The Legal Problems with Paying a Pastor Too Much (or Too Little)
Oct 01, 2025Churches have a very important but frequently hard job to do: pay their pastors fairly. Pay must be carefully balanced so that it isn't too high, which might lead to IRS penalties and public skepticism, or too low, which could lead to pastor dissatisfaction and legal problems. If a church pays too much or too little, it could lose its tax-exempt status, its financial stability, and its ability to keep doing ministry. In this detailed guide, we talk about the legal and operational effects of paying pastors too little, the best ways to set fair and legal pay, and how Church Law and Strategy's tiered subscription plans—from THE STARTUP PLAN (Tier 1) to THE EXECUTIVE PLAN (Tier 4)—give churches of all sizes the tools they need to manage pastoral pay well.
Why It Is Important to Pay Pastors Fairly and Legally
The IRS says that churches and other nonprofits must pay their pastors a fair wage based on their tasks, expertise, and the size of the church. The IRS can audit you, fine you, and take away your tax-exempt status if you pay someone too much or don't have proof of it. Fair pay not only follows the law, but it also helps pastors stay in their jobs longer, boosts morale, and makes their ministries more effective.
The Legal Risks of Paying a Pastor Too Much
Transactions with Too Much Benefit and IRS Penalties
The IRS calls paying pastors too much an "excess benefit transaction" when it comes to nonprofits. This leads to intermediary sanctions that make the pastor and responsible others (such as board members) pay excise taxes. If the church breaks the law too many times or in a serious way, it could lose its tax-exempt status, which would hurt its finances.
Personal Responsibility of Board Members
Church leaders who approve exorbitant pay without doing their homework could be personally liable for breaching their fiduciary duties.
Damage to the Church's Reputation and the Trust of Its Donors
People may lose faith in a ministry and stop giving money if they think the pastor is making too much money. This could hurt long-term support for the organization.
What Happens When You Don't Pay a Pastor Enough
The Chance of Losing Good Leadership
Underpaying pastors can cause them to burn out, leave, and make it hard to find skilled leaders, which can throw off the ministry's operations.
The IRS Looks Closely at How You Pay People
If pastors get unreported fringe perks or housing allowances, the IRS may ask concerns about their pay if it is much less than fair market value.
Possible Lawsuits and Disagreements
Pastors can legally fight for pay that is less than what they are owed, which can lead to expensive lawsuits or severance negotiations.
How to Set Up Pastor Pay in the Best Way
Do Regular Benchmarking of Pay
Use pay surveys that are not connected to the church to find out what a fair salary is for a pastor depending on the size of the church, where it is located, and the tasks of the pastor.
Write Down Rules for Pay
Make sure that formal church policies spell out how much people will be paid, what benefits they will get, and how reviews will work.
Make Sure That the Housing Allowance Designation Is Clear and Follows the Rules
Set aside a housing allowance in official board resolutions, following IRS rules about how much money can be set aside and how to document it.
Write Out Detailed Job Contracts
Contracts should explicitly state the income, benefits, housing allowance, job duties, and conditions for ending the contract.
Review of Annual Pay
Add a review of pay to budgeting and governance meetings to account for inflation, church expansion, or changes in roles.
How Church Law and Strategy Help Pastors Follow the Rules About Pay
The Startup Plan (Tier 1) gives you basic legal advice, templates for employment contracts, and help with setting up your pay structure. The Foundation Plus Plan (Tier 2) adds full church legal audits, reports on how much to pay people, and protections for trademarks. The Pastor Support Plan (Tier 3) gives pastors detailed audits of their executive pay, priority legal access, insurance reviews, and a plan to protect their personal wealth. The Executive Plan (Tier 4) gives you a full-service legal relationship with white-glove care, strategic compensation planning, risk management, and personalized help with ministry growth.
To Sum Up
Keeping pastor pay within legal and moral limits protects your church from IRS fines, keeps donors' trust, and honors your pastoral leadership. Churches can create long-lasting compensation practices that help their ministries flourish by making clear rules, reviewing them often, and getting competent legal advice. Church Law and Strategy's tiered plans give churches the tools they need to handle pastoral pay well, from small groups in THE STARTUP PLAN to large ministries in THE EXECUTIVE PLAN. They also offer expert help at every stage.
This blog post is only for informational purposes and is not 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 legal advice that is specific to your church or organization.
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Find out more about the legal strategy for pastoral recompense.
Read our church's legal audit and compliance report.
Find out how to follow church HR and employment laws.
