This week’s post is by Rev. Malcolm Himschoot who serves the United Church of Christ as the Minister for Ministerial Transitions with the Ministerial Excellence, Support, and Authorization (MESA) Team. He is also current Vice President of the Board of the Interim Ministry Network.
Possible changes to the clergy tax benefit of designated housing allowance – clarification anticipated by UCC General Counsel as soon as next year – cast into fresh relief the options for church employers and ministers. Churches can compensate clergy more as an off-set. Ministers can adjust and moderate their financial decisions. These changes may be uncomfortable on both sides, but are necessary within a trend of growing financial stress on clergy employment.
Churches should continue to designate housing allowance each year, a figure to cover “fair rental value of the home including furnishings and utilities.” Meanwhile courts and governmental agencies will proceed to make their final decisions, and churches should stay tuned for developments.
In preparation, congregations employing a minister should plan raises to the salary portion of pastoral support, not expecting pastors to bear alone the cost of the anticipated change in IRS regulations.
The following comparative example is loosely based on the average pastoral salary figure reported by the UCC Pension Boards. Though it can be helpful to consider this example as an illustration, the caveat must be understood that all ministers have distinctly individual circumstances, and each one’s tax responsibility is to be calculated individually by the minister, with the advice of a certified public accountant. To underscore the range of varied situations, note that UCC churches currently report to the UCC Data Hub a range of pastoral salary basis (including parsonage or housing allowance) between $0 – $456,226 per year.
The example below for illustration purposes should not be taken as a replacement for actual information for real ministers calculated each year on an individual basis.
Example impact based on the IRS tax tables for 2018 follows a sample minister making $57,000.
For simplicity’s sake, this hypothetical minister is filing single. Based upon a housing allowance of $20,000, their taxable income is reduced to $37,000. Taking the standard deduction of $12,000, their federal tax is estimated based upon a figure of $25,000. This income would fall mostly within the 12% tax bracket, at $2,813.
With no housing allowance exemption for the same minister, the entire package is considered taxable. Using the standard deduction again, the figure for taxable income becomes $45,000, and the estimated federal tax would increase to $5,845. Change to the tax status of clergy housing allowance would put this minister partly within a 22% tax bracket. Further increases would result to the minister’s state tax (in most states) as well.
Self-paid SECA tax for Medicare and Social Security would not change. In this example, in both scenarios the minister pays, and the church offsets, a “self-employment” tax of $8,054.
Using more precise figures adjusting for the deductible part of self-employment tax, this minister calculates their federal tax at $2,326 in 2018, and in the hypothetical year when housing allowance is disallowed as a deduction, at $4,954.
The result of the changed code in this example more than doubles the federal tax. Without a salary increase by the church as employer, the impact to the minister is a loss of at least $2,628.
Pastoral Support Defined
Pastoral support is the employment-related commitment of a congregation to the ministry of a pastor. It can be partially described in terms of compensation.
What is considered fair and just compensation? A healthy standard for all workers and professionals includes sufficient resources for financial health, giving and stewardship, medical care and emergencies, provision for dependents, and savings for retirement. A common expectation is that people should be able to earn with their time the resources needed to access credit, manage debt, and set and meet financial goals. Add in widely-held values for pastors on education, continuing education, and participation in the wider church, plus the need to reimburse qualified expenses such as ministry-related mileage.
Investments in pastoral support return to the present and future church by way of stability, stewardship, and renewable pastoral ministry in the congregation and community. Yet some churches may not know when they are asking the pastor to subsidize the church’s ministry – through low wages, subtracted benefits, artificially-low housing allowance, deferred parsonage maintenance, or reliance on spouse support for health insurance or dependent care.
Remembering that the pastoral relationship simultaneously is and is not a relationship of employment will help to preserve the traditions and trust of the wider church, expressed in local church expectations and opportunities.
Full-Time and Part-Time
Sole-congregation employ of an ordained minister, with a support package to promote livelihood for pastor and dependents, remains a common scenario in US Protestant churches. Meanwhile, UCC conferences report to MESA that their documents known as “Clergy Compensation Guidelines” are stretched in two directions: increasing use of part-time ratios of full-time professional compensation for smaller churches, and the maintenance of full-time compensation standards for larger churches.
For active pastors, situations of bi-vocational support (rather than sole-congregation support) become clarified when church-provided benefits are dropped, or when salary cannot meet full-time conference guidelines. Churches are cautioned not to equalize a full-time with a part-time salary. Likewise, churches need to guard against naming and compensating a “part-time” position while retaining full-time expectations, which limits other means of livelihood.
Full compensation written into a pastoral call agreement includes benefits, sick time, vacation time, weekly time off, and periodic sabbatical. Churches offering part-time pastoral support should retain employer-provided benefits as indicated in the Call Agreement Workbook. Churches that choose to share a pastor with another congregation can best utilize the Scope of Work in the Workbook to set expectations appropriately.
Costs involved with ministry are significant. A church tabulates these costs, keeping pace with regional trends in housing, health care, and general cost-of-living, when committing to the support of a pastor.
In the event of federal action in the future to eliminate housing allowance exemption, one example shows greater tax liability impacting a minister. Church employers are encouraged to make adjustments to compensate for such changes, related to possible governmental updates to elements of U.S. tax code in existence since 1954.
 Internal Revenue Bulletin No. 1018-10, March 05, 1018, conveys recent information regarding tax tables.
 Except with regard to the SECA tax, ministers are considered employees, not self-employed. SECA calculation based on https://www.free-online-calculator-use.com/self-employment-tax-calculator.html, updated May 2018.