By Tom Burbrink, Kim Robinette, and Karen Isaacs
People of all stripes have difficulty with personal finances, but it can be even more challenging for ministers. A minister’s life is an open book; his salary might be public knowledge. When a minister struggles with personal finances, it impacts his effectiveness and can even cause him to leave the pulpit.
Some of the best ministers are terrible at handling their personal finances. Contributing factors include:
- A lack of financial training in seminary
- Absence of teaching on how to keep simple records of ministry expenses
- An unavailability of people with whom to discuss money problems and concerns
As a result, ministers commonly face these money-related issues:
- Many fail to plan for their long-term financial future.
- A significant number have less than $10,000 saved for retirement.
- Many have very little, or nothing, in college savings for their children.
- Many have no personal savings.
The following ideas can help churches ease their ministers’ financial stresses and struggles.
Churches are not required to withhold taxes from a minister’s paycheck, and many don’t. When that’s the case, ministers are left to make quarterly tax payments. But ministers may not understand how much to withhold; many underpay quarterly deposits or fail to make deposits at all. Churches that do withhold tax monies for their ministers sometimes fail to withhold enough. Every tax season, many ministers receive shocking and unexpected news: they owe thousands of dollars to the Internal Revenue Service!
The minister or the person handling the church payroll—or both—needs to work to make sure adequate estimated tax payments (federal, state, and local) are being made. If you need guidance, seek advice from a qualified ministerial tax preparer.
The structure of a minister’s compensation package has a direct bearing on taxes owed.
Housing allowance: Failing to designate an adequate amount for the minister’s housing allowance can result in a costly tax error. The housing allowance cannot exceed the fair rental value of the residence, whether the minister owns, rents, or lives in a parsonage. (Follow the guidelines outlined in IRS Publication 517.)
The church should allow the minister to determine the amount of housing allowance designated.
The U.S. Tax Court decision in a case involving Rick Warren from 2000 determined that 100 percent of a minister’s compensation can be designated as housing allowance. The housing allowance designations must be recorded in the church board minutes, and the housing allowance can be changed at any time, but it must be changed from the current date forward (and not retroactively). In other words, “before the payment is made.” [As with other important financial decisions, first consult a CPA, the IRS, or a tax attorney.]
Parsonage vs. housing allowance: We recommend that churches provide a housing allowance rather than a parsonage.
Churches may think it’s a good idea to provide their ministers with housing, including utilities, but a minister who lives in a parsonage will have no home of their own at retirement. At that point, the minister must purchase a home or pay rent for the remainder of their life. As a part of long-term financial planning, home ownership is essential.
If your church provides a parsonage, we recommend you use the property for some other purpose or sell it so that the minister can start acquiring equity in a home. (It’s possible the minister would want to buy the parsonage.)
Nontaxable Employee Benefits
Health insurance is a complex issue that, depending on how it is handled, can result in tax savings or cause hundreds of dollars in “unnecessary” taxes. Decisions can affect whether the minister’s health insurance premium is taxable or not.
To ensure this aspect of the minister’s compensation is handled to the best advantage taxwise, seek advice from a qualified tax preparer.
Life insurance/disability insurance: As an employee of the church, a minister can have disability insurance and up to $50,000 of term life insurance as nontaxable benefits.
Retirement Contributions: One-third of all ministers have less than $10,000 set aside for retirement.
Many ministers have exempted out of Social Security, and those folks should be contributing increased amounts to their retirement funds. Whatever the case, many ministers will likely need to continue working longer than they intended.
Various retirement plans—403(b), 401(k), IRA, Christian Church Pension Plan, and others—have different tax advantages. Using the wrong type of retirement account can be costly.
How much is your church contributing toward the ministers’ retirement? Which type of retirement plan is being used? How much is being saved for retirement? Churches and ministers should seek counsel from a professional financial planner for the best advice for their long-term future.
The church should reimburse the minister for job-related expenses. The only way a church can receive the full tax benefit for expenses is for it to reimburse the minister for miles driven, books, cell phone, Internet, and other ministry-related expenses. Such reimbursements require documentation of miles driven and all other expenses (mileage log, receipts, etc.). An expense allowance that requires no documentation is of no help taxwise.
Business records are very important. Whether records are kept in a logbook, , or computer, consistent and habitual—that is, daily—recording of mileage and expenses is the key.
Church leadership needs to make sure the minister understands the importance of this and how to keep simple, but accurate, records.
Tax Return Preparation
Ministers are taxed differently than other professionals. An incorrectly prepared tax return can be very costly.
- Does the minister’s spouse also work? How does that affect the couple’s tax return? Should the minister’s compensation be reevaluated?
- Does the minister have a second job? Is that necessary? Should the minister’s compensation be reevaluated?
- Is the minister comfortable discussing personal finances with someone in the congregation? Can the church help facilitate discussions between the minister and an outside person with financial expertise?
Ministers who are not skilled money managers may ultimately leave preaching for a higher-paying career. The church should offer to pay a financial counselor to work with a minister who struggles in this area.
The Center for Church Leadership (CCL) received a grant from the Eli Lilly Foundation to work with many leading churches and well-known ministers to reduce the number of ministers leaving full-time preaching. Learn more about CCL at www.centerforchurchleadership.org.
Tom Burbrink, Kim Robinette, and Karen Isaacs work for Burbrink Financial Services, Grayson, Kentucky. The company, started in 1978, specializes in services to churches and ministers. The company’s website is burbrink.com. Contact Tom at firstname.lastname@example.org.