The Legal Risks of Paying Pastors Too Much or Too Little (And How to Fix It)

A healthy and successful ministry depends on paying pastors properly and adequately. But when churches with 2,500 to 10,000 members create pay packages, they have to deal with a lot of different issues at the same time, such as being responsible with money, following the law, and taking care of their pastors. Paying pastors too much or too little can put your church's purpose and leadership stability at danger in a big way, both legally and financially. This handbook talks about the complicated legal problems that can come up when you don't pay your pastor properly, shows how these problems can affect your ministry in the real world, and gives you strategic solutions to protect it. The information below is very similar to the full support that comes with the Tier 3: THE PASTOR SUPPORT PLAN.

Knowing the Legal Risks of Paying Pastors Too Much

Too Much Pay and IRS Attention

The IRS says that pastors and executives of tax-exempt groups must be paid "reasonable" amounts, not too much. Paying pastors too much might lead to:

• Loss of Tax-Exempt Status: If you pay someone too much, it could be seen as private inurement, which could put your church's tax-exempt status at risk.
• Excise Taxes and Penalties: The IRS can charge both the church and the pastor who receives the money too much for their work.
• Donor Backlash and Damage to Reputation: People may lose trust in donors and support for the church if they think they are getting too much money.
• Personal Liability for Board Members: Trustees who agree to pay too much may be personally responsible or face penalties.

Example from the Real World

An audit showed that a big church's senior pastor was paid a lot more than other similar churches, and there wasn't enough documentation to back up the salary level. As a result, the church lost its 501(c)(3) registration.

The Legal Risks of Not Paying Pastors Enough

Breaking the Wage and Hour Law

Paying pastors too little, putting them in the wrong job category, or not giving them the right benefits can put your church at risk of:

• Pastors can submit claims for unpaid pay, overtime, or benefits under state or federal statutes.
• Damage to the Ministry Continuity: Not paying enough could cause talented pastors to leave, which would damage the stability of the leadership and the congregation.
• Complaints Against Unfair Work Practices: Workers or volunteers can tell labor boards about wage infractions, which will lead to investigations.

Moral and Ethical Issues

Fair pay shows that your church cares about pastoral care and respects their spiritual leadership and personal health.

A Strategic Way to Fix Problems with Pastor Pay

1. Do Regular and Thorough Benchmarking of Pay: To set fair and competitive remuneration for pastors, use salary surveys from different denominations, nonprofit compensation databases, and data from your area. Make sure that benchmarking takes into account the size, location, pastor's duties, and experience of the church.
2. Make Sure Your Pay Policies Are Clear and Complete: Write out rules for salary ranges, housing allowances, benefits, bonuses, and how to get reimbursed for expenses. Policies should follow IRS guidelines and employment laws, and there should be a clear reason for the pay levels.
3. Set Up Separate Compensation Committees: To avoid conflicts of interest, give an independent board committee or compensation consultant the power to make decisions on pay. Make sure to write down everything that happens in meetings, discussions, and decisions so that there is a record of everything.
4. Keep Communication and Documentation Clear: To build trust and accountability, provide church leaders, board members, and other important people access to your remuneration schemes. Keep thorough records of pay agreements, board approvals, and statistics for benchmarking.
5. Review and Change Pay on a Regular Basis: Set up yearly reviews of pay based on how the church is growing, the state of the economy, and how well the pastor is doing. Be proactive about changing pay to reflect changes so that fairness and compliance are always maintained.

How THE PASTOR SUPPORT PLAN Improves Your Plan for Paying Executives

The PASTOR SUPPORT PLAN gives churches:

• Professional audits of pay and legal reviews that are specific to your church's situation.
• Consulting on governance and creating compensation policies that fit your needs.
• Planning for riches in the church, such as reviewing personal income taxes and coming up with ways to pay executives.
• Risk management initiatives help keep church leaders and the organization healthy.

In Conclusion

Balancing pastor pay protects your ministry and its future. Taking care of pastor pay properly lowers legal risks, honors pastoral leadership, and helps your church's mission and growth. Your church may develop a fair, open, and lawful compensation system by finding and fixing problems with your pay plan and working with the PASTOR SUPPORT PLAN.

Links Inside

• Templates for Executive Compensation Policies
• Programs for the Protection of Pastors
• Best Practices for Church Governance

Links to Other Sites

• IRS Guide on Reasonable Compensation
• National Association of Church Business Administration (NACBA)
• BoardSource on Executive Compensation

Disclaimer

This blog post is only for informational purposes and is not legal advice. Talk to a licensed lawyer for specialized help.