CLERGY COMPENSATION A Presentation for Seniors Lutheran Theological Seminary at Gettysburg 1

Stewardship of Rostered Leaders We live from the resources of others. You need enough compensation to live on AND you are being supported by the resources of the people of God. Personal stewardship matters. Charitable contributions matter. 2

COMPENSATION COMPONENTS Compensation – CASH + Salary + Housing Allowance or Parsonage Allowance + Social Security (SECA) Allowance + Other Income - CASH = DEFINED COMPENSATION + Compensation – BENEFITS Medical Insurance Pension Plan Vacation Other Days = TOTAL COMPENSATION 3 Reimbursed Expenses Travel Continuing Education Publications Official Meetings Entertainment

SALARY Check minimum salary guidelines for the synod Pay attention to categories and definitions 4

Negotiation??? Some first-call congregations do not offer the minimum; this is worth a conversation with the Bishop Ask for some recognition of “first career” experience Regular personnel reviews and salary adjustments; if not at minimum, ask for early review 5

Housing Allowance Clergy are entitled to a special tax exclusion-- amounts spent on housing are excluded from your taxable income. You receive the funds but you do not declare the funds as taxable income. YOU decide this amount, not the congregation! Often Synod guidelines list an amount, but YOU decide the amount you will declare as housing allowance The Congregation Council MUST approve each year the amount you designate and it must be recorded in the official minutes 6

HOUSING ALLOWANCE Estimate amount for upcoming calendar year: sum of rent or mortgage principal and interest Utilities (electricity, gas, fuel oil, water & sewer, trash collection, cable, phone, internet) Furnishings (furniture, appliances, rugs, curtains, durable goods) Real estate property taxes, property insurance Maintenance costs for house and yard (lawn mower, weed eater, grass seed, fertilizer, paint, major repair costs) 7

Housing Allowance Keep track of all “Housing Allowance” expenditures during the calendar year Compare your Estimated/ Declared amount with the Actual amount NON-TAXABLE amount for IRS purposes is smaller of estimated allowance designated at beginning of year OR actual expenditures at end of year (Total is also limited by fair market value calculations) 8

Housing Allowance – practically speaking Make a good estimate of your eligible housing expenses for the calendar year Add some amount to the estimate as a cushion (10%-15%) You want your approved housing allowance to be at least as much as your expenditures, but not too much more than your actual. 9

PARSONAGE Parsonage generally considered to be worth 30% of salary (when comparing call packages) Congregations may provide furnishings and/or utilities allowance that is treated as “housing” allowance Congregations may provide equity allowance (synod guidelines typically 1%-3%) Deferred income held in investment account, taxable upon distribution 10

Example: A pastor earns an annual salary of $42,000 and designates $12,000 as housing allowance in January. When the pastor totals all receipts on housing at the end of the year, the actual amount spent on housing was $10,500. How much can the pastor exclude from taxable income as non-taxable housing allowance? How much would the pastor’s taxable income be? 11

Social Security Allowance Employees of a business are responsible for FICA tax (Federal Income Contribution Act). The employer pays 50% and the employee pays 50% of the total rate of 15.3% (7.65% each). Pastors are self-employed for Social Security purposes and are required to pay SECA tax (Self- Employment Contributions Act) on full salary (including amounts designated as housing allowance). The rate is 15.3%. 12

SECA Allowance Many synod guidelines suggest a minimum of 50% = 7.65% (“employer’s” portion); some pay the full amount. Whatever is paid to you is included in your total defined compensation. The actual calculation of SECA tax due is done on Schedule SE (more later) and submitted along with your federal income tax. 13

DEFINED COMPENSATION + Base salary (taxable amount) + Housing allowance (non-taxable amount) + SECA allowance paid to you (if applicable) = Total Defined Compensation For purposes of calculating benefits 14

Other Income Interest and dividend income Fees received for weddings, funerals, etc. Check congregational policy. Consider carefully. Bonuses; Christmas gifts that are collected by congregation-wide solicitation 15

Cash Compensation Salary$45,000 Housing Allowance (12,000) Taxable salary 33,000 Set aside for taxes ( 7,000) Usable Cash$26, Spent on housing Food, clothing, entertainment, student loan pmts, car pmts, charity, etc.

Compensation - BENEFITS Medical Insurance – coverage in the ELCA plan for rostered leader or rostered leader and family Pension Plan – 10% to 12% of defined compensation contributed by congregations; your additional pre-tax contributions are tax- deferred Vacation – 4 weeks per year, incl 4 Sundays Other days – sick leave, maternity/parental leave, continuing education days (2 weeks, incl 2 Sundays), sabbatical policy (min. 3 months after 7 years) 17

Cost of Benefits Very helpful calculators at Defined Compensation Calculator You input Base Salary of $33,000 You input Housing Allowance of $12,000 Calculated SECA (“employer’s portion”) of $3,066 (if being paid to you) Calculated Defined Compensation of $48,066 18

