How to Increase Your Salary by 19%: Become a Pastor (Ok, Not Really)

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why. This post isn't exactly in line with my usual Sunday "sermons", but the issue certainly deals with money and the church so I thought it fit best here.

I am on the mailing list for a pastor's leadership magazine (I'm not a pastor, but I wrote a few personal finance articles for the publication for free and they gave me a free subscription.) Every other month they send me a special CD where the host discusses issues related to church management with a special guest. This month they had a CPA on the show and talked about the various accounting/tax/finance issues associated with being a pastor.

I was surprised to hear how a couple of them can be very lucrative. So I went to Google and found this piece from the New York Times (not quite the expert on religion, mind you, but hopefully they have most of their facts straight.) This article talks about the various tax breaks associated with being a pastor (priest, rabbi, etc. -- really any form of church leader). The highlights:

...the most valuable tax break available to ordained clergy members of all faiths: an exemption from federal taxes for most of the money they spend on housing, which typically represents roughly a third of their compensation.

Ministers of every faith are also exempt from income tax withholding and can opt out of Social Security. And every state but one exempts religious employers from paying state unemployment taxes — reducing the employers’ payroll expenses but also leaving their workers without unemployment benefits if they are laid off.

If you do some quick adding in your head, you'll see that this can add up to quite a bit of money. More on that later -- let's keep exploring the issue for now:

The deduction, usually called the parsonage exemption, is available to ministers, rabbis and other clergy members of all faiths working at houses of worship. It allows them to live in congregation-owned housing without being taxed on the imputed value of their free housing.

Until 1968, clergy members were exempt from Social Security unless they joined voluntarily. Since then, they have been automatically covered — but, unlike other citizens, they are allowed to drop out as conscientious objectors if they assert, by a certain point early in their ministry, that they have a religious opposition to receiving public welfare benefits.

Because the exemption is irrevocable, why would so many ministers take such a drastic step? Clergy members are considered self-employed and therefore pay a 15.3 percent contribution to Social Security, Mr. Hammar explained. So young ministers on tight budgets sometimes decide, or are persuaded, to drop out and thereby give themselves an 18.1 percent raise.

“The vast majority of clergy who did opt out of Social Security never replaced it with another retirement scheme,” he added.

Yikes!

There's a lot more to this issue, and if you'd like to read about it you can check out what the IRS says about the clergy housing allowance.

I have a few thoughts on this issue:

1. The exclusion includes "the lesser of the fair market rental value (including furnishing, utilities, garage, etc.) of the amount officially designated (in advance of payment) as a rental or housing allowance, or the actual amount used to provide a home, and cannot exceed what is reasonable pay for your services." So think about it. Take your mortgage payment, cost of utilities, cost of furnishing the home, and so forth and add them up. What will they be? I'm not sure since I haven't had a mortgage in more than a decade, but let's be conservative and say that's 25% of your income.

2. Now add to #1 the fact that a pastor doesn't have to pay Social Security taxes if he doesn't want to. That's another 18.1% pay increase if you're self-employed. And even if you're not considered self-employed, you get to save your half of the 15.3% employer/employee payment every year. So that's another 7.65% added to your salary.

3. Taking #1 and #2 together, let's see the financial benefit of being a pastor. If you're in the business world and make $100,000 a year (I'm using this because it's a round number too -- easy to calculate -- but you could plug your own number in) and you go into the ministry making the same $100,000 per year, here's how much better off you'll be:

• Standard income: $100,000
• Total federal income tax owed (married filing jointly): $17,847.50
• Income after housing adjustment: $75,000
• Revised total federal income tax owed (married filing jointly): $11,597.50
• Amount saved by not paying your portion of Social Security taxes: $7,495
• Total saved by being a pastor: $19,092.50

I probably calculated these wrong a bit here or there, but I'm at least in the ballpark.

4. In other words, earning $100,000 as a pastor has the same financial benefit as someone who earns $119,092.50 in the business world (or in another profession.)

5. Don't quote me on this, but I believe that pastors can still claim the mortgage interest deduction if they itemize, so they don't lose out on this benefit when they get the housing allowance break.

6. Pastors/church members will say that these benefits are called for because pastors get paid so little compared to other professions. There are two ways to look at this -- both of them pointing to the same conclusion. The first is that pastors earn a low salary (FYI, this data is a bit dated -- I couldn't find anything more current) compared to what others earn. The details:

The study also revealed that the compensation package of the typical pastor now exceeds $38,000.

In 2006, the median annual household income according to the US Census Bureau was determined to be $48,201.00.

Note that the second number is income while the first is total compensation. If additional compensation was added to the second number (which it probably should be), the difference would be even greater. Then again, the first number is five years older, so it's likely that it's increased during that time.

But if you look at salary by education, pastors take a real beating:

George Barna, who directed the study, also pointed out that clergy compensation is especially noteworthy because more than two-thirds of all Senior Pastors have a graduate-level degree. Other professionals with that level of education earn average salaries over $60,000 or more, depending upon their profession. He pointed out that many church-goers, however, expect their pastor to earn less than the national average because they are involved in ministry, regardless of their school loans and family obligations. Pastors who have a seminary degree receive an average compensation package of $42,083 – significantly above the average for pastors without a seminary degree ($31,500), but notably below the national norm for professionals with advanced degrees.

7. The flip side of the argument in #6 is that other non-profit workers often earn a low salary but they don't get the same breaks. Maybe they should.

