Housing Allowance for Pastors Still Constitutional…For Now

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Pastors and church leaders around the country breathed a sigh of relief on Friday, March 15, when the Seventh Court of Appeals ruled that the housing allowance for church ministers does not violate the First Amendment’s Establishment Clause.

For months, church leaders nervously awaiting the appeals court ruling, after a Wisconsin district court ruled that the tax exemption was unconstitutional. The Freedom From Religion Foundation (FFRF) had argued that the housing allowance was clearly a handout and represented an “advance on religion on behalf of the government.” 

In Friday’s ruling, the 7th Court of Appeals disagreed, stating that the housing allowance provides opportunities for “churches to advance religion, which is their very purpose.” Judge Michael Brennan wrote that the exemption does not “connote sponsorship, financial support and active involvement of [government] in religious activity.” 

What is the Housing Allowance? 
 
According to current IRS tax guidelines, churches can compensate ministers who are “licensed, commissioned and/or ordained” for expenses directly related to the cost of living. (https://www.irs.gov/faqs/interest-dividends-other-types-of-income/ministers-compensation-housing-allowance/ministers-compensation-housing-allowance

 This housing allowance has allowed pastors to serve congregations that may have otherwise not been able to afford a pastor.  The allowance is similar to the exemption provided to military members and other workers that are displaced for their employment. 

What Happens Next? 
 
While the current ruling is indeed a victory for religious freedom, the ruling may not be the end of the story. FFRF is currently considering an appeal, which would surely drive the case to the US Supreme Court.  

What Can You Do? 
 
It’s important that we as church leaders continue to be above reproach, especially when it comes to financial management. While the housing allowance is a blessing to minsters, the allowance should never be abused. Be sure that your pastor’s compensation is calculated correctly, and only include expenses that meet proper IRS guidelines. To learn more, visit https://www.irs.gov/taxtopics/tc417. 

Are You Compensating Your Pastor Correctly? 
 
We’ve found that many churches are compensating their pastor incorrectly, or they are not confident they are doing it correctly. We can provide a FREE analysis of whether your church is handling your bookkeeping correctly and if you are paying your pastors and staff appropriately. Click here to schedule a quick call and let us know that you want to be confident that you’re handling your pastor’s compensation correctly! We’re happy to help!  

Three Things to Consider Now That Your Church or Ministry is An Employer

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So your church has taken a big leap and hired your first employee. Guess what, you’re now an employer.

As the church grows so does the need for help. There are many cases where you can be blessed to have volunteers pitch in, which we all know is a double-edged sword, but there are just times that it’s time to hire that first employee.

We’ve written information about having volunteers and how sometimes there are positions that are just better filled by a paid person.

Hiring that first employee is something that needs to be done with some forethought.

I’ve met several pastors that have hired their first employee and in hindsight realized they did it for the wrong reasons. Yes, there may have been work that they could do, but their motivation was really the pride that hiring an employee would mean that the church has some how now “made it”.

In reality, hiring that first employee in some cases has been the detriment for the church. There is a whole new set of needs and requirements that come into play now that your church is an employer.

Here are three things to consider now that your church has employees. In most cases, your ministry just got more complex.

1. You now have a new set of legal requirements and filings

As an employer, you are now on the “radar” of the government. I write that sort of tongue and cheek, but it is true. There is a new set of expectations from your organization now.

At the very least, you are now responsible for notifying the government via monthly or quarterly forms that detail the payroll information for the previous quarter. This requirement starts the day you begin compensating a person in an employment relationship.

“But we only pay a pastor and his compensation is all housing allowance…”

Doesn’t matter.

If that person is paid as an employee of your organization, you need to file the forms. Many times in this situation you will file the forms with $0.00 in the box for the taxable compensation numbers, but nonetheless the forms still need to be sent.

Secondly and very important, in most if not every case, the pastor IS and employee. Pastors are considered “Dual Status” which means they are an employee for Federal withholdings, but considered self-employed for SECA amounts (Medicare and Social Security). We will cover this in more detail in another post detailing pastors compensation.

