For ministers, learning to navigate their financial situation involves several considerations that are unique to ministry. Learning about these considerations and managing them effectively, can save a minister from unnecessary stress and strengthen their ability to continue in ministry into the future. Here are three that will have an impact on every minister.
- Housing Allowance – According to the federal government, a minister has the ability to exclude their housing expenses for each year for income tax purposes. This can be a huge tax savings throughout the arc of their ministry and into retirement. In order to be eligible for the exclusion, part of a minister’s salary has to be officially designated as a housing allowance by their church. For example, a minister who makes $40,000 a year and has a designated housing allowance of 40% or $16,000 of his or her salary, will not have to report the $16,000 as income for federal income tax purposes.
- SECA (Self-Employment Contributions Act) taxes – Even though ministers are considered employees for federal and state income tax purposes, they are considered self-employed for Social Security Self Employment tax. This means that the minister must pay 15.3% of their income for SECA tax alone as opposed to the 7.65% paid by those considered employees of organizations. A minister must also pay the full SECA tax on any amount designated as housing allowance. This amount can really add up and needs to be taken into consideration when planning and navigating a minister’s personal budget.
- Church or Denominational Retirement Plan – One way to minimize the impact of the SECA tax that every minister faces is to contribute pre-tax dollars to your retirement plan offered through your church. Generally, most church retirement plans allow ministers to shelter some of their income from SECA taxes on salary reduction contributions. There is nothing wrong with contributing to a Roth IRA for retirement, but as a minister, you are paying federal and SECA taxes on your contributions that you could avoid if using your church plan. If able, every minister should save for retirement through a church retirement plan, also known as 403(b)9. If your church doesn’t offer one, there are many organizations who offer plans to churches and their ministers to help them save for retirement and avoid some of the heavier tax implications involved with being a minister.
Taking small steps towards better understanding your unique financial situation can and will benefit you and your family in the long run. As a minister, it could be said that understanding your unique financial situation holds even higher importance because of the additional impact you have on others through your ministry. Understanding these unique financial considerations will help you to move toward peace of mind about your finances and will help free you to continue to minister effectively in the work God has called you to do.