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How the IRS Looks at a Pastor's Salary

By Raul Rivera

She was dismayed when she got a letter from the IRS telling her that her $18,000.00 salary at the church was too high.  After all, Pastor Geneva worked for the church and clocked approximately 40 hours per week as the pastor.  She also spent time counseling and working hard to feed many homeless in New York City.  So why was her humble $18,000.00 salary too high?

The board meeting

Earlier that year, the board of directors at their annual meeting approved her salary package.  They felt good about it because it was a creative way to make sure that the church could also pay its rent and other important bills.  Moreover, they recorded the salary approval in the minutes of the church and had them signed by two officers.  Everything looked perfect.  But then the letter came.

A little bit about unwelcomed news

Have you ever received unwelcomed news; the kind that completely changes your day?  That kind of news seems to come when you least need it!  Knowing whom my readers are, I can bet that unwelcomed news related to the church you started, or the church you took over, seems to come in waves.  It can begin with low attendance and terrible tithes/offerings during a Sunday service, or unplanned events at a board meeting, topped off by a letter from the zoning department, and unforeseen problems with disgruntled church members...soon it can be enough to doubt yourself and encourage improper meditation.  "Maybe God is telling me to quit," you may be tempted to think.

That is what Pastor Geneva thought when the IRS letter came in.  The church was suffering from internal struggles with some of its members, and it had caused the tithes and offerings over the last month to tumble.  Some of the ministers in the area told her that she had no business, as a woman, pastoring a church; and then came the letter.  

It's easy to get discouraged

When your church is small, it is very easy to get discouraged.  One bad week in attendance or low tithes and offerings, and it is very easy to feel like God has abandoned you.  Some of you may be feeling condemnation because you started the church and your former pastor or overseer, instead of blessing you, gave you the left foot of fellowship.  All these factors influence your emotional state when you are in the early stages of a new church. 

Be encouraged

Before we discover the root of the IRS letter to Pastor Geneva, I want you to stop for one moment and meditate on this promise in God's Word, "Before I formed you in the womb I knew you, before you were born I set you apart . . ." God is so ravished with love for you, that He neither condemns you nor does He leave you alone.  The emotional struggles are part of His wonderful plan to prove Himself faithful in your own eyes.  Stay the course, my friend and colleague in the Kingdom.  He will prove Himself to you as faithful and true.  You will win by simply not quitting.

So what about Pastor Geneva?

Sorry for the diversion.  Oh yes!  On the fretful day when the letter came she wanted to quit.  Here is what happened.  There were two things that the IRS outlined in its inquiry.

  1. The board approved her salary to be set at 33% of the tithes and offerings:  The board of directors approved the salary as a percentage of tithes and offerings because they were not sure what they could or should pay.  So they figured that no matter what the tithes and offerings were the church would always be able to operate on 67%.  That year the church was on pace to collect $54,000.00 in tithes and offerings which meant that her projected salary would be $18,000.00.  Under the rules of Treasury Regulation 53.4958-4, her contract did not meet the fixed payment requirements because she, having already been an officer of the church, would receive a salary that had no ceiling.  In essence, the contract did not set a maximum amount that it would pay her.  For example, what if the tithes and offerings would have reached 2 million that year? Would her pay be 660,000.00?  To fix it, we suggested that the board amend her contract so that it had a maximum amount.
  2. She had use of the church van:  There is nothing wrong with a pastor using the church van.  However, it is important to know that there are important consequences if personal miles vs. church business miles are not adequately documented.  She used the van for the homeless outreach, but she also drove it home to her apartment, with occasional stops at the grocery store.  The board approved for her to use the church debit card for the van.  However, because she had personal use of it for commuting back and forth from her house to the church, a certain portion of the gas paid by the church was a personal benefit to her that the church was not reporting on her W-2 as income.  Because there was not any language in her contract that required her to document her personal miles vs. business miles, she was unknowingly engaged in what Section 4958 defines as an excess benefit transaction.  To correct this issue, an accountable reimbursement policy was adopted and the personal miles that she incurred were reported on her W-2 as income.


Bad news turns to good news

When Pastor Geneva got the IRS letter, she called us.  She was attempting to apply for her church's 501(c)(3) status on her own, and the letter she received was in response to some of the information she had put in the original application and in follow-up correspondence.  It had been nearly one year since she started the process.  This letter made her feel as though the whole world was against her.  Shortly after she called us, we were able to review her application and follow up correspondence, and to correct her issues.  Within four weeks she received a positive determination letter approving her 501(c)(3) status.  She later testified that the approval letter was a reminder from the Lord that He is in control.

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