are you going to provide for your pastor when he or she retires? If you don't have a plan in place, get one!
- Is there a vesting period for your retirement plan? Spell it out in the offer letter.
"Even though, for social security tax purposes, you are considered a self-employed individual in performing your ministerial services, you may be considered an employee for income tax or retirement plan purposes. For income tax or retirement plan purposes, some of your income may be considered self-employment income and other income may be considered wages."
—IRS Publication 517
Extra compensation to pay the Employers portion of SECA
- Some churches pay the pastors an extra 7.65% to cover the employers portion of SECA. Note, this is taxable income to the pastor.
"Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. If you are an employee of a church or church organization that makes this election and pays you $108.28 or more in wages, you must pay SE tax on those wages. Churches and church organizations make this election by filing two copies of Form 8274. For more information about making this election, see Form 8274."
—IRS Publication 517
Time Away and Vacation
- How much vacation time does the person get each year? Does it accrue based on hours worked or does it begin on the first day of employment?
- How much time away for enrichment, conferences and speaking will you give the person?
- Pastors often begin at three weeks of vacation plus enrichment time. The more senior your staff, the longer time away is given.
- How much sick time will you give each class of employee?
- How about a couple of personal days?
- How many holidays does your church close the office?
Church Budget items to consider
- Book budget
- Education & Conference budgtet (like the XP-Seminar)
- Meal budget
Transitional Expenses
- Moving expenses: how much will you pay to move the pastor to your community? Will you rent a truck and do it yourself or hire a professional company. Spell out that you want three bids in writing.
- Travel during the transition, to home and the new job. Establish a budget for how often the pastor can go to their former home to take care of selling their house.
- Transitional housing, such as an apartment. If they are selling a house in their former community, where are they going to stay in the interim. Establish a reasonable timeframe that you will pay for transitional housing, such as three months.
- Expensive communities: some places cost much more to buy a house. Do you want your pastor to live close to the church, where it may be more expensive? Consider a joint equity agreement, where each party have a fixed interest in the house, such as 50% each. Get an attorney involved and put it all in writing! Don't think you are being nice and leave it with a handshake--this is really quite unfair!
- Will you cover the medical premium at their old employer until your health insurance kicks in?
Time Limit
- Set a reasonable amount of time for the person to weigh your offer. My preference is 3 weeks, then the offer is withdrawn. I may give another offer or I may not.
Explain the Offer by Phone or in Person
Call the person and walk through the offer.
Drafting the Letter
After the phone call, send a written and formal letter of your offer.
Sample Offer Letter
June 1, 2007
Dear Joe,
On behalf of our church, we are delighted to offer you the position of Youth Pastor, reporting to our Executive Pastor.
We trust that you have gained an appreciable understanding of both the challenges and opportunities that the Lord may be calling you to at our church. The details of our base offer are:
1. This is a pastoral level position and is considered an exempt role.
2. Start date of your employment is no later than August 1, 2007, unless we mutually decide otherwise.
3. You will receive a salary and housing allowance of $2,000 per pay period. There are 26 pay periods in a year.
4. You will receive 21 days of paid vacation per year, accrued over each pay period. Vacation will increase consistent with our employment practices.
5. You will receive 8 days of paid sick leave per year consistent with our employment practices. You also receive 2 personal days per year.
6. You will receive paid medical and dental benefits for you and your family, consistent with our employment practices. We will cover your present premium for the first 30 or 60 days of employment until our coverage picks you up.
7. You will also receive paid life insurance coverage, long-term & short-term disability and workmen’s compensation coverage consistent with our employment practices.
8. The church does not pay an employer portion of FICA for pastors that opt to remain a part of Social Security benefits. Pastors are considered self-employed for this purpose.
9. The church will cover the cost of moving you, your family and your belongings to our city. We request that you get three estimates on moving and submit them for pre-approval.
10. For transitional expenses, you will receive reimbursement for expenses and travel up to $2,000 per month for up to three months, as well as $3,000 in cash to help with house closing costs.
Joe, we are excited to extend this offer. We believe that the Lord is truly in this and we ask that you respond to our Executive Pastor by e-mail with your acceptance of this offer, within the next two weeks—otherwise the offer is void.
In the interim, please do not hesitate to call us if we can be of help.
To His glory,
XP for our Church
