2003 Shepherd's Conference, A Ministry of Grace Community Church 818.909.5530.  © 2003 All Rights Reserved. Grace Community Church. A CD, MP3, or tape cassette copy of this session can be obtained by going to www.shepherdsconference.org


Pastor or Prisoner-Your Choice

(Handout  --  Study Guide)

 

Avoiding the Potential Bondage of Personal Finance

James W. Rickard

Director of The Stewardship Services Foundation

 

 

 

In my 30 years working with pastors in the area of financial stewardship I know of more defaults from ministry due to financial indiscretion than moral indiscretion.  This workshop will focus on the issues I believe important to preserving and protecting the pastor’s financial reputation in his church and community.

 

            I.       The Church’s Responsibility to the Pastor

 

                     A.     His Pay Package

 

                     B.      Protecting His Integrity

 

            II.      The Pastor’s Responsibility to Model Stewardship

 

                     A.     His Personal Finances

 

                     B.      His Tax Obligation

 

                     C.      His Teaching Opportunity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SSF PASTOR’S SURVEY RESULTS

 

 

 

Not Reimbursed for Expenses by the Church                                                         35.2%

 

Average Ministry Miles per Year                                                                            10,844

 

Exempt from Social Security                                                                                  25.4%

 

Rent or Live in Church Owned Parsonage                                                              42.5%

 

Don’t Own a Home and Exempt from Social Security                                            9.6%

 

Spouse Works                                                                                                         54.6%

 

 

 

 

 

 

THE CHURCH’S RESPONSIBILITY TO THE PASTOR

 

 

LOVING YOUR PASTOR THROUGH HIS COMPENSATION PACKAGE

 

 

A.     The housing/parsonage allowance issue.  How and why?

 

 

B.           Is owning his own home an important consideration?  How can that be accomplished?

 

 

C.      Paying salaries based on a fair and livable wage. 

 

 

D.     What should the tax free fringe benefits include?

 

 

E.      Why does the church need to reimburse for all professional expenses?

 

 

F.      How should the pastor’s self-employment tax be handled?

 

 

G.     Why is it important for the pastor and his wife to attend other conferences?

 

 

H.        What should the pastor’s vacation package look like?

 

           

 

 

 

 

 

 

Text Box: Pastors should have a cash salary that meets the physical needs of the family independent of the wife having to work.In the middle 1960’s as a young accountant I began helping my pastor prepare his state and federal tax returns.  Needless to say I was surprised at his meager salary, lack of fringe benefits and his inability to provide for his future financially.  His family lived in a church owned parsonage totally controlled by the church; they couldn’t even paint a wall without committee approval.  It was a large farmhouse that was difficult to maintain and expensive to heat.  I can remember visiting that parsonage and finding his wife in tears over the frustration of living under those conditions.  I can remember thinking “this is not right”.  Little did I know how that experience would begin to sow the seeds for the Stewardship Services Foundation ministry.  A ministry that would allow me to devote my energies to counseling pastors regarding finances and teach church boards how to structure the pastors’ salary packages staying within the limits of IRS tax law.  As a result, in 1977 the Stewardship Services Foundation ministry was born.

            In this seminar I will attempt to discuss salary packages and their proper application in the budget process.  The most important issue when it comes to this subject is attitude, a proper understanding by the board as it relates to the salary package issue including the desire to meet the needs of the family in a fair and equitable way.  When a church calls a pastor (e.g., youth, music, visitation, senior, etc.) it is important to consider the following issues:

 

1.               A cash salary to meet the physical needs of the family independent of the wife having to work.  A good starting point would be to review his personal budget and build on it.

2.               Full family medical plan that provides adequate health insurance and protects the family and the church from a catastrophic illness or accident.  (tax free fringe benefit in most cases)

3.               Disability Insurance – cash replacement that provides income and protects the family and the church due to a disabling illness or accident.  (tax free fringe benefit)

4.               Retirement Plan – coupled with Social Security an amount that would give the pastor approximately 70% of his take home pay at retirement.  If he has opted out of Social Security the plan must be more aggressive to meet his needs.  I recommend the plan begin as early as possible with a minimum annual contribution of $2,000, more if he starts the plan after 40 years of age.  Pastors should not be in IRA’s.  They should be in a 403-b pension plan where the deposits are made by the church which exempts the amount from the Social Security Tax and makes the distributions eligible for the housing allowance upon retirement which would shelter it from Income Tax.