Just remember, now that you are compensating people as employees, you have an obligation for accurate records.

One more thing on this before we move on, it is NOT ok to circumvent this by saying the person is an Independent Contractor and pay them via 1099-MISC. The IRS has very clear guidelines regarding this and that person has to met certain criteria to qualify. This is an area we see many churches handling incorrectly. We will also address this in an upcoming post.

2. You are now a boss.

Chances are you went got into ministry because your life was changed by the Gospel and you want to serve the Lord by helping others know the life changing Good News of the Gospel. You chose to be a pastor to preach the Word, disciple and encourage others in their faith, and work to spread the story of Jesus with your community.

I’ll bet you didn’t get into ministry with plans to run a small business.

As pastor of your church you are in a unique position once you hire that next employee. You serve a dual role as both pastor and boss.

Many lead pastors will attempt to delegate this responsibility to a committee or leadership team which will work in some instances, but is not the best solution. You’ve probably been around enough churches that are committee driven and in almost every case, those churches have horror stories on how people (pastors) have been treated.

I could write volumes of stories that I’ve seen and heard of churches and situations that have occurred with committees.

This has also been solved in some cases where churches have hired a pastor specifically for these areas. The Executive Pastor role has become popular recently in churches realizing that there is a huge need for someone to be focused on the administrative responsibilities of the organization.

What happens if you can’t afford that XP role? Guess who the responsibility falls to?

As an employer, there will ultimately be one person the IRS or state and local government looks to for as the “manager” of the organization. As much as many pastors try to say they’ve delegated this role, at the end of the day it will fall on them.

We’ll detail much more later but just remember you now have a dual role in the organization as “shepherd and boss”. Don’t let this role scare you, it really is a great opportunity when handled correctly.

3. Your Employees have expectations of you now that you are an employer

One of the greatest joys that people can have is working for a ministry. The fulfillment of knowing your work is being done for the Lord cannot be found anywhere else.

The minute you hire an employee, there is an expectation on you as the employer. This is a very simple area of being an employer, but is important as well.

Your employees need to have consistent, intentional communication on their role. This goes beyond just talking about job responsibilities and assigning tasks, but an ongoing communication on expectations and feedback.

Setup a time to have a routine, intentional chat with your employees. In our company, I push to have a weekly “check in” chat with every employee. Usually just 10-20 minutes those chats allow me to maintain the pulse of our organization. I get to know what’s going on personally with each person but also can keep a handle on their work-load and how they are feeling.

Secondly, you should have routine performance reviews. This is an area where many churches lack and problems arise. Let me share a scenario.

Let’s say you have an employee that gets hired and is a great worker. As time goes on, because there’s just a plethora of work to get done, and they are such a go-getter, they are able to expand and take care of many things. As boss, you see this as great because it keeps those tasks off your plate.

Months go on and because the work just gets done, you don’t have a chat or job performance review with the person.

Sounds great right?

As you know in most churches we assign tasks on the fly. Most people are doing what they do because they were the only person around that knew how to do something.

Let’s project this out to a story I hear many times. Let’s say that person continues to grow their role and because they have not had any guardrails or parameters of their position put in place, they are responsible for a lot of different things.

Now that person is perhaps in a role that you didn’t originally have for them. Let’s say you want to scale back their responsibilities a bit or they have begun acting “too big for their britches”. How are you going to have that conversation without it being confrontational and awkward?

Without consistent feedback and vision from you, your employees will develop their own vision of where they think things need to go and that may not match your vision.

Remember as well, It’s not just the employee that is affected by your decisions, but their family as well. We’ll definitely cover this in a later post.

Conclusion

There is so much we can cover on this topic and we’ll continue to publish posts to help you be a better “manager” of the church as an employer.

If you’re concerned about managing the records and legal requirements as an employer, consider outsourcing that to our Church Bookkeeping System. We’ll take care of everything from that perspective so that you don’t have to worry about it. It’s also better than bringing on a volunteer to do it and hope that they know what they are doing.

