What is "excessive" pay for Pastors and Church Staff?

When paying pastors and church staff, it's important to find a good balance between being fair and following the law. If a church pays its employees too much, it could lose its tax-exempt status and face serious consequences. This article explains the laws, how to figure out fair pay, the dangers of overpaying, and the best ways to run your church to protect it and its leaders.

The Law on Excessive Pay

IRS Definition and Requirements

The IRS uses "intermediate sanctions" to go after "excess benefit transactions," which are deals where insiders get paid more than what is justified. Churches need to make sure that pay is:

• Fair: Similar to what people in similar jobs at similar companies get.
• Good Faith Reliant: Backed up by the right data and procedures.
• Well-Documented: You need to keep records of board approvals, minutes, and contracts.

A lot of power and trust

Churches that use compensation studies, outside experts, or recommendations from their own denomination show good faith and lower their risk.

Figuring out fair pay

Setting a standard

Use wage guides from your denomination, like the National Association of Church Business Administration or the ECFA. Look at area labor statistics and compensation surveys for nonprofits.

Analysis of Roles

Look at the job description, the scope of leadership, the time commitment, and the credentials. Think about if you want to be full-time or part-time and how complicated the ministry is.

Parts of a compensation package

• Compensation: Base compensation that is in line with industry standards.
• Housing Allowance: IRS-approved help with housing costs.
• Bonuses: Fair rewards depending on performance.
• Health insurance, retirement programs, and reimbursements for expenses are some of the benefits.

Risks of Too Much Pay

IRS Penalties

• Excise Taxes: The beneficiary has to pay a 25% excise tax on the extra amount, and the responsible parties in the organization have to pay a 10% tax.
• Possible Loss of Exemption: If you break the rules too many times, you could lose it.

Actions taken to fix the problem:

• Getting back too much money.

Legal Risk

Lawsuits from unhappy contributors or members can hurt the church's reputation and the trust of its donors.

Ways to govern to stop too much pay

Independent Pay Committees

Separate from pastors and executives so that there are no conflicts of interest. Check pay on a regular basis.

Policies and procedures that are easy to understand

Written rules for pay that follow IRS and church rules. Approval workflows that have been written down.

Writing things down and being open

Minutes from board meetings, official decisions, and contracts that have been signed. Using compensation surveys from other companies as proof.

The Pastor Support Plan

The third tier's job in managing compensation.

Audits of Executive Pay Every Three Months

Thorough checks of pay packages to make sure they are in line with the law and to make them better.

Legal Consultation with Priority

Get expert help with difficult issues about pay.

The Pastoral Support Program

Help with tax preparation, wealth planning, and setting up compensation plans.

Managing Risk and Governance

Help writing policies, bylaws, and agreements about pay.

Disclaimer of Legal Responsibility

This blog post is not legal advice; it is just for information. Churches should talk to licensed lawyers to get advice that is specific to their needs.

Links

• Church Legal Audit and Compliance Report
• Pastoral Compensation Legal Strategy
• Pastor Support Plan Details

Links to Other Sites

• IRS Intermediate Sanctions Guidance: https://www.irs.gov/charities-non-profits/excess-benefit-transactions
• ECFA Compensation Resources: https://www.ecfa.org/Content/Compensation
• Nonprofit Compensation Benchmarking: https://www.nacubo.org/Research/Research-Reports/Compensation-Survey