5.               Text Box: I have advised churches for over 22 years to get out of the parsonage businessLife Insurance - $100,000 of term life insurance with the wife as beneficiary – this protects the church and provides for the family upon a premature death.  The church can pay the premiums on the policy but only the premium on the first $50,000 is a tax-free fringe benefit.  The pastor should provide his own additional life insurance as needed.

6.               Professional Expense Reimbursement Fund – Professional expenses incurred while performing his duties (automobile mileage, conferences, entertainment, supplies, anything pertaining to his responsibilities) should be paid by the church.  In reality these expenses are incurred for the benefit of the church not the pastor.

7.               Housing/Parsonage Allowance – I have advised churches for over 25 years to get out of the parsonage business.  I think it is very important to get a pastor into his own home as soon as possible for many reasons. Retirement – owning a home at retirement is a key ingredient to retirement planning.  Security – for his family particularly his wife, privacy – they can decorate how they want – its home.  I think it tends to add to longevity – the family feels more attached to the community because there’s a stronger sense of belonging.  Tax purposes – income tax law provides for generous benefits to the pastor who is buying his own home.  Federal and state income taxes are greatly reduced and sometimes eliminated due to the housing allowance and double deduction for mortgage interest and real estate taxes.

8.               The self-employment tax is another issue that is often misunderstood – A pastor is a dual status employee.  He is an employee for income tax purposes and self-employed for Social Security purposes.  Instead of paying 7.65% for his Social Security and his employer paying 7.65% as all other employees do, he must pay 15.3% (less a small credit).  I recommend the church include in his salary an amount that would cover the 7.65% that the church would normally pay if he weren’t the pastor.  Because he must pay taxes on the additional 7.65% a proper increase would be 9.8%.

 

            A good procedure is to assign two board members to review the needs of the staff annually and make recommendations to the full board for consideration.  When it comes to our pastors we should take I Corinthians 9:14 and I Timothy 5:17 very seriously.  Addressing all of the above issues at one time may be difficult but by prayer, planning and proper stewardship all the issues can be addressed.

 

 

 

 


 

 

 

 

THE PASTOR’S RESPONSIBILITY TO MODEL STEWARDSHIP

 

 

 

 

 

 

HIS PERSONAL FINANCES

 

 

1.                  Give God a chance first. 

 

2.         Learn to be a saver. 

 

3.         Learn to spend less than you earn.

              

4.         Have cash in an emergency fund.

 

5.         Credit Cards:

                        1 trillion dollar business

                        20% pay-off every 30 days

                        Average = 17.93% interest

 

6.         Have adequate life insurance ($400,000).

 

7.         Have retirement plan in progress by age 40.

 

8.         Own your home by age 65 or retirement.

 

9.         Be self‑insured for life insurance by age 65 or retirement.

 

10.       Have a workable budget ‑ key discipline and control.

 

11.       Don’t finance pleasure items.

 

12.       There is a difference between debt and obligations.

 

13.       Understand the TAX law as it applies to you.

 

14.      Have a will or estate plan that includes a will.

 

 

 

 

 

 

 

 

 

 

 

 

AUTOMOBILE PURCHASE

2 ‑ 4 ‑ JUNK

 

            Purchase a 2‑year‑old auto for $11,000 with $2,000 down and financed at 10% for 3 years.  Maximum mileage 25,000 with 2 year or 24,000 mile warranty.