Choosing to hire that next employee is more than just a status to say that you’ve somehow now “made it” as a church. It’s an entirely new level of ministry that needs to be handled with some forethought and planning.

All that aside, when you’re church becomes an employer, you’re now able to impact more lives and it’s just that next step as the Lord continues to bless your ministry and grow where you’re reaching.

Does the Overtime Law Affect Pastors?

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The new overtime law that goes into effect December 1, 2016 will require many churches to review how they are managing their staff. Churches are not exempt from the New Overtime Law and it will have affect the way employees are compensated.

One big question we’re getting Does the New Overtime Law Affect Pastors?

The short answer is NO!

While that maybe is not definitive, all the initial considerations are showing that Ministerial (clergy) Employees will not be affected because of the ministerial exemption that exists in the FLSA. Furthermore, we can also conclude that even with no specific comment about pastors in the new law, their is a “duties test”put out by the Department of Labor that would provide job duties that would exempt an employee from the New Overtime Law. Since most pastors serve as the leader of their ministry or organization, it may be fair to determine that they would be exempt as an “Executive, Administrative or Professional” employee.

To view for your own knowledge, Ministers are considered exempt from any FLSA coverage which can be viewed on Table 3-1 of the final regulations which lists “clergy and religious workers” as one of the six categories of “Occupations Exempt from FLSA’s Overtime Provisions.” In plain English, pastors are not subject to minimum wage or overtime requirements of the FLSA. This would encompass people that function in a “spiritual/pastoral” function and not only through ordination. You can see that in the DOL Final Report on page 7 of the .pdf

The New Overtime Law for Churches

The new overtime law raises the minimum salary level for which a salaried employee must be compensated if they worked more than 40 hours per week. The former salary level was $23,600 per year which has now been raised to $47,476. Basically, anyone earning less than that amount (including salary, bonuses & commissions) is eligible for overtime pay.

What Does The New Overtime Law Mean for Pastors?

In general, pastors compensation will not be affected as they perform their duties as a minister for the church. Since they are exempted from FLSA under the ministerial exemption, they are not eligible for overtime pay.

4 Things Your Church Can Do To Prepare For The New Overtime Rule?

1. Consult legal advice. We’ll do our best to give you the facts, but your situation may be fact dependent on your current organization. You should view this article as legal advice.
2. Adjust pastor job descriptions with the following line: ” Religious Worker Not Covered By FLSA, Not Entitled to Overtime or Minimum Wage”
3. Review your church employment policies – it’s always good to do this periodically to make sure everything is up to date and current. Don’t let this document get out of date as your church grows.
4. Review your other employees to see if they may be affected by the new law – Here’s another article we wrote on how the new Overtime Law Will Affect Churches

As always, our goal is to help your church be freed up to focus on ministry. This stuff can get very complex and confusing and pull you away from focusing on your Church Mission and Vision. Let us partner and help you manage your payroll and accounting so you can focus on ministry. If you’d like to know more about how we help churches manage these parts of ministries, Get In Touch With Us.

How the New Overtime Law Will Affect Your Church

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Here’s what you need to know about the New Overtime Law for Churches

There is a lot of buzz right now as people are talking (sometimes freaking out!) about the New Overtime Law that goes into affect this December 1, 2016. There is a lot of chatter out there about what this means and how it will affect your organization and we’ll deal specifically with how this affects your church.

The new overtime law was put in place as an effort for the Government to require employers to pay what they consider “fair wage”. I will try my best to avoid political undertones and cynicism but forgive me if some comes through. I’m a skeptic of the value of this idea to say the least.

Under the new law, anyone making less than $47,476 per year regardless of white collar, blue collar, salary or hourly will need to be eligible for overtime pay. (In most cases, hourly employees were already entitled to overtime pay)

The intent of the law is to increase the number of people who qualify for overtime pay. For an illustration, this will greatly impact Restaurant Managers who work long hours and previously were paid a set salary. Overtime was just part of the gig.

