Friday, November 16, 2018
Hey Fletch … When it comes to excess/unreasonable compensation, is this something to monitor on a per employee basis or an overall budget basis? I had someone tell me that the personnel percentage of our overall budget is too high and could be considered unreasonable compensation. Is that true?
DRF—When a church has more than 65% or 75% of their budget going to salaries and benefits, they may be in a poor financial posture for unexpected expenses. It may be difficult or impossible for that church to get a bank loan. The bank will ask, “How are you going to pay it back? Where is the money going to come from?” This is not what is meant by the term “unreasonable compensation.”
Excess or unreasonable compensation is what is paid to an individual. GuideStar has an article about “What You Need to Know about Nonprofit Executive Compensation.” It says:
The IRS permits tax-exempt organizations to pay executives “fair and reasonable” compensation. There is no universal standard defining fair and reasonable, however; what’s fair and reasonable at one nonprofit may be a gross under- or overpayment at another.
My friends at Christianity Today have great materials on this subject for churches:
- An audio clip of Rich Hammar on inurement (free)
- An article from Rich Hammar on inurement (subscription required)
Premium resources going in-depth on inurement:
- The 2018 Church & Clergy Tax Guide by Richard Hammar
- Church Compensation: From Strategic Plan to Compliance by Elaine Sommerville
Personnel as a percentage of church budget:
- “How Churches Spend Their Money,” by Matt Branaugh (subscription required)
- “How Churches Spend Their Money” Infographic (free)
- “How Churches Pay Their People” infographic (free)
You can read a GuideStar article on “The Private Inurement Prohibition, Excess Compensation, Intermediate Sanctions, and the IRS’s Rebuttable Presumption.” GuideStar gives input on non-profits and charities. These non-profits file IRS Form 990 that churches are not required to file. This means that salaries for non-profit executive are in the public record with Form 990, while church salaries are not. The bottom line is that, by-and-large, the church board or compensation team sets the fairness and reasonableness of their church’s salaries.
Non-profits have standards for compensation, which churches would do well to utilize. The GuideStar recommendations include:
- Compensation paid by similar organizations, both exempt and taxable, for equivalent positions in the same community or geographic area.
- The need for the particular services of the person in question.
- The uniqueness of the person’s background, education, training, experience, and responsibilities.
- Whether the compensation was approved by an independent board of directors.
- The size and complexity of the income and assets and the number of employees.
- The person’s prior compensation arrangements.
- The person’s job performance.
- The relationship of the person’s compensation to the compensation paid to the other employees.
- The number of hours the person spends performing his or her job.
Utilizing these nine recommendations can guard against excessive compensation in church salaries.