Many churches have already completed their budget process for 2011 while others are still working on it. Chances are that your church has not officially adopted the budget yet, so this post could still be helpful to you.
Few bivocational ministers are paid well. Some churches simply won't pay the pastor what he or she is worth even though they are capable of doing better, but I find many churches want to pay their bivocational pastor more and do not have the funds to do so. There are ways for a church to increase the true salary of the pastor without it costing them any more money to do so. Let me say at the outset that I am not a financial advisor and my recommendations should be verified with your tax person.
The greatest benefit a church can provide its minister is a housing allowance. A housing allowance must be set up correctly to be valid, but it is not difficult to do so. The pastor estimates what it will cost to provide housing for the year and presents that to the church. This estimate should include rent or mortgage payments, utilities, repairs, insurance, taxes, maintenance, furniture, and any other cost the minister believes he or she will incur during the coming year that is associated with the home. If you want to keep your receipts I understand you can even include your cleaning supplies. That amount must be designated by the church IN ADVANCE for the allowance to be valid. This designation can be done as a line item in the budget or by having a statement to the effect in the official minutes of the church. In addition, if the minister files a long form the mortgage principle and taxes can still be deducted giving you a dual deduction. That mortgage allowance will not be subject to federal taxes although you still have to pay Social Security taxes on that amount. You should also know that if you do not actually use the estimated amount you must pay taxes on the difference,and if you exceed your estimate you cannot claim the additional amount at the end of the year. It must be designated in advance. As you can see, this can add a substantial amount to the pastor's income without any increase in salary from the church. I have used the housing allowance throughout my ministry and have saved thousands of dollars. Word is that the current administration in Washington is looking at eliminating this benefit so I don't know how long it will be available to ministers, but it is certainly worth doing in 2011.
A second benefit is to provide the minister with a medical flexible spending account (FSA). Again, this money is deducted from the minister's salary before taxes and is based upon his or her estimate of what the out-of-pocket medical expenses will be for the upcoming year. When the minister spends money on a prescription or doctor visit or some other medical procedure they submit a statement to the church who then reimburses them from the FSA for the amount they spent. The amount in the FSA is the amount the minister has estimated he or she will need. It is important to be careful with this estimate because if you do not use all that money it is lost to you. The first year I had an FSA I had to get new glasses and prescription sunglasses at the end of the year to use up the amount I had in my account. It's the first time in my life I had prescription sunglasses. This is a little trickier than the housing allowance so I would suggest the church get advice from a tax consultant to be sure to properly establish the FSA. There have been changes in the program for 2011 due to Obamacare, so it will be important to understand those changes. However, this is another good way for the minister to save money on taxes which adds to the value of his or her salary package, and it doesn't cost the church a dime.
The third benefit I will mention is reimbursable expenses. Ministers often have out-of-pocket expenses related to their ministries. These expenses are for the benefit of the church, and the church should reimburse the minister for them. Such expenses can include things such as ministry related mileage, ministry related books and magazines, convention expenses, continuing education, hospitality, and other expenses that are incurred for the benefit of the church. When I was a bivocational pastor I received $400 a year for books, $300 a year for convention expenses, and another $300 a year for continuing education. Some churches make the mistake of including these in the pastor's salary, but that makes them taxable. If the minister is reimbursed for actual expenses the money is not taxable. Again, the minister can save a few hundred dollars a year on taxes with a properly designed reimbursable plan with no extra cost to the church.
Many churches are struggling financially during these difficult times. As a result I am being told by a lot of pastors that they are not receiving salary increases this year, and in some cases they didn't receive one last year either. By including just these three items in the pastor's salary package a church can add several hundreds (even thousands) of dollars to the pastor's net income without incurring any additional cost to the church. Again, talk to a tax professional about properly setting these up to ensure the are done correctly. It will be well worth your time to do so.
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