The New Overtime Law For Churches

For our purposes here, we’ll assume your church is paying an Ordained Pastor, has a part time Ministry Assistant paid a set salary and an hourly custodian.

For paying your pastor, they will not be affected by the new law. Pastors are Clergy and not covered by the FLSA under the ministerial exemption from Labor Laws. What this means is that they are not subject to minimum wage concerns, nor do they benefit from the FLSA new Overtime Rules. We won’t get into the definition of Clergy according to FLSA or the IRS but in almost every case, the pastor will not be affected.

For NON-CLERGY employees, you must now increase the amount of documentation you are keeping. In that documentation, you will need to keep record that:
– the employee is paid at least your local/state minimum wage
– the employee did not qualify for overtime pay during each and every pay period (basically showing they did not work more than 40 hours/week)

What Happens If Our Church Doesn’t Follow The New Overtime Law?

The repercussions are pretty severe for an employer (your church) that doesn’t comply with the new law.

1. An employee may be entitled to unpaid back wages for “Off the Clock” volunteer work
1. We all know that ministry has to happen and in many cases, the Paid Staff are working when ministry happens. Many times they also volunteer for other ministries not directly related to their position. Unfortunately, since they are an employee and the church is an employer, there will not be a clear distinction between duties on and off the clock. This further provides reasoning for very clear and accurate time records. Also, take the additional step to add into the Employee Agreement or Offer Letter that describes their job and clearly states that any volunteer activities within the church are non-compensated.

2. The Fines can be Expensive!
1. Failure to comply can result in “Liquidated Damages” of two times unpaid wages and overtime assessed.

How Can Your Church Prepare For The New Overtime Law?

1. Make sure you employee documentation is clear, accurate and up to date. This should specify clergy and non-clergy roles as well as job descriptions.

2. Consider offering Comp-Time to your ministry staff.
Of course ministry has to happen, and there are times when people will put in long hours. Consider adding in comp time to the schedule and document those hours so you can be sure you’re avoiding anyone working over 40 hours per week. This may require giving an afternoon off to your secretarial staff to keep their total hours down.

3. Put a time system in place to track your Non-Clergy staff. Even if they are salary this should be done. The analysis may also help in future hiring decisions!

4. Use a professional Payroll System like ours to be sure people are paid accurately and the documentation is in place.

Does That Person You Paid Actually Qualify For a 1099?

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A current hot debate in the church world is when a person qualifies for a 1099-MISC for monies they were paid.  The big question is when does a person qualify for a 1099?
OK, I’ll admit, it’s kind of a nerdy topic, but you’ll be thankful you took a few minutes to read what’s next.
do they qualify for a 1099Many churches have unfortunately fallen victim to the idea that they can make the decision on whether or not someone qualifies to receive a 1099 vs. a W-2.
Unfortunately, that decision is not left up to the church.
Some have decided to issue a 1099-MISC because it seems easier.  It’s too tedious to add this person to payroll and we’re only going to pay them one-time.  Adding a person to payroll costs more money so we’ll just do it this way.
The problem with each of those statements is that it is not a decision the church has the authority to make.
The IRS has made it very clear when a person does and does not qualify to receive a 1099-MISC.  They have released a “filter test” form of 20 questions.  Here is a link to the IRS filter test to determine if a person is Self-Employed or a W-2 Employee.  If any one of the questions is true, that person is considered the result of that question (vague right?) Take a look at the form and you’ll get what I mean.
So what now?
Make sure you’re correctly classifying people that you pay individually at your church.
Here’s an example.
We had a church ask us about paying childcare workers.  They had a girl who worked for them one time during the year and wondered if they still needed to pay her through payroll.
It’s easy to attempt to avoid it because for one, there’s a good chance they’ll be paying her less than the $600 threshold where you are required to provide a 1099 MISC.
But let’s change the context.
What if this girl was working for your small business bakery that you owned.  She came by to help ice donuts one day and you paid her cash for her work.  Many in the business world would call this “paying under the table”.
Sounds a bit shady in that context right?
Well the same thing is basically happening in the church childcare scenario.  They are wanting to pay her “under the table” to avoid the work of getting her payroll documents and doing things above reproach.