 

                    First Time - First Year

Total payment - Down Payment

$  2,000

Finance at $290.41/month times 36 months

  10,455

                              TOTAL

$12,455

 

 

Pay 4th year into savings - $290.41 x 12

$  3,485

                           Interest

       100

Sell auto at end of the 4th year

    4,400

                          TOTAL CASH AVAILABLE

$  7,985

 

                    Second Time - Fifth Year

Purchase 2-year-old auto for

$  13,000

    Less - Down Payment

       7,985

    Amount to finance

$    5,015

Finance $5,015 at 10% for 1 ½ years = $300.29/month

 

NOW

 

Save $300.00/mo for 2 1/2 years - 30 mo x $300.18 =

$   9,000

    Interest

        250

Sell auto at the end of the 4th year

     5,200

                          TOTAL CASH AVAILABLE

$ 14,450

 

                          Third Time – Ninth Year

       Purchase 2-year-old auto for $14,450 CASH

              Continue to save at $300/month

 


 

 

 

HIS TAX OBLIGATION

 

PASTOR'S ARE EMPLOYEES FOR INCOME TAX AND SELF-EMPLOYED FOR SOCIAL SECURITY TAX (SECA)

 

1.    Churches must issue a W‑2 to their ministers.

2.    Even though the church must report income on the W‑2, the minister still has a choice on whether he will continue to pay his taxes quarterly on Form 1040ES or whether the church is to withhold the proper amount.

3.    The church must file the 941 quarterly tax report to the IRS.

4.    All professional expenses including travel expenses related to the minister's W‑2 income must be reported on Schedule 2106 of Form 1040.  They then transfer to Schedule A Miscellaneous and are subject to the 2% limitation UNLESS REIMBURSED.

5.    Income and expenses related to funerals, baptisms, marriages, other speaking engagements, etc. are still reported on Schedule C of Form 1040.

       

SAMPLE BENEFIT PACKAGE                                Annual Amount          Taxable For             Included in W-2          

Base Salary                                             $24,600                                       FIT & SECA         Block 1   

Church Paid Social Security                        2,900                                       FIT & SECA         Block 1

Housing Allowance                                   14,500                                       SECA   Block 14

Medical Insurance                                       4,200                                         Not Taxable           No

Group Term Life Insurance                           300                                         Not Taxable           No      

Disability Insurance                                    1,600                                         Not Taxable           No

Retirement Plan (403b)                               2,000                                       Not Taxable         Block 13

Professional Reimbursement                       4,000                                            Not Taxable     No      

   Total                                                                        $ 54,100                                               

              

a Control Number

                       

                           OMB No. 1545-0008

This information is being furnished to the Internal Revenue Service. If you are required to file a tax return, a negligence penalty or other sanction may be imposed on you if this income is taxable and you fail to report it.   

b Employer's identification number

     35-6529841

1 Wages, tips, other compensation

        27,500

2 Federal income tax withheld

          NONE

2 Employers name, address, and ZIP code

    

     FIRST BAPTIST CHURCH 

3 Social security wages

         NONE

4 Social security tax withheld

          NONE

    1860 MAIN STREET

    NEWHALL CA 91321

 

5 Medicare wages and tips

           NONE

6 Medicare tax withheld

          NONE

 

                                         

7 Social security tips     

8 Allocated tips

      

d Employee's social security number

9 Advance EIC payment

       

10 Dependent care benefits

      

e Employee's name (first, initial, last)     

         TOM F JONES

 

C

O

D

e

 
11 Nonqualified plans  

Retirement

plan

 

Statutory

employee

 

Third-party

Sick pay

 

 

C

O

D

e

 

12a See instructions for box12

    E         2,000

            826 BRIAR STREET

          NEWHALL CA 91321

 

 

 

 

 

f, Employee’s Address and ZIP Code

13

 12b

   

C

o

D

e

 
 14 Other

         MINISTER HOUSING

ALLOWANCE  $14,500

 12c

 

 

C

O

D

e

 
 12d

 

15 State

Employer's state I.D. No.

16 State wages, tips, etc.

17 State income tax

18 Locality name

19 Local wages, tips etc.

20 Locality name

  CA

  

    27,500  

   NONE

       

 

 

 

 
     W-2 Wage and Tax Statement     Department of the Treasury-Internal Revenue Service


 

 

 

PARSONAGE ALLOWANCE/HOUSING ALLOWANCE/MANSE ALLOWANCE = SAME TERM

 

HOW THE PARSONAGE EXCLUSION BENEFITS CLERGY?

