A well-designed compensation plan helps a church care for its minister, use ministry resources responsibly, and clearly distinguish the minister’s and other church employees’ personal compensation from their professional expenses incurred while serving the church.
Although every church and minister’s circumstances are different, a balanced approach usually considers three separate areas:
- Business expenses associated with carrying out the church’s ministry
- Employee benefits and housing
- Cash salary
Keeping these categories separate provides a more accurate picture of the minister’s compensation and helps the church apply the appropriate tax treatment to each type of payment.
Ministry Expenses and Minister Compensation
Churches sometimes combine salary, benefits, and ministry-related expenses into one overall “package.” However, these amounts do not all serve the same purpose.
The cost of carrying out the ministry includes ordinary and necessary expenses an employee incurs while performing work for the church.
The cost of compensating the minister includes salary, housing, retirement plan contributions, insurance, paid time off, and other employee benefits.
When ministers are expected to pay church business expenses from their salary without reimbursement, they are using personal, taxable compensation to support the church’s work. Under current federal tax law, most employees generally cannot deduct these unreimbursed employee business expenses on their individual federal income tax returns.
For current information, see the IRS pages for Form 2106, Employee Business Expenses, and Publication 463, Travel, Gift, and Car Expenses.
Accountable Reimbursement Plans
A better strategy is to create an accountable reimbursement plan that allows a church to reimburse employees for qualifying business expenses. This allows employees to pay for these ministry expenses without treating those reimbursements as taxable wages.
To qualify under IRS accountable-plan rules, an arrangement must ordinarily meet three requirements:
- Business connection: The expense must have a legitimate connection to the employee’s work for the church.
- Substantiation: The employee must document the amount, date, place, and business purpose of the expense within a reasonable period.
- Return of excess amounts: The employee must return any advance or reimbursement that exceeds the substantiated expense within a reasonable period.
IRS guidance provides safe-harbor examples of what may be considered reasonable:
- An advance is provided no more than 30 days before the anticipated expense.
- The employee substantiates the expense with receipts and other documentation within 60 days after it is paid or incurred.
- The employee returns an excess advance within 120 days after the expense is paid or incurred.
Churches should adopt a written accountable reimbursement policy, communicate its requirements to employees, require appropriate documentation, and apply the policy consistently. Reimbursements that do not meet accountable-plan requirements are generally treated as taxable wages and reported on Form W-2.
For current requirements, consult the sections addressing accountable plans in IRS Publication 15, Employer’s Tax Guide, and IRS Publication 463.
Establish Compensation and Reimbursements in Advance
A church should not attempt to reclassify salary as a business-expense reimbursement after the salary has been earned or paid.
Salary, employee benefits, housing allowance, and any budget established for accountable reimbursements should be approved in advance of payments and documented in the church’s records. Reimbursements should be based on properly substantiated business expenses rather than paid automatically as additional compensation.
If the church establishes an annual reimbursement limit, any amount that is not supported by qualifying expenses should remain with the church. It should not automatically be paid to the employee as a bonus or year-end distribution under the accountable plan. These payments would be considered regular, taxable income by the IRS and must be reported as such on the employee’s W-2.
Churches considering a change to an employee’s existing compensation arrangement should consult a tax professional familiar with churches and ministerial taxation before implementing the change. Consider these Tax Preparer Recommendations, which we have received from Servant Solutions members that have used their services.
Cost of Ministry: Typical Expenses for Accountable Reimbursement Plans
Depending on the employee’s responsibilities and the church’s policies, reimbursable ministry expenses might include:
- Business use of a personal vehicle
- Ministry-related travel
- Conferences, conventions, and denominational gatherings
- Continuing education related to the employee’s work
- Ministry-related books, subscriptions, and professional resources
- Dues to qualifying professional organizations
- Church supplies, postage, and similar expenses
- Qualifying business meals
- Hospitality expenses with a documented ministry or business purpose
Not every expense is reimbursable or deductible. For example, commuting between an employee’s home and regular workplace is generally personal, and business entertainment expenses are generally not deductible. Meal, travel, gift, and vehicle expenses are also subject to specific documentation and tax rules.
Because mileage rates and other limitations can change from year to year, churches should regularly consult the IRS’s current standard mileage rates and Publication 463 rather than placing a specific annual rate in a permanent policy or website article.
Cost of the Minister: Components of Ministerial Compensation
A balanced ministerial compensation plan may include:
- Cash salary
- A properly designated housing allowance or use of a church-owned parsonage
- Employer retirement contributions
- Health and dental coverage
- Life and disability insurance
- Paid vacation, holidays, and other forms of leave
- Continuing-education support
- A Social Security or SECA allowance
- Other benefits appropriate to the church and minister
The tax treatment of each benefit may differ. Churches should review current IRS guidance, the terms of their benefit plans, and applicable federal and state law.
