CLERGY COMPENSATION

1
CLERGY COMPENSATION

• A Presentation for Seniors
• Lutheran Theological Seminary
• at Gettysburg
• Rev. Dr. Marty Stevens, CPA
• 22-23 January 2008

2
Ancient prebends

• Prebend the right to an income from the temple
  in return for the performance of services
  connected with the cult
• Quantity and quality depended on age, status, and
  type of work performed

3
Ancient Prebends

• Dates, barley, beer, a share of the sacrificial
  offerings, wool, shoes, blankets, and
  water-bottles
• Sale of his entire share in the cooks prebend,
  his entire share in the buckets of the goddesses,
  his share in the tail meat of the ox and the
  pertinent hides, his entire share in the -s of
  the goddesses, and his entire share which he owns
  with his brothers and partners which pertains to
  the cooks prebend.

4
Compensation for Priests

• And this will be the just due of the priests
  from the people, from the ones offering the
  sacrifice, whether bull or lamb, he will give to
  the priest the arm and the jaws and the stomach.
  Your first grain, your new wine, and your fresh
  oil, and the first of the shearing of your flock
  you will give to the priest. Deut 183-4

5
Modern prebends

• You need enough compensation to live on AND you
  are being supported by the resources of the
  people of God. Personal stewardship matters.
• We are called to be servant leaders or lead
  servants, not bosses or employees
• This is a CALL, not a job

6
COMPENSATION COMPONENTS

• Compensation CASH
• Salary
• Housing Allowance or Parsonage Allowance
• Social Security (SECA) Allowance
• DEFINED COMPENSATION
• Other Income - CASH
• Compensation BENEFITS
• Medical Insurance
• Pension Plan
• Vacation
• Other Days
• TOTAL COMPENSATION

Reimbursed Expenses Travel Continuing
Education Publications Official
Meetings Entertainment
7
SALARY

• Check minimum salary guidelines for the synod
• Pay attention to categories and definitions

8
Negotiation???

• Some first-call congregations do not offer the
  minimum this is worth a conversation with the
  Bishop
• Ask for some recognition of first career
  experience
• Regular personnel reviews and salary adjustments
  if not at minimum, ask for early review

9
Housing Allowance

• Clergy are entitled to a special tax loophole --
  amounts spent on housing are excluded from your
  taxable income. You receive the funds but you do
  not declare the funds as taxable income.
• YOU decide this amount, not the congregation!
  Often Synod guidelines list an amount, but YOU
  decide the amount you will declare as housing
  allowance
• The Congregation Council MUST approve each year
  the amount you designate and it must be recorded
  in the official minutes

10
HOUSING ALLOWANCE

• Estimate amount for upcoming calendar year
• sum of rent or mortgage principal and interest
• Utilities (electricity, gas, fuel oil, water
  sewer, trash collection, cable, phone, internet)
• Furnishings (furniture, appliances, rugs,
  curtains, durable goods)
• Real estate property taxes, property insurance
• Maintenance costs for house and yard (lawn mower,
  weed eater, grass seed, fertilizer, paint, major
  repair costs)

11
Housing Allowance

• Keep track of all Housing Allowance
  expenditures during the calendar year
• Compare your Estimated/ Declared amount with the
  Actual amount
• NON-TAXABLE amount for IRS purposes is smaller of
  estimated allowance designated at beginning of
  year OR actual expenditures at end of year
• (Total is also limited by fair market value
  calculations)

12
Housing Allowance practically speaking

• Make a good estimate of your eligible housing
  expenses for the calendar year
• Add some amount to the estimate (10-15) as a
  cushion
• You want your approved housing allowance to be at
  least as much as your expenditures, but not too
  much more than your actual.

13
PARSONAGE

• Parsonage generally considered to be worth 30 of
  salary (when comparing call packages)
• Congregations may provide furnishings and/or
  utilities allowance that is treated as housing
  allowance
• Congregations may provide equity allowance (synod
  guidelines typically 1-3) Deferred income held
  in investment account, taxable upon distribution

14
Example A pastor earns an annual salary of
42,000 and designates 12,000 as housing
allowance in January. When the pastor totals all
receipts on housing at the end of the year, the
actual amount spent on housing was 10,500.How
much can the pastor exclude from taxable income
as non-taxable housing allowance?
Answer 10,500, the smaller of the designated
amount or the actual.
15
Social Security Allowance

• Employees of a business are responsible for FICA
  tax (Federal Income Contribution Act). Normally
  the employer pays 50 and the employee pays 50.
  In 2007 the rate was 12.4.
• Pastors are self-employed for Social Security
  purposes and are required to pay 15.3 SECA tax
  (Self-Employment Contributions Act) on full
  salary (including amounts designated as housing
  allowance).