 

The Internal Revenue Code provides clergy with an exclusion from gross income commonly known as the "parsonage exclusion."  Section 107 of the Internal Revenue Code reads as follows:

 

In the case of a minister of the gospel, gross income does not include:

  

       1.    the rental value of a home furnished to him as part of his compensation; or

 

       2.     the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.

 

WHO MAY QUALIFY FOR THE PARSONAGE ALLOWANCE EXCLUSION?

 

To qualify, a minister or religious worker must be duly ordained, commissioned or licensed and authorized to perform duties of a minister of the gospel.

 

       1.     The board votes the allowance prior to the first pay period of the year in question.

 

       2.    Overestimate the allowance.

 

3.     You may amend the allowance during the year if needed, but never retroactively.              

 

       4.    Keep accurate records.

 

WHAT DOES THE PARSONAGE ALLOWANCE EXCLUSION INCLUDE?

 

1.    Rent, purchase of a home or major improvements, not to exceed fair market rental value *(FMRV) costs included in this category are down payment, legal fees, mortgage payments, interest, taxes, insurance.

 

2.    Furniture, appliances, curtains, rugs, vacuum sweepers, washing machines, dryers, etc.

 

3.    Utilities:  heat, electric, telephone, water, sewer charge, etc.

 

4.    Cleaning supplies, brooms, light bulbs.

 

5.    Miscellaneous repairs.

 

* Fair Market Rental Value (FMRV) varies by location and by house.  A general rule of thumb for FMRV is ‑ 1% of appraised value per month.  Example if appraisal equals $100,000 the monthly FMRV would be $1,000.  The annual FMRV would be $1,000 x 12 equals $12,000.  Items 2‑5 are in addition to FMRV.

 

 

 

 

 

                                                                                                                            

PROFESSIONAL EXPENSES

 

Professional expenses include:  Automobile ($.36 per mile), books, periodicals, entertainment, equipment, wedding and graduation gifts, Christmas cards, postage, dues, conferences, educational, office supplies, and telephone expenses for professional calls.  NOTE ‑ THE HOUSING ALLOWANCE IS NOT A PROFESSIONAL EXPENSE.

 

 

PROFESSIONAL REIMBURSEMENT FUND

 

Pastors may now be targets for IRS audits on professional expenses.  The IRS regulations state that an employee must be accountable for professional expenses either to the IRS through Schedules 2106 and Schedules A miscellaneous or to their employers by reimbursement.  We recommend the reimbursement method.   HOW DOES IT WORK?  You can set us this fund by establishing an expense category in the church budget for professional expenses (ex.-travel @ $.36 per mile, entertainment, books, periodicals, conferences, business telephone, etc.).  You would then submit the receipts and records to the church on a monthly basis and get reimbursed for these expenses.  WHAT DOES IT DO?  It will prevent an audit by the IRS for those areas now targets – you eliminate Schedules 2106 and a Miscellaneous from your tax return.  It will also save taxes as a portion of expenses listed on your 1040 will be subject to limitations.  They are not subject to limitations if reimbursed.  You do not report the reimbursed amount on the Pastor’s W-2.  It is not income.

 

 

SELF‑EMPLOYMENT TAX RATE (SOCIAL SECURITY)

 

                 2003. . . . . . . . .15.3%

 

 

 

HOW LONG TO KEEP RECORDS

 

Generally speaking, 6 years.  Exceptions include records on home purchase and any major improvements over the year plus other investment transactions such as land and stock.  If you fail to report more than 25% of income the IRS has 6 years to come after you.

 

A PASTOR’S OPTION IN PAYING TAXES DURING THE YEAR ARE:

 

1.         Your treasurer can withhold enough FIT for FIT & SECA taxes.

2.         Your treasurer can withhold FIT and you can file SECA quarterly on Form 1040ES.

3.         You can file quarterly on 1040ES for all taxes.

 

 

Penalties are now being assessed to those who do not prepay their tax obligations.  Interest is charged if the payments are made after the due date.

 

Added to Bible Bulletin Board's "Shepherd's Conference Collection" by:

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