Do I Need a Lawyer to Set Up My Pay?

Properly organizing pastoral pay is an important but sometimes misunderstood part of being a ministry leader. A lot of pastors and congregations want to know if they require a lawyer to set up their salary. Yes, definitely, especially since there are so many complicated tax laws, nonprofit rules, employment classifications, and church governance difficulties that affect how much pastors get paid. Your pay package probably includes more than simply a paycheck. It usually contains a mix of income, housing allowance, benefits, reimbursements, and sometimes bonuses or deferred pay. Each part has its own legal and tax effects. If you make mistakes when structuring, the IRS may audit your church, put your tax-exempt status at risk, or make you personally liable. This in-depth article explains why it's important to hire a lawyer to help you set up pastoral pay, what mistakes to avoid, how a lawyer can protect you and your ministry, and how to make sure your pay package is fair and legal.

Why It's Important to Structure Pay Correctly

The structure of pay has a direct effect on:

• Tax Treatment and Compliance: Pastors get specific tax breaks, like the home allowance exclusion, but they come with strict requirements. Mistakes might lead to taxes and fines.
• Employment Classification: It's important to correctly classify employees and independent contractors for tax withholding, benefits, and following labor laws.
• Nonprofit Governance: To keep their 501(c)(3) status, churches must follow standards around fair pay and reporting. Too much or poorly documented pay risks IRS checks.
• Legal Responsibility: Pastors may be personally responsible or risk wrongful termination claims if there are no clear, written agreements.
• Financial Responsibility and Openness: A well-structured pay system shows that you are responsible, which fosters trust with contributors and congregations.

Understanding the Parts of Pastoral Compensation

1. Pay: The base compensation is simple, but it needs to be fair given the church's size, location, and budget. Paying too much could get you in trouble with the IRS, while paying too little could hurt the pastor's health.
2. Allowance for Housing: A very important benefit that lets pastors leave out part of their pay for housing expenditures from federal income tax. Some important rules are:
• The church board must officially name them in writing.
• Only reasonable costs, like rent, mortgage, utilities, and maintenance, are allowed.
• Needs careful record-keeping and reporting.
• Incorrect classification or missing records might lead to IRS audits and back taxes.
3. Good Things: Includes coverage for health care, retirement, life, and disability. Both the church and the pastor have to follow the law and pay taxes on each.
4. Payments Back: To avoid being taxed as income, travel, ministry expenses, and professional development reimbursements should be documented and follow IRS accountable plan rules.
5. Bonuses and Pay That Is Deferred: Any incentive payments or delayed agreements need thorough legal and tax planning to make sure they are genuine, lawful, and clear.

Things That Can Go Wrong with Pay Without a Lawyer

• Misclassifying Pastors or Staff: Calling employees contractors or the other way around might lead to expensive fines.
• Improper Housing Allowance Designation: If you don't follow IRS guidelines, you could be taxed on money you already got.
• Vague or Missing Employment Agreements: When contracts aren't explicit, disagreements about obligations, salary, or firing get worse.
• Ignoring Reasonableness Standards: Paying too much will hurt your reputation and make you lose your tax-exempt status.
• Not Enough Documentation: Not having enough records makes it harder to follow the rules during audits.

How a Lawyer Can Help You Set Up Your Pay

• Personalized Pay Agreements: Church law attorneys write clear, enforceable contracts that take into account your church's specific needs and the laws that apply to it. Agreements encompass pay, housing allowance, benefits, tasks, and how to end the agreement.
• IRS and Tax Compliance: Lawyers make ensuring that all parts follow federal tax laws, such as rules about housing allowances, self-employment taxes, and reporting requirements.
• Guidance on Job Classification: They help you figure out the right categories under IRS and labor rules, which lowers the risk of penalties for misclassification.
• Aligning Governance in Nonprofits: Lawyers help make sure that pay is in line with state regulations and best practices for nonprofit corporations, which protects tax-exempt status.
• Reducing Risk: Legal advice finds and fixes liability problems by writing protections like indemnification clauses and ways to settle disputes.

Examples from the Real World

A pastor at a church was audited by the IRS because they didn't have proof of a housing allowance. With the help of a lawyer, they set up allowances and worked out fines. Another ministry saved thousands of dollars by setting up retirement benefits in a way that made them eligible for tax breaks. A pastor's employment agreement made clear their duties and salary, which kept them from having to file a costly wrongful termination lawsuit.

The Part of Church Law and Strategy

Regan runs Church Law and Strategy, where we focus on the legislation of pastoral compensation. Our subscription levels, especially the FOUNDATION PLUS PLAN, include legal audits, custom contract writing, and continuous support to keep pastors and congregations safe.

What to Do if You're Changing or Setting Up Pay

• Get a Church Law Attorney on board early: Get legal advice before difficulties come up.
• Look over current compensation agreements to find any gaps or concerns.
• Figure out a fair amount of pay based on the size of the church, its resources, and what is normal in the business.
• Set aside a housing allowance: Document properly with contracts and board resolutions.
• Make the rules for benefits and reimbursements clear: Follow the regulations for IRS accountable plans.
• Set up strong documentation and recordkeeping so you're ready for audits.
• Pay structures should be reviewed and updated on a regular basis: Follow the rules when they change.

A Checklist of the Main Points

• Talk to a lawyer who knows a lot about church law.
• Make sure your pay agreements are clear and tailored to your needs.
• Make sure to properly designate and keep records of housing allowances.
• Put them in the right job category.
• Make sure pay is in line with IRS and nonprofit governance criteria.
• Keep good records of your finances and taxes.
• Plan for regular reviews of the law.

Final Thoughts

Structuring pay for pastors is a difficult legal and financial job that needs a lot of knowledge. A good church law attorney makes sure that your ministry follows the rules, keeps its tax-exempt status, and protects you from personal liability. Pastors may focus on their calling and make sure their financial future is safe by getting professional help. Church Law and Strategy is dedicated to assisting congregations and pastors create fair, legal, and strategic pay packages that honor both the law and the church.

Links Inside

• Find out more about the legal method for pastoral recompense.
• Look into church tax strategy consulting.
• Learn about church compliance and legal audit reports.

Links to Other Sites

• IRS guidance on Minister Compensation
• ECFA resource on Pastoral Pay and Benefits
• Christianity Today article on Structuring Pastoral Compensation

This blog article is only for informational purposes and does not give legal advice. Reading this material does not make you a client of Church Law and Strategy or its representatives. Please talk to a professional lawyer for particular legal counsel that is right for your church or organization.