Social Security and Medicare Taxes
Ministers are “dual status” taxpayers. For federal income-tax purposes, a minister serving a congregation is generally treated as an employee when the church has the right to direct and control the minister’s work.
However, for payroll tax purposes, minister’s are considered to be self-employed. Their compensation received for ministerial services is generally subject to Social Security and Medicare taxes through the self-employment tax system. Compensation for determining payroll taxes due commonly includes salary and the taxable value of housing, unless the minister has received an approved exemption from self-employment tax.
This self-employed status means that a minister must pay both the employee and employer portions of the payroll taxes, a burden not experienced by other church employees. We encourage churches to provide a Social Security or SECA allowance to help the minister with this cost, but keep in mind that this allowance amount is considered additional taxable compensation by the IRS. So, the church should make the allowance at an amount that will cover the additional cost after income taxes have been withheld.
For current guidance, see IRS Topic 417, Earnings for Clergy and Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Retirement Benefits
Employer retirement contributions can be an important part of a minister’s compensation and long-term financial security. This may be especially important for ministers who live in a church-owned parsonage and do not build equity in a personal residence during those years.
Churches may be eligible to offer a 403(b) retirement plan, including a church retirement income account like the Servant Solutions plan, commonly referred to as a 403(b)(9) plan. Plan eligibility, contribution limits, tax treatment, and distribution rules are subject to current law and the terms of the particular plan.
For general federal tax information, see IRS Publication 571, Tax-Sheltered Annuity Plans.
Minister’s Housing Allowance
A church may provide housing through a church-owned parsonage, a cash housing allowance, or a combination of the two.
To qualify for the federal income-tax exclusion, a cash housing allowance must be officially designated by the employing church or other qualifying organization before it is paid. The amount a minister may exclude from federal gross income is generally limited to the lowest of these three figures:
- The amount of compensation officially designated in advance of payment as a clergy housing allowance
- The amount actually used to provide a home
- The fair rental value of the home, including furnishings and utilities
The exclusion is also limited to reasonable compensation for the minister’s services. Any portion that does not qualify must generally be included in taxable income.
Although qualifying housing may be excluded for federal income-tax purposes, as noted earlier regarding the “dual status” taxes paid by ministers, the housing allowance is generally included when calculating the minister’s net earnings from self-employment for Social Security and Medicare purposes.
For current information, see the IRS page on ministers’ compensation and housing allowance and IRS Topic 417.
Servant Solutions also provides additional information in:
Determining an Appropriate Cash Salary
Cash salary is the portion of compensation available to meet the minister’s (and their family’s) general living expenses.
When reviewing salary, church leaders may consider:
- The responsibilities and expectations of the position
- Education, training, credentials, and experience
- Compensation for comparable positions
- Local housing costs and other economic conditions
- Changes in the cost of living
- The church’s financial resources
- Internal fairness among employees
- The minister’s overall compensation and benefits
Compensation should be reviewed regularly. Churches should also document the approval process and confirm that total compensation is reasonable for the services provided.
When Additional Funding Is Limited
Some churches may not be able to increase their overall personnel budget immediately. Even so, they can improve clarity and stewardship by separating compensation, benefits, and legitimate ministry expenses in their planning.
Any restructuring should:
- Be approved before the compensation is earned
- Preserve compliance with wage-and-hour and other employment laws
- Avoid retroactively reclassifying salary
- Require substantiation for business-expense reimbursements
- Ensure that unused reimbursement funds remain with the church
Be reviewed with a qualified tax or legal professional
Clear structuring alone will not ensure fair compensation of a minister, but it can help the church understand how its resources are being used and prevent the minister from personally absorbing expenses that properly belong to the ministry and should be borne by the church.
Additional Resources
Because tax laws, contribution limits, mileage rates, and benefit rules can change, churches should rely on current sources rather than dated numerical information.
Useful IRS resources include:
- Publication 15, Employer’s Tax Guide
- Publication 15-B, Employer’s Tax Guide to Fringe Benefits
- Publication 463, Travel, Gift, and Car Expenses
- Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers
- Publication 571, Tax-Sheltered Annuity Plans
- Topic 417, Earnings for Clergy
- Standard Mileage Rates
- Ministers’ Compensation and Housing Allowance
For information about compensation planning and retirement benefits available through Servant Solutions, call (800) 844-8983 or contact us.
Important Notice
This information is general in nature and is provided for educational purposes only. It is not intended as legal, accounting, investment, or tax advice. Tax rules can change, and their application depends on the facts and circumstances involved. Churches and ministers should consult qualified legal and tax professionals who are familiar with ministerial taxation and the laws of the applicable state.