Is it okay to give our pastor more money?

In many churches, pastors are more than just spiritual leaders; they are also significant executives who assist in setting the ministry's vision, growth, and everyday operations. Like any other significant executive, pastors can obtain bonuses, which are extra payments on top of their normal compensation. These bonuses are given to thank them for doing a great job, completing financial goals, or hitting important milestones. But church leaders and boards need to be vigilant when it comes to pastor bonuses to make sure that these payments fulfill IRS rules, nonprofit governance standards, and best practices for paying workers.

What does it mean to get a pastor bonus?

A pastor bonus is extra money that a pastor earns in addition to their agreed-upon salary or housing allowance. Bonuses can be one-time payments or awards that are given out on a regular basis. They could be connected to:

• Meeting or going above and beyond what the ministry wants
• Holidays or special occasions
• Reviews or tests of how well someone did
• Unplanned requests for the ministry or extra money flowing in

The IRS and the Law on Bonuses for Pastors

• Reasonableness: Pay must be fair compared to what other churches pay.
• Documentation: The governing body must approve bonuses and maintain track of them.
• Purpose of Nonprofit: Pay should be in keeping with the nonprofit's goal.
• W-2 Form Reporting: You must report bonuses since they are taxable income.
• Self-Employment Tax: Bonuses are subject to self-employment tax unless they are exempt.

Best Ways to Govern

• Make clear guidelines for bonuses.
• Get permission from the board or the compensation committee.
• Look at the benefits of other churches that are similar to yours.
• Put bonus terms in contracts.
• Keep careful records of payments and approvals.

Effects on Taxes

Churches can deduct bonuses from their taxes if they are reasonable and documented. Pastors: You have to record bonuses on your tax return since they are taxable. Interaction with Housing Allowance: Bonuses don't impact how much housing allowance you get.

How bonuses fit into a plan for paying employees

Add bonuses to your wages, housing allowance, and other advantages. Use bonuses appropriately to encourage and reward. Don't just give your pastor bonuses to pay him.

What Could Go Wrong with Bonuses

• IRS checks and penalties.
• Problems with how things are run.
• Taxes that affect churches and their leaders.
• A damaged reputation.

Tier 3: Help with the Pastor Support Plan

• Every three months, pay is checked.
• Getting help from an expert is really important.
• Planning taxes and money for pastors.
• Help with rules and paperwork.

What to Do

• Make rules for bonuses and discuss them.
• Check for reasonableness by using data that is similar.
• Get the board's permission.
• Include bonuses in contracts.
• Report bonuses the appropriate way.
• Review your rules often.

Questions That Are Commonly Asked

• You can't say that bonuses are "housing allowance."
• Taxes apply to all bonuses.
• If you send in the paperwork on time, you can obtain bonuses that are backdated.
• Companies should only give bonuses when they can afford to.

Disclaimer of Legal Responsibility

This blog post is just for information and is not legal advice. If you need help with pastor bonuses or compensation, please consult a lawyer.

Links Inside

• Legal Plan for Paying Pastors
• A report on the Church's legal audit and compliance
• More information on the Pastor Support Plan

Other Sites' Links

• IRS Executive Compensation Guidance: https://www.irs.gov/charities-non-profits/excess-benefit-transactions
• ECFA Compensation Best Practices: https://www.ecfa.org/Content/Compensation
• Christianity Today on Pastor Pay: https://www.christianitytoday.com/search/?q=bonus+pastor+compensation