Can a Church Give the Pastor a Raise, but Not Spend Any More Money? (Hint: it's all in the taxes)
Pastor Randy is seeking a raise, but the church is constrained by its budget. How can the church help him increase his take-home pay without spending more? By structuring his compensation strategically, Pastor Randy can benefit from tax savings that maximize his salary without additional costs to the church.
1. Housing Allowance
What It Does:
The church can designate a portion of Pastor Randy’s salary as a housing allowance (up to the fair market rental value of his home). This allowance is not subject to federal and state income tax, although it is still subject to self-employment tax.Tax Benefit:
By excluding the housing allowance from income tax, Pastor Randy saves on federal and state taxes.Example:
If Pastor Randy's housing allowance is $35,000, he could save around $5,250 in taxes annually.
2. Church-Provided Health Insurance
What It Does:
Instead of Pastor Randy paying for his health insurance premiums out of pocket, the church covers these expenses directly.Tax Benefit:
Health insurance premiums paid by the church are excluded from federal and state income tax, offering significant savings.Example:
With $7,200 in premiums, Pastor Randy could save around $2,160 in taxes each year.
3. Reimbursement for Professional Expenses
What It Does:
The church reimburses Pastor Randy for professional expenses, such as education, books, and other ministry-related costs, eliminating the need for him to pay these out of pocket.Tax Benefit:
These expenses are deductible, reducing Pastor Randy’s taxable income.Example:
If Pastor Randy spends $5,000 annually on professional expenses, he could save about $1,500 in taxes.
Total Tax Savings Calculation
Let’s calculate how these strategies would impact Pastor Randy’s taxes. If the church adjusts his cash salary to $27,800 while offering the following:
Housing Allowance: $35,000
Health Insurance: $7,200
Professional Expenses: $5,000
Total Tax Savings:
Pastor Randy could potentially save $8,860 annually in taxes, effectively increasing his take-home pay without costing the church more money.
Conclusion
By structuring Pastor Randy’s compensation package in a way that maximizes tax benefits—through housing allowances, health insurance, and professional expense reimbursements—the church can effectively provide him with a significant raise without increasing its budget.