16
SECA Allowance

• Many synod guidelines suggest a minimum of 50
  7.65 (employers portion) some pay the full
  amount.
• Whatever is paid to you is included in your total
  defined compensation.
• The actual calculation of SECA tax due is done on
  Schedule SE (more later).

17
DEFINED COMPENSATION

• Base salary (taxable amount)
• Housing allowance (non-taxable amount)
• SECA allowance paid to you
• Total Defined Compensation
• For purposes of calculating benefits

18
Other Income

• Interest and dividend income
• Fees received for weddings, funerals, etc. Check
  congregational policy. Consider carefully.
• Bonuses Christmas gifts that are collected by
  congregation-wide solicitation

19
Cash Compensation

• Salary 42,000
• Housing Allowance (12,000)
• Taxable salary 30,000
• Set aside for taxes ( 7,500)
• Usable Cash 22,500

Spent on housing
Food, clothing, entertainment, student loan pmts,
car pmts, charity, etc.
20
Compensation - BENEFITS

• Medical Insurance coverage in the ELCA plan for
  pastor or pastor and family
• Pension Plan 10 to 12 of defined compensation
  contributed by congregations your additional
  pre-tax contributions are tax-deferred
• Vacation 4 weeks per year, incl 4 Sundays
• Other days sick leave, maternity/parental
  leave, continuing education days (2 weeks, incl 2
  Sundays), sabbatical policy (min. 3 months after
  7 years)

21
Cost of Benefits

• Very helpful calculators at
• https//www.elcabop.org/calculators
• Defined Compensation Calculator
• You input Base Salary of 30,000
• You input Housing Allowance of 12,000
• Calculated SECA of 2,800
• Calculated Defined Compensation of 44,800

22
Cost of Benefits

• Benefits Contribution Calculator
• Input Defined Compensation and make choices for
  benefit levels
• Single coverage, 10 pension, Lower Susquehanna
  means benefits cost the cong 11,247/yr
• Family coverage, 12 pension, Lower Susquehanna
  means benefits cost the cong 20,439

23
Compensation Package

• Most congregations have a bottom line amount in
  mind for the cost of the pastor.
• Use the calculators to move money between line
  items.

24
Examples

• Medical Member only 4,632
• Pension Plan 10 4,008
• Other (Disability, etc) 1,282
• Total Benefits 9,922
• SECA 7.65 2,848
• Compensation Cash 37,230
• Salary Package 50,000

• 11,592 Medical Family
• 4,001 Pension Plan 12
• 1,067 Other
• 16,660 Total Benefits
• 4,424 SECA 15.3
• 28,916 Compensation - Cash
• 50,000 Salary Package

25
Reimbursed Expenses

• Travel
• Reimbursement of actual business mileage
  (commuting mileage is not included) OR
• Estimated auto allowance agreed on in advance
  compare with actual mileage and settle account at
  end of year
• Either way, keep a log of daily mileage!
• Receipts for other travel expenses (parking,
  tolls)
• Moving Expenses

26
Reimbursed Expenses

• Continuing Education
• Minimum 50 Contact Hours per year, report to
  Bishop annually
• Annual amount (minimum 700) cumulative for
  specified number of years
• Continuing Education Covenant with Congregation
• Publications
• Annual amount for books and periodicals (minimum
  100)

27
Reimbursed Expenses

• Official MeetingsCosts related to attending
  Synod and conference meetings, area ministers
  association, etc.
• EntertainmentCosts related to meals with
  business colleagues or parishioners. Consider
  carefully.
• Supply pastors for Sundays away from parish or
  preachers on special occasions (Homecoming, Rally
  Day)

28
CLERGY TAXES

• www.irs.gov
• Publication 517 Social Security and Other
  Information for Members of the Clergy Religious
  Workers
• http//www.elca.org/treasurer/congregations/index.
  html

29
CLERGY TAXES

• BASIC RULE
• Clergy are considered EMPLOYEES for Federal and
  State Income Tax purposes (pay income taxes)
• and SELF-EMPLOYED for Social Security purposes
  (pay self-employment tax)
• Form 1040 is used to remit Federal Income tax and
  SECA tax

