Legal, Tax, and Compensation Guide
Most bi-vocational pastors get zero training on the financial side of ministry. This page will not make you a tax expert, but it will help you understand the basics and know when to call in a professional.
This is general information, not legal or tax advice. Consult with a qualified professional for your specific situation.
The Housing Allowance
The ministerial housing allowance is one of the most significant tax benefits available to pastors. Under Section 107 of the Internal Revenue Code, an ordained, commissioned, or licensed minister can exclude a designated portion of their compensation from federal income tax if it is used for housing expenses.
Here is what you need to know:
- The housing allowance must be officially designated by the church in advance of payment. A verbal agreement is not enough. It should be in the church budget or in a board resolution.
- The amount excluded cannot exceed the fair rental value of the home, including furnishings and utilities.
- You can only apply the housing allowance to ministerial income, not to your secular job income.
- The housing allowance is excluded from federal income tax but is generally still subject to self-employment tax.
If your church provides a parsonage instead of a cash allowance, you can exclude the fair market rental value of the home from your income, but you must still include it in your net earnings from self-employment.
Sources: IRS.gov, Servant Solutions
Self-Employment Tax
This is the one that catches most bi-vocational pastors off guard. If you are considered self-employed for your ministry work (which most bi-vocational pastors are), you are responsible for self-employment tax on your church income. That is 15.3 percent, which covers both the employer and employee portions of Social Security and Medicare.
Your secular job already withholds the employee portion of FICA from your paycheck. But your church income does not have that withholding. You are responsible for paying it yourself, typically through estimated quarterly tax payments.
Some ministers are eligible to opt out of self-employment tax, but the rules are strict. Talk to a tax professional before making this decision.
Dual W-2s and Dual Income
As a bi-vocational pastor, you will likely receive two W-2s: one from your secular employer and one from your church. These are reported together on your tax return.
Make sure your church is issuing you a W-2, not a 1099. Ministers are generally treated as employees for income tax purposes, even if they are self-employed for Social Security purposes. This is one of the more confusing areas of clergy tax law, and it is worth getting right.
Accountable Reimbursement Plans
If your church reimburses you for ministry expenses, such as mileage, books, or conference fees, make sure they use an accountable reimbursement plan. Under an accountable plan, the reimbursement is not taxable income to you, as long as you document the expenses and return any excess reimbursement.
Without an accountable plan, those reimbursements are taxable income. The Alabama Baptist State Board of Missions notes that many churches still use the old “lump sum” approach, which can cause the minister to pay taxes on money that was never really income.
Retirement Planning
Most bi-vocational pastors do not have access to a church-sponsored retirement plan. That means you need to build your own. A Roth IRA or a traditional IRA is a good starting point. If your church is willing to contribute, even a small amount, a 403(b) through an organization like GuideStone can be a valuable benefit.
Some denominations offer assistance programs for small churches. If your church budget is under $75,000, ask your denomination whether any retirement matching programs are available.
Having the Compensation Conversation
Talking about money with your church is uncomfortable. But it is necessary. You deserve fair compensation for the work you do, and your church deserves to know what it actually costs to support a pastor.
Before you have that conversation, do your homework. Find out the average compensation for pastors in your area and your church size. The MMBB Financial Services guide to negotiating pastor compensation is a helpful resource for this. Come to the conversation with a clear number and a clear explanation of what you need and why.
Remember: asking for fair compensation is not greed. It is stewardship. A pastor who is financially stressed is not free to focus on ministry.