What are the consequences?

Well, the IRS has been known when a decision has been made that the church paid people incorrectly where the entity (the church) has to pay the amounts that should have been withheld PLUS fines and penalties they can apply.  Where at one time the church was trying to save some money and time, it’s not coming back to bite them.

It’s a very tough situation and in some ways I will agree there seems to be some grey area.  however, do yourself and the church a favor and error on the side of caution.  If you are paying a person, chances are very likely you should pay them as a W-2 employee.
If you’d like to know more about this issue or to have a chat regarding your individual situation, get in touch with us, we’d love to hear your thoughts.

Your Church as an Employer

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As an employer, you now have new responsibilities to take care of.

It’s great to be in a position of ministry where there is need for more staff members. That means your church is growing and things are happening. But it also adds a new level of complexity to your ministry that needs to be considered. Here are a few items to keep in mind now that you are an employer.

1. You are responsible for accurately handling payroll

A place we see lots of churches get in trouble is improperly handling actually paying their employees. There are plenty of specifics to cover which will we’ll be handling in another post but at the most basic, you need to pay your employees, accurately withhold any federal and state taxes as applicable, file with your state the appropriate forms and make the Tax liability payments on time and provide documentation to your employees each year for their tax records.

Unfortunately, we see churches all the time that handle this incorrectly. Many times churches rely on people in the church that may have some idea on how to handle it, or they pay a big national firm way too much that doesn’t really know how to handle pastors payroll. Yes, pastors are paid differently than non-ordained employees, and the differences are not just salary versus housing allowance.

2. You now have added costs for insurance, benefits and such

You may or may not be able to offer benefits, but there are still a few things to consider now that you have an employee.

The ACA has added a new level of complexity for churches especially those with more than 50 employees. With fewer than 50, the fact is its probably easier to just avoid trying to offer a health benefit and just provide them more gross income to go get an individual plan.

You will also now have an added cost of Workman’s Comp insurance. In most states, this is a requirement as an employer but you’ll want to do your own research there.

Along with benefits, there are non-monetary benefits that you have to consider. What is your vacation policy? Do you offer sick leave? Will you just provide a total number of days off as PTO? Who will track that, approve it, etc.?

Obviously there are plenty of things to think about that just add more complexity.

3. You’re now a boss.

You’re now a boss of people. Finding the balance between pastor and boss can sometimes be a difficult line for some pastors. How are you going to make good hiring decisions? What is your process for hiring that next staff member? Does your leadership team agree with your system, do they fully understand whats involved?

And even worse, what happens when you need to fire that person? Firing in churches adds an entirely new level of complexity. Chances are, that person being fired has a family who attends your church. That decision now affects more than just the person getting fired.

Now hopefully, if it comes to that point, the decision was merited, but regardless, there are repercussions that extend beyond the employee/employer relationship that don’t exist in a secular business for instance. But also remember, the number of other churches that may be hiring are very limited, and even then, that process is often 6 months to a year to make a decision. When you have to fire a person from a church staff specifically, it is a much bigger deal.

Your role as pastor is also now entered a new dimension. You are no longer only pastor to these people, but you are their supervisor, boss and leader. In some cases you have to play a dual role and learn how to draw that line between loving people as their pastor, but also supervising as a boss.

Here is a great solution.

Consider services and tools at your disposal to help you handle and navigate the waters for your church as an employer. As a Simplify Church Bookkeeping Partner, we will handle most of these issues for you. Now we can’t help with your position as boss, but we can be an adviser, a trusted ear and discuss with you how to best handle situations that develop. Hopefully, but putting some systems in place you can proactively avoid any of the negative items we discussed here and set your church up for success as you grow your staff and provide jobs for people to serve in ministry.