Cost of Benefits Benefits Contribution Calculator Input Defined Compensation and make choices for benefit levels Single coverage, 10% pension, Lower Susquehanna means benefits cost the cong $12,260/yr Family coverage, 12% pension, Lower Susquehanna means benefits cost the cong $22,737 19

Compensation Package Most congregations have a “bottom line” amount in mind for the cost of the rostered leader. Use the Total Compensation calculator to move money between line items. 20

Examples Medical – Member only 6,348 Pension Plan 10% 4,778 Other (Disability, etc) 1,099 Total Benefits 12,225 Compensation – Cash 47,775 Compensation Package $60,000 15,864 Medical – Family 4,634 Pension Plan 12% 888 Other 21,386 Total Benefits 38,614 Compensation - Cash $60,000 Compensation Package 21

Reimbursed Expenses Travel Reimbursement of actual business mileage (commuting mileage is not included) OR Estimated auto allowance agreed on in advance; compare with actual mileage and settle account at end of year Either way, keep a log of daily mileage! Receipts for other travel expenses (parking, tolls) Moving Expenses 22

Reimbursed Expenses Continuing Education Minimum 50 Contact Hours per year, report to Bishop annually Annual amount (minimum $700) cumulative for specified number of years Continuing Education Covenant with Congregation Publications Annual amount for books and periodicals (minimum $100) 23

Reimbursed Expenses Official Meetings Costs related to attending Synod and conference meetings, area ministers’ association, etc. Entertainment Costs related to meals with business colleagues or parishioners. Consider carefully. Congregation should be prepared to pay for supply pastors for Sundays away from parish or preachers on special occasions (Homecoming, Rally Day) 24

CLERGY TAXES Publication 517 Social Security and Other Information for Members of the Clergy & Religious Workers 25

CLERGY TAXES BASIC RULE: Clergy are considered EMPLOYEES for Federal and State Income Tax purposes (pay income taxes) and SELF-EMPLOYED for Social Security purposes (pay self-employment tax) Form 1040 is used to remit Federal Income tax and SECA tax 26

Understanding “Tax Liability” The tax form is organized as follows: Income -Deductions from income =Adjusted Gross Income (line 37) -Deductions and Exemptions =Taxable Income (line 43) Tax Liability (line 61) -Tax payments during year (line 72) =Tax owed or refunded (line 73 or 76) (write a check or receive a check) 27

Getting started for first call 1. Determine your 2012 tax liability (line 61 on Form 1040) 2. Estimate your 2013 tax liability using the 2012 forms and rates Amount to be reported on W-2 Taxable salary 2013 $36,000 (W-2 Box 1) Call begins July 1, so use 50% = $18,000 28

Estimated Tax Liability The law requires that a taxpayer pay in during the year the smaller of: -90% of the current year’s (2013) tax liability OR -100% of the previous year’s (2012) tax liability Otherwise, the taxpayer is subject to an underpayment penalty 29

An Example… Calculated tax liability (line 61) for 2012 is $125 Estimated tax liability for 2013 $3,500 Minimum required payment during the year of 2013 is smaller of: 90% of 2013 $3,150 or100% of 2012 $125 30

Managing Taxes Each year, you will need to make estimated tax payments during the year to pay in the required amount Estimated tax payments are made in 4 equal installments on April 15, June 15, Sept 15 and Jan 15 Download the estimated tax voucher (1040ES) at 31

Partial Year Taxes in 2013 Amount owed for 2013 is $3,500 or $ per month for 6 months of call Set aside at least this much every month in a savings account – consider Mission Investment Fund for this Make an estimated payment of $125 on Sept 15, 2013 (due date of first estimated tax payment); Write a check to the IRS on April 15, 2014 for $3,375 ($3,500 - $125) 32

Tax Quiz Jezebel accepts a call to Land of Canaan Lutheran Church, is ordained on July 1, 2013, and begins serving on the same day. Her compensation package says she will receive a total annual amount of $45,000, of which $9,000 has been designated by the congregation as housing allowance. 1. What should Jezebel do with respect to her housing allowance and compensation package? 33

Jezebel attended the Senior Seminar, so she understands the basics of clergy taxes. She determined her 2012 tax liability was $250 and estimates her 2013 tax liability at $3, How much should Jezebel set aside each month as taxes? 3. What is the minimum amount Jezebel must pay to the IRS during 2013? When? 34

4. Jezebel estimated her housing expenses for July-Dec at $4,000. At the end of 2013, Jezebel calculates she spent $3,500 on housing expenses. What effect does this have on the amount to be reported on line 7 of Form 1040? 35

Jezebel completes her 2013 Form 1040 and calculates her final tax liability of $3,850. (She estimated a tax liability of $3,600.) 5. Does she owe any underpayment penalty because she underestimated the amount of her 2013 tax liability? 6. How much does she owe in taxes and by when? 36

Jezebel estimates her 2014 tax liability will be $10, Does Jezebel owe payments during 2014? How much and when ? 37

My best advice: Ask clergy colleagues in the area to recommend a CPA who has worked with clergy taxes Be familiar enough with clergy taxes to have reasonable confidence in what the CPA is doing on your behalf Keep in your contact list 38