6 Major Law Changes Impacting a Minister's Compensation

Written by Keith Hamilton

Free Download: One-page PDF of this information to give to your church treasurer or finance committee: Law Changes Impacting a Ministers Compensation (50 KB PDF).

In recent years, Internal Revenue Service and tax courts have made tax law changes that impact the way churches pay their ministers. Many churches have not made the transition on the road to governmental compliance. Recently, six major changes have occurred that impact churches.

Management Essentials for Christian Ministries

The following is a checklist for a church to make sure the church is compliant with current tax laws.

The church can ask the minister for his input about his financial needs, but the minister himself cannot “break down” how he is paid. The traditional concept of the minister’s pay package is out of compliance. In other words, the church or church committee cannot tell the minister he has so much money available and let the minister decide how he wants to break down his income into subcategories without the church’s or church committee’s approval. The church or a church committee, such as a budget committee, has to determine how a minister is paid. For example, the minister can share with the budget committee that he expects to travel so many church-related business miles next year, but the minister by himself cannot reduce his income to create a budget line item for business travel. The church or church committee must budget this money.
The church should offer benefits, not a cash option, to a minister. For instance, tax courts have ruled that if an employee has the option of receiving cash or medical insurance, then the church must treat the money the church pays for a minister’s medical insurance as taxable income. In other words, a minister can share with the church or church committee what his medical insurance premiums will cost next year and the church or church committee can decide to budget or not budget for the medical insurance costs as a benefit. The church, not the minister, is deciding to offer medical insurance coverage. If the church budgets the ministers’ medical insurance as a benefit, then the benefit will be non-taxable.
A car allowance is taxable and must be included on the minister’s W-2 as taxable income. If the church establishes an accountable reimbursement plan, the travel expenses are nontaxable for a minister. An accountable reimbursement plan is the Internal Revenue Service’s preferred method for handling church-related travel expenses.
Annually, the minister must submit to the church a written estimate of next year’s housing expenses so the church can establish the minister’s housing allowance. The written estimate gives the church a legal basis for establishing a housing allowance. Even if the minister lives in a church parsonage, the minister should give a written estimate to the church or church committee to help establish the utilities expenditures and other housing expenses as a housing allowance.
The maximum limit for a minister’s housing allowance that can be designated by church is restricted by the lowest amount of the following limitations:

1) A minister’s written housing expense estimate or
2) The fair rental value of minister’s furnished home plus utilities.

The maximum amount that a church can establish as a minister’s housing allowance is the lower of these two amounts. This limit only applies to ministers who rent or own their homes.
The minister must be furnished a W-2, not a 1099 MISC, for taxable income from the church.

This document is intended to provide churches and church leaders with current and accurate educational information about the subjects covered. However, such information is not intended to be sufficient for dealing with a particular legal problem, and the authors and distributors do not warrant or represent its suitability for such purpose. The reader should not rely upon this document as a substitute for independent legal consultation or tax advice.

About Dr. Hamilton

Keith Hamilton, D.Ed.Min, CFP, CRPC is with the Georgia Baptist Convention. He has written several publications on establishing church designated funds, managing your household finances, and protecting your church and ministry from identity theft. Check out www.churchfinancialservices.org for more help. Other articles by Keith...

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