Compensating for Employees Church & Faith Base

There are three primary issues that churches and faith base in the area of compensating employees:

Determining

the appropriate level of compensation. Compensating employees too little can create issues for employees by the Fair Labor Standard Act. On the other hand, in a few situations, compensating employees excessively may jeopardize a ministry's tax-exempt status.

Documenting and reporting compensation. The approval of the compensation, including fringe benefits, of the ministry's top leader should be contemporaneously documented.

Maximizing the tax advantage of certain fringe benefits. Compensation may be maximized by effectively structuring fringe benefits.

Reasonable Compensation

Ministry employees may receive reasonable compensation for their services. However, excessive compensation can result in private inurement and may jeopardize the organization's tax-exempt status. According to the IRS, reasonable compensation is based on what would ordinarily be paid for like services by a like organization under similar circumstances.

Housing Allowance

Every minister should have a portion of their salary designated as a housing allowance. For a minister living in ministry-owned housing, the housing allowance may be only a modest amount to cover incidental expenses such as maintenance, furnishing, and utilities.

403(b) plan

Employees of churches and other nonprofit organizations may have a Section 403(b) salary reduction arrangement based on the written plan. These plans are also called tax-sheltered annuities (TSA).

Part 1 will continue with part 2 next week. I hope you enjoy the content provided by Zoe Financial Provision.