Our church is just starting, and I’m bi-vocational. When we start having some income, should they start paying me a salary first and then add housing and benefits as they’re able? Is this the best way to do compensation from a tax perspective?
The church should generally make tax-free payments—tax-free for income and social security tax purposes—to a minister as a priority. For example, reimbursements of ministry expenses, like mileage reimbursement for church-related miles and the payment or reimbursement of a minister’s health insurance (even for a policy that includes coverage for the spouse and dependents) are totally tax-free for income and social security tax purposes.
After tax-free payments are made, then the focus can shift to payments which are tax-free for income tax purposes but taxable for self-employment social security tax purposes. The designation of a portion of the minister’s cash compensation as a housing allowance fits this definition.
Finally, cash compensation that is fully taxable should be considered. By using this simple approach to determining the priority of payments, hundreds or thousands of dollars of taxes may be saved for the ministry…and the church provides optimal stewardship over the funds entrusted to it.
Dan Busby is a certified public accountant, acting president of the Evangelical Council for Financial Accountability (ECFA), and the author of the Zondervan Clergy Tax & Financial Guide.