Discussing the pastor's salary package can be a sensitive issue and must be approached sensibly and with tact by the congregation. Typically, most churches form a pastoral relations board or ad-hoc committee to handle this responsibility. Putting together an attractive compensation package, which includes other factors besides the pastor's cash salary, is important for retaining a qualified and gifted pastoral leader.
Compute the pastor's cash salary. Check to see if your denominational headquarters offers salary guidelines for pastors. Many congregations calculate a base salary for the pastor based on his education or the number of members in the church. For example, you might offer a higher base salary if the pastor has earned his Master of Divinity versus only a bachelor's degree. Add to the base salary an allowance, such as $500 or $700, for each year of experience your pastor brings to the church.
Establish a housing allowance payable directly to the pastor for utilities (heat, light, water, trash, etc.), maintenance and upkeep, property insurance and furnishing costs if your church requires him to live in a parsonage. Otherwise, designate a cash package that allows the pastor to either buy or rent, furnish and maintain a home. Review home prices in the community and calculate an allowance based on median housing prices. The United Church of Christ's (UCC) Connecticut Conference suggests calculating one percent per month of the value for median-priced homes in the community. If median prices are around $150,000, for example, one percent equals $1,500.
Decide how much money you'll contribute to the pastor's tax-deferred retirement account, such as the 403(b) pension plan. Review IRS Publication 571 (see Resources) to find the annual limits you can contribute to a pastor's pension plan. For the 2011 tax year, a church can contribute a maximum of $49,000 or the amount of the pastor's taxable ministerial income, whichever is less.
Organize a benefits package that includes a health and dental insurance plan, life insurance and disability benefits. Find out whether your denominational headquarters or regional division or chapter offers group policy life, health and disability plans for which you can pay for the pastor and his family. Otherwise, research state-sponsored or private-pay plans. Generally, churches are encouraged to pay the monthly premiums for these fringe benefits, which the pastor is typically allowed to exclude from his taxable income.
Decide what portion, if any, the church will contribute to the pastor's Social Security and Medicare tax obligations. For 2011, self-employed individuals must pay 13.3 percent of net earnings from self-employment to Social Security and Medicare taxes. Both the Church of God Benefits Board and UCC's Connecticut Conference, for instance, recommend paying at least 50 percent of the self-employment tax directly to the pastor. Even though these payments must be reported as part of his taxable income, it offsets the cost of the added tax burden.
Adopt an accountable reimbursement plan for the purpose of paying for or reimbursing the pastor's professional expenses. Request the pastor to submit detailed documentation showing the amounts he needs for specific professional expenses. Expenses covered under an accountable reimbursement plan include auto expenses, entertainment, convention fees, supplies and books, travel expenses, vestments and anything else that pertains to his ministerial responsibilities. Decide on an agreed upon overall monthly or annual limit the pastor can spend for these expenses at his discretion.
IRS Publication 1828 (see Resources) explains federal tax law and rules related to the compensation of ministers.