Compensation Planning

I have a friend who often said “I love teaching so much that I would still do it even if I didn’t get paid.” I’ll bet that his employer loved the passion and enthusiasm my friend brought to his job each day. I pray that every minister and church employee has the same passion and enthusiasm for the ministry—I suspect most do!

However, to be fair, ethical, and comply with federal and state laws, we should pay employees for their dedicated service.

The apostle Paul reminds us to “respect those who labor among you and have charge of you in the Lord and admonish you; esteem them very highly in love because of their work.” I Thessalonians 5:12-13

One way to show respect for our spiritual leaders is through the wages that they receive. The goal of compensation planning is to provide your ministry staff with a fair wage that adequately compensates them for the services they provide the organization.

There are two components to a compensation package: wages & benefits.

• The wages is the cash component that includes the minister’s salary, housing allowance, and any other cash components like a car or phone allowance, or an additional amount to cover social security taxes.
• The benefits component includes things like retirement contributions, health insurance and life insurance.

While the cash component is the primary driver in the pay package, churches can provide tremendous value to their staff by not neglecting the benefits component. Further, how a compensation package is structured can have significant tax savings for your employees.

Here are some best practices to keep in mind as you consider your compensation planning practices.

Document all Compensation Packages

In order to ensure that all employees are clear about their wages, benefits and total compensation, I suggest providing a written document that summarizes each employee’s compensation package. This summary can be provided annually. This document can be reviewed and approved by the board at the beginning of the year or whenever changes to the employee’s wages are made. A written compensation package will help reduce any confusion or conflict and provide some accountability over payroll.

Case Study: Upon hiring their pastor, the governing board stated that the church would provide health insurance. However, no details were provided. Subsequently, the pastor signed up for medical, dental and vision insurance. When the pastor submitted the monthly insurance premiums and a recent deductible for an office visit for reimbursement, he was surprised when the board rejected his request and said it exceeded their verbal offer. Without a detailed, written compensation package, the Pastor thought some expenses were an appropriate part of his benefits package that the board did not.

Tip: A written compensation package will help reduce confusion and conflict.

Benchmark your compensation package with other churches

There are several resources that can help you determine what a fair wage is for specific roles and positions in your church. One resource is the annual Compensation Handbook for Church Staff, by Richard Hammar. Gathering research from churches across the nation, the handbook provides compensation statistics by church size, total revenue, geographic location, years of service and education for many church staff positions. Using this research, church boards can identify comparable wage data when reviewing their own compensation structures.

Reduce your employee’s tax liabilities by offering non-taxable fringe benefits

Here are some types of fringe benefits that are excluded from taxable income, if handled appropriately:

De Minimis Gifts of Tangible Personal Property

The IRS allows occasional gifts to employees of de minimis tangible personal property to be excluded from income. This would include a gift of a turkey or fruitcake during the holidays. The IRS doesn’t put a value on what is considered de minimis, but it would seem reasonable, that while a turkey is excludable from income, an expensive watch would not be excludable.

Achievement Awards

Some employers give achievement awards to employees, such as length of service or safety awards. Awards that consist of tangible personal property (other than cash or gift certificates) can be excluded from income. The amount excluded can be up to $1,600 per recipient, if the organization has a “qualified plan.”

A qualified plan includes giving the award as part of an established written plan or program that does not favor highly compensated employees [those earning more than $120,000 in 2015]. Further, the award can’t be offered more often than every 5 years.

Health Savings Account Contributions

Health Savings Accounts contributions made by the employer on behalf of employees are excludable for income purposes. Maximum dollar limits apply, which are $3,350 for an individual and $6,750 for family coverage (2016 tax year). These limits can be increased by $1,000 if the qualified individual is 55 or older during the year.

Tip: For more ideas and specific requirements, see IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

Find other ways to provide value to your employees. Many of these can be low-cost, but they can help your employees feel valued and increase morale. Consider flex time, telecommuting, free coffee and snacks in the office, or offering wellness benefits like a gym membership.

For more ideas, read this Fast Company article, “Low-Cost Ways to Show Employees They’re Highly Valued.”