By Brent Lacy

Pastor compensation is one of the most sensitive topics in small church ministry. It feels awkward to discuss. It often gets deferred year after year. And when it is finally addressed, it is frequently handled without adequate information or process.

This guide gives church leaders a clear, fair framework for setting and reviewing pastor compensation , and gives pastors the language to advocate for themselves without it feeling like a personal demand.

Tax Disclaimer: Pastor compensation involves complex IRS regulations including housing allowance (IRC Section 107), self-employment tax (Schedule SE), and retirement plan rules. This guide is for educational purposes only. Consult a CPA before implementing any compensation changes.

Why This Conversation Is Hard (And Why It Matters)

Small church boards often avoid compensation conversations because they feel personal, because the church genuinely has limited funds, or because no one knows what “fair” looks like. Pastors avoid the conversation because they don’t want to appear greedy or ungrateful.

The result is that many small church pastors are significantly underpaid , not because their congregations don’t value them, but because no one has done the work of figuring out what fair compensation looks like.

The Components of Total Compensation

1. Base Salary or Housing Allowance

For ordained ministers, compensation is often structured as a housing allowance (IRC Section 107) rather than a traditional salary, because housing allowance is excluded from federal income tax. The housing allowance must be designated in advance by the church board and cannot exceed the fair rental value of the home.

2. Health Insurance

Health insurance is one of the most valuable components of a compensation package. If the church cannot provide full health insurance, consider a Health Reimbursement Arrangement (HRA) that reimburses the pastor for individual health insurance premiums.

3. Retirement Contribution

Even a 3-5% contribution to a 403(b) or IRA is meaningful. GuideStone Financial Resources offers retirement plans specifically designed for churches and ministers.

4. Ministry Expense Reimbursement

Mileage, books, conferences, and continuing education should be reimbursed through an accountable plan , not added to taxable income. Keep receipts and document the ministry purpose of every expense.

5. Paid Time Off

Vacation (2-4 weeks), sick leave, and continuing education time should be defined in writing. Many small churches have no formal policy, which creates ambiguity and resentment.

Benchmarking: What Is Fair?

Use these sources to benchmark pastor compensation for your church size and region:

• Lifeway Research , Annual pastor compensation survey by church size and region
• GuideStone Financial Resources , Compensation planning tools for churches
• Your denomination , Most denominations publish compensation guidelines

General benchmarks for a full-time pastor of a church under 100 in attendance:

• Total compensation (salary + housing + benefits): $40,000-$60,000 annually
• Housing allowance alone: $15,000-$25,000 annually (varies significantly by region)
• Health insurance: $6,000-$15,000 annually

The Annual Compensation Review Process

Step 1: The board chair or personnel committee initiates the review , not the pastor.

Step 2: Gather benchmarking data from Lifeway, GuideStone, or your denomination.

Step 3: Review the pastor’s current total compensation package (salary, housing, benefits, expenses).

Step 4: Compare to benchmarks and to the church’s financial capacity.

Step 5: Propose a specific compensation package for the coming year.

Step 6: Present to the full board for discussion and approval.

Step 7: Communicate the decision to the pastor in writing.

The Housing Allowance: What Every Small Church Must Know

The housing allowance is one of the most significant tax benefits available to ordained ministers. Key rules:

• Must be designated in advance by the church board (before the tax year begins)
• Cannot exceed the fair rental value of the home (furnished, plus utilities)
• Must be used for actual housing expenses (mortgage/rent, utilities, repairs, furnishings)
• Is excluded from federal income tax but NOT from self-employment tax

Important: Bi-vocational pastors who are self-employed must pay self-employment tax (15.3%) on their ministry income, including housing allowance. This is a significant tax burden that many bi-vocational pastors are unaware of. Consult a CPA.

Frequently Asked Questions

How much should a small church pay its pastor?

According to Lifeway Research and GuideStone benchmarking data, the median total compensation for a full-time pastor of a church under 100 is $40,000-$55,000 annually. Use benchmarking data and your church’s financial capacity to determine a fair amount.

What is the pastor housing allowance?

The housing allowance (IRC Section 107) allows ordained ministers to exclude a portion of their compensation from federal income tax if used for housing expenses. It must be designated in advance by the church board. CPA review is strongly recommended.

Should a small church pay its bi-vocational pastor?

Yes, even if the amount is modest. Compensation communicates value and creates accountability. Even a small stipend or housing allowance is better than nothing.