By Gregg Boll, Director of Missions

In last month’s newsletter, we started the conversation about pastors, or anyone for that
matter, preparing for retirement. Since not all pastors plan to retire, we said the article
could be titled, “Are You Living and Planning Today in Such a Way that is Preparing You
Financially for the Final Chapter of Your Life?” Even if you don’t plan to retire, (1) you
may someday desire to work at a slower pace, (2) you may not be as desirable of an
employee, (3) you may have unforeseen health issues that affect your ability to work, (4)
and regardless of what you do, you will need a continuing stream of income throughout
the final chapter of your life. The basic message of last month’s article was “Have a
Plan!” A good plan today is better than a great plan sometime in the future.

Other Issues That Impact Our Ability To Retire

Pastor’s Pay – Ok, I’ll just say it. Most pastors are underpaid. Not all, but most. I’ve
never met a pastor who got into pastoring thinking they would get rich. It’s a calling.
They feel compelled by God to do what they do. If you compare pastor’s salaries against
workers from the private or governmental sectors of the economy with similar education
and years of experience, the pastor’s salary is substantially less. Now, I’m not assigning
any blame as to why this is true but let me share a few reasons pastors are underpaid.
First, church members don’t understand the tax laws with relation to ministers/pastors.
Let me explain. Ministers are considered self-employed regarding Social Security taxes
and are considered employees of the church with regard to Federal and State taxes. So,
regarding Social Security taxes, as self-employed, pastors pay all 15.3%+ percent on their
earnings rather than 7.6%, like most employees who work for a company who pays half
of their social security. Let’s use a round figure salary of $70,000/yr. The minister must
pay $10,500 in Social Security taxes while most people pay only $5,250 and this is
before we’ve even paid State and Federal income tax. So, right out of the gate, the
pastor’s salary has been reduced over $5,000 compared to the secularly employed person.

There are precious few deductions for the minister to take, too. Besides the normal
deductions such the child-tax credit deduction, ministers really only have a few
deductions: (1) professional ministerial expenses for money spent out of the pastor’s
pocket to do ministry, and (2) the housing allowance. The housing allowance only helps
to the extent you spend the money on your home allotted in the housing allowance. Any
unused portion of the housing allowance simply gets added back to the bottom line of
taxable income. The Affordable Care Act took away our paid medical expense
deduction. Up until 2012, a church could designate a portion of the pastor’s salary as a
medical insurance deduction, thus reducing his taxable income by the amount of his
insurance costs. This was huge, since few churches pay their pastor’s health insurance
costs for them, or any portion of it. If your health insurance was $7,500/yr., taxed at a
normal tax rate of 20%, there’s another $1500 dollars of the pastor’s salary that he must
pay out of pocket, thus reducing his overall salary. Adding the $5,250 and the $1,500
you can see that the pastor’s salary is $6,750 less than their secularly employed
counterpart who makes the same gross income. Factor in that the private employee may
have a big portion of their healthcare insurance paid by their company, and the gap is
probably even wider between their salaries. Additionally, if the company puts some
money in a 401k Retirement Account for their employee and the church does not
contribute something to their pastor’s retirement then the gap grows wider, probably
approaching $10,000 per years difference in pay/benefits. If the pastor makes $10,000
less in salary and benefits compared to their privately employed friend, that is $400,000
dollars less income over a 40-year working career, not counting how that extra
$10,000/yr. would have grown exponentially if invested during that same 40-year career.

What To Do About It

I’m writing this for pastors so they can advocate for themselves if they’re being
underpaid, but I’m also writing this so that church personnel committees or others
entrusted with reviewing and setting their pastor’s salary will have this vital information.

1. Review and evaluate your pastor’s current salary yearly to make sure it’s fair and
competitive with other churches of similar size and budget. Use the following link
from Lifeway:
https://compstudy.lifeway.com/homepage.do;jsessionid=63693CAC1435C2851C8
or https://www.churchsalary.com/ using the salary calculator.
I intentionally said that it should be reviewed annually because of the onward and
upward march of inflation in recent years. I don’t want to insult anyone, but
churches and pastors must understand the corrosive power of inflation on your
standard of living and ministry capacity of your church. For example, let’s say
your combined take home pay is $100,000 dollars. If inflation is 7% for the year,
that means the real value of your salary is $93,000 by the end of the year. Or, put
another way, if it costs you $100,000 to live after paying all the bills, with 7%
inflation it will cost you $107,000 dollars for the same goods and services next
year.

2. Be sure the pastor’s salary is set using a “salary and benefits” approach rather than
a “lump sum” package approach. The lump sum approach is the most ungenerous,
unhelpful method for your pastor. In this approach, basically the church puts the
gross pay of the pastor into the budget and says, “Here’s your money, divide it up
and spend it the way you want to between your retirement, housing expenses, etc.”
The salary and benefits approach could save your pastor hundreds of thousands of
dollars over his entire career. While we are to give unto Caesar that which is
Caesar’s (taxes) we certainly shouldn’t give them a dime more than we are legally
obligated to, as good stewards. The salary and benefits method is necessary
because the pastor cannot legally claim a tax exemption unless the church
establishes it in their duly approved annual church budget. Work with your pastor
as to what is best for him, but here is an example of a “salary and benefits”
package in your annual church budget that will save your pastor $1,000’s of
dollars each year: Salary $50,000; Retirement $5,000; Housing Allowance
$10,000. This means that your pastor’s take home pay is $60,000, but he’s only
getting taxed on $50,000 plus the unused portion of the housing allowance.
You’re also helping him shield his $5,000 annual investment from taxes and
helping him establish the financial discipline of paying into a retirement account
(deferring taxes unless it’s a Roth IRA).

3. Also, work to pay your pastor for any professional ministerial expenses separately
in the budget, not under the salary portion of the budget. Professional Ministerial
Expenses are things such as mileage reimbursement, books and study materials,
trip costs for conventions, conferences etc. These items are all professional
ministerial expenses that the church should pay their pastor separately from their
salary for the cost of “doing ministry business” on behalf of the church.

4. One last little tip that could save you $1,000’s of dollars over the course of your
career is to consider using a faith-based retirement company like Guidestone. I
don’t get a dime for promoting them; the advantage for ordained ministers is that
we are classified by the I.R.S. as a Church Organization legally, so when you retire
and begin taking earnings from your retirement account, you can designate a
portion of those earnings as your usual housing allowance, thus saving on your tax
bill, even in retirement.

To discuss all of these things and more with regard to your or your pastor’s
retirement and salary structure go to Guidestone.org/Resources to schedule a
virtual appointment with a representative. Also, don’t hesitate to reach out to me
on these and many more ways to prepare for retirement, save money, establish a
trust, etc. I don’t have all of the answers, but I usually know someone who does.
BR-KC is here to help you start well, minister well, and finish well.