In previous articles, I examined two major items relating to a minister’s compensation.
In previous articles, I examined two major items relating to a minister’s compensation.
The first item I discussed was the procedure for setting up the minister’s compensation so that he pays the lowest amount of taxes possible while at the same time maximizing the amount of money he is able to keep in his pocket. The second item was the concept of the Housing Allowance.
Remember, the premise of this entire exercise is to lower the minister’s tax liability. As a result, a minister is able to keep more of his own money. A church is able to do this without adding a single penny to the minister’s compensation. All a church has to do is allow the minister to identify money from his salary as housing allowance.
There are two other ways the church can help the minister in respect to his finances. They are through direct payments and accountable reimbursements.
Direct payments are monies that the church pays directly to a company for a service. However, the recipient of the service will be the minister. Almost all direct payments will deal with insurances of one variety or another, and retirement funds.
As a general concept, the minister will not have to pay taxes on monies paid directly to insurance companies. This would include, but not be limited to, life insurance, health insurance, disability insurance, and dental insurance.
There are some exceptions to the tax exemption as it relates to some insurance. It would be best if the minister and a member of the finance committee or personnel committee consulted a tax expert to become apprised of these exceptions.
Retirement funds are treated in the same fashion.
Any monies placed into a retirement fund on behalf of a minister are tax exempt at the point of the deposit. However, most of the funds may be taxable upon withdrawal from the retirement fund. It would be advisable to consultant with a tax professional.
I would also suggest that the retirement fund established for the minister be handled by the GuideStone Financial Resources of the Southern Baptist Convention. While there are several good reasons to suggest this step, there is one that is very important.
When a minister retires and, at the appropriate age, begins to withdraw the retirement funds from GuideStone, there is a way to reduce his tax liability. Some of these monies could be identified as housing allowance and thus be exempt from federal and state income tax. Generally, this is not true of retirement funds held in other accounts such as a 401K.
A second way of assisting a minister with his finances is an accountable reimbursment plan.
An accountable reimbursement plan is where an employee spends his/her own money for a business expense and then turns in a written request to be repaid. That request could be a form that is filled out and receipts or explanations are attached to the form. Or the request could simply be the receipts themselves.
If an employee requests to be reimbursed and does not turn in documentation to show the expenditure was work related, any money given to the employee is taxable.
The one item in an accountable reimbursement plan that is most often misused is the auto allowance. Many churches think that simply giving the minister a set amount of money each month for auto expenses is a tax exempt activity. The IRS disagrees and the minister must pay taxes on this money.
In order for an automobile allowance to be an accountable reimbursement plan, the minister must turn in his mileage and provide a brief explanation showing the miles driven were for a business purpose. If the minister does this, the miles he drives for business purposes will be tax exempt.
The IRS could count auto allowance money as taxable if the minister turns in a report and the church gives the minister the same amount of money each month. There is some precedent for this. The best solution is for the church to list an amount of money in the budget for auto allowance. Then have the minister to turn in the mileage report and have the church pay the varying monthly amount due the minister.
On occasion I have been asked why a church should take the actions that I have suggested in these articles. The main reason is that the church and the minister should be efficient and prudent in handling and using of the monies God has given the church. Additionally, the church should be willing to follow legal and proven steps to assist the minister in retaining as much of his money as possible.
If you would like a more complete discussion of these topics go the Louisiana Baptist Convention web site (www.lbc.org). In the banner at the top of the page you will see the word Resources. In that pull down menu you will find On-Line Training. In that list you will see “The Role of the Treasurer in Stewardship.” Going there will allow you to see a video used to train church treasurers. It is set up in chapters. Just select “Chapter 10 – The Minister’s Compensation” to hear more on the subjects we have examined in these four articles in the Message, archived at www.baptistmessage.com.
You may wish to contact the Stewardship/Cooperative Program Office of the Louisiana Baptist Convention for help with a minister’s compensation. I am also available to assist the church with the aforementioned issues. Contact me via phone at 318-451-1160 or visit my web site atwww.cornerstoneconsultants.org