30
Understanding Tax Liability

• The tax form is organized as follows
• Income
• - Deductions from income
• Adjusted Gross Income (line 37)
• - Deductions and Exemptions
• Taxable Income (line 43)
• Tax Liability (line 63)
• - Tax payments during year (line 72)
• Tax owed or refunded (line 73 or 76)
• (write a check or receive a check)

31
Getting started for first call

• 1. Determine your 2007 tax liability (line 63 on
  Form 1040)
• 2. Estimate your 2008 tax liability using the
  2007 forms and rates
• Amount to be reported on W-2
• Taxable salary 2008 30,000
• Employers SECA 2,800
• 2008 W-2 Box 1 32,800
• Call begins July 1, so use 50 16,400

32
Estimated Tax Liability

• The law requires that a taxpayer pay in during
  the year the smaller of
• 90 of the current years tax liability OR
• 100 of the previous years tax liability
• Otherwise, the taxpayer is subject to an
  underpayment penalty

33
An Example

• Calculated tax liability (line 63) for 2007 is
  125
• Estimated tax liability for 2008 3,423
• Minimum required payment during the year of 2008
  is smaller of
• 90 of 2008 3,081
• or 100 of 2007 125

34
Managing 2008 taxes in 2008

• Amt owed for 2008 is 3,423 or 570.50 per month
  for 6 months of call
• Set aside at least this much every month in a
  savings account consider Mission Investment
  Fund for this
• Make an estimated payment of 125 on Sept 15,
  2008 (due date of first estimated tax payment)
  Write a check to the IRS on April 15, 2009 for
  3,298 (3,423 - 125)
• OR Make 2 estimated payments to the IRS for
  1,711.50 each.

35
Managing 2009 Taxes

• In 2009, you will need to make estimated tax
  payments during the year to pay in the required
  amount
• Estimated tax payments are made in 4 equal
  installments on April 15, June 15, Sept 15 and
  Jan 15
• Download the estimated tax voucher (1040ES) at
  www.irs.gov

36
Tax Quiz

• Jezebel accepts a call to Land of Canaan Lutheran
  Church, is ordained on July 1, 2008, and begins
  serving on the same day.
• Her compensation package says she will receive a
  total annual amount of 45,000, of which 9,000
  has been designated by the congregation as
  housing allowance.
• 1. What should Jezebel do with respect to her
  housing allowance and compensation package?

Answer Estimate her eligible housing allowances
for 2008. Get the amount approved at the
congregational council meeting in July 2008.
37

• Jezebel attended the Senior Seminar, so she
  understands the basics of clergy taxes. She
  determined her 2007 tax liability was 250 and
  estimates her 2008 tax liability at 3,600.
• 2. How much should Jezebel set aside each month
  as taxes?
• 3. What is the minimum amount Jezebel must pay to
  the IRS during 2008? When?

Answer 2 600 (3,600/6 mos of call) Answer 3
125 (smaller of 125 2007 liability or 90 of
3,600 2008 est) on Sept 15 (first pmt date after
start call)
38

• 4. Jezebel had estimated housing expenses for
  July-Dec at 4,000. At the end of 2008, Jezebel
  calculates she spent 3,500 on housing expenses.
  What effect does this have on the amount to be
  reported on line 7 of Form 1040?

Answer 500 Excess allowance will have to be
added to amount reported as income
39

• Jezebel completes her 2008 Form 1040 and
  calculates her final tax liability of 3,850.
  (She had estimated a tax liability of 3,600.)
• 5. Does she owe any underpayment penalty because
  she underestimated the amount of her 2008 tax
  liability?
• 6. How much does she owe in taxes and by when?

Answer 5 If she paid in 125 (100 of 2007
liability), no penalty. Answer 6 3,725
(3,850 - 125) on April 15.
40

• Jezebel estimates her 2009 tax liability will be
  10,000.
• 7. Does Jezebel owe payments during 2009? How
  much and when?

Answer Owes smaller of 100 2008 liability
(3,850) or 90 of 2009 liability (9,000).
Minimum payments are 962.50 on April 15, June
15, Sept 15, 2009 and Jan 15, 2010 (3,850/4). Be
sure to set aside 833.33 per month to pay
taxes(10,000/12), since a payment of 6,150 will
be due April 15, 2010 (10,000-3,850).
41
My best advice

• Ask clergy colleagues in the area to recommend a
  CPA who has worked with clergy taxes
• Be familiar enough with clergy taxes to have
  reasonable confidence in what the CPA is doing on
  your behalf
• Keep mstevens_at_Ltsg.edu in your contact list