8. I don't have a real conclusion here other than I find the topic interesting. It certainly was new news to me. For those thinking of making a shift from another profession to going into the ministry, you can earn much less and still take home the same net amount as you do now. Good thing because it looks like if you make the move, you will be earning a lot less.

Comments

[bettergoalsetter]

every state but one exempts religious employers from paying state unemployment taxes — reducing the employers’ payroll expenses but also leaving their workers without unemployment benefits if they are laid off.

What's the one state? Bit odd that they're out in the cold there.

Would also be interested to know if Catholic priests', imams' and rabbis' income is similar to Protestant priests. And if nuns/monks count too.

[David]

In answer to your question, pastors can itemize deductions in addition to using the parsonage allowance. It's a unique double-deduction. You're also right about the salary discrepancies, particularly for those with advanced degrees.

The Master of Divinity degree I completed was 90 hours of graduate work -- in comparison to many friends who earned master's degrees with as little as 30-36 hours of graduate study. (Not complaining about this -- just another useful tidbit of comparision.)

[BenG]

What was with the unnecessary dig on the NYT?

From the looks of your article, most of the quotes had very little to do with religion. By and large, the content you quoted pertained to taxes and personal finance with an emphasis on employment in the religious field. If you didn't trust the material, why quote it in the first place?

I'm sure this comment won't see the light of day... But if you don't like the paper, don't use their material.

[FMF]

Ben --

Do you consider the NYT and expert on religion?

[BenG]

FMF -

Very few newspapers are "experts" in anything beyond condensing information from multiple sources and presenting it as news. So of course they are not "experts" on religion. But again, the comment you made was meant to be snarky. And besides, pretty much everything you quoted had to do with salaries, statistics, and tax law. I'm sure any major daily would be more than capable of gathering these facts and presenting them in an article, regardless of their qualifications on religion.

[Sarah]

While there's no doubt that a great many pastors do good and hard work for little pay, the same could easily be said of any number of public servants (check out the average salary for a starting ADA) or nonprofit workers. I'm not sure why I should be subsidizing employees of religious denominations in preference to them.

[El Cheapo]

FMF, it seems this post was written tongue-in-cheek but I would certainly recommend against anyone pursuing a pastor position due to financial compensation. My father is a head pastor and has been my entire life. Being surrounded by ministry and ministry-types my whole life, I can't remember one pastor that made 100K in salary. I'm sure they are out there, for larger churches, but its not something that is offered to someone immediately switching jobs from a non-clerical position.

Reasons to not chase money by becoming a pastor off the top of my head:

1) Seminary school costs - There are little or no scholarships available for seminary attendees. Even while working part-time to get through school, most pastor's I know start 50K in the whole. On average, they are fortunate to land a position out of seminary that pays above 35K.

2) Limited, or non-existent benefit packages - PTO, insurance, retirement options, etc.

3) Non-existent overtime pay - 70-80 weeks are the norm

4) Entry level pastors rarely make any money - Like many professions, pastors need to 'pay their dues'. So many younger pastors will start with youth ministries with lower starting pays than say.. a senior pastor with 20+ years of experience. Only after substantial experience will a pastor even be eligible for an increase in pay. I would say that the average starting pastor salary is between 30-40K.

5) All the random BS that pastors have to deal with - Don't want to get into details here. Not sure if this is offset by lower taxes though.

A pastor's life is one of sacrifice and servanthood. That should be the primary reason and calling for the profession.

[Elizabeth]

Interesting. My parents are both pastors, but I don't think they get either of these tax breaks.
Their housing is military housing, so they don't pay rent or a mortgage (though I suppose they could deduct things like the electric bill?). And they definitely pay Social Security--I think at times my mom has had to pay both parts of her Social Security despite being what most people would call "employed," though I could be wrong on that.

[Leia]

I agree with the comment above - getting through seminary can be daunting, and many ministers emerge with debt.

The starting salary is quite low, and it is so bad in our synod that they had to publish guidelines for congregations so that they paid their pastors a living wage.

That being said, many ministers do get free housing and perhaps free utilities (though the homes can be unlivable at times and congregations take offense at ministers complaining) and can opt out of social security. Many do get health insurance, and lots of free food. LOTS of free food. ;)

It's a very difficult profession, but if you are called you just go and do it. I know that you know that, of course. ;)

[Matt]

I know a pastor who leads a small but thriving church and who also works full time telecommuting to a company three hours away. Not sure if the social security opt-out benefit applies to his secular income, though.

Although being a pastor is definitely a lot of work and involves a lot of time commitment, I think pastors probably have a very high quality of life, at least it seems so from the outside looking in.

[Jim]

Thank you all for this discussion. My wife and I are Co-pastors at a small church in Wisconsin, smaller than the average Protestant attendance. (by the way, it may be helpful for some that read FMF to know that the average Protestant church has attendance of 102) We are splitting 1.5 positions and have had this arrangement in our current church for 4+ years and in our former church for 6 years.

In our former church, we lived in a church owned house, a parsonage. That was per terms of our call. While housing was provided and utilites paid, we built up zero equity. If we would have bought the house and sold it when we left, we would have "made" well over $100,000. I'm not complaining, that's just how it was.

Where we are now, we have purchased a home. It is below the average price for homes in our area. We would not be able to afford even this home without the "housing allowance."

Also, we both feel God has called us to the ministry. It has its ups and downs, like all types of work. I would like to comment though, on how "good a life" it is. If we were not called to it, we would never do it. In the 1960's, being a minister was way up on the list of "healthy" professions. Now it is very near the bottom. There are a thousand reasons for that, but for most pastors I know, they would say the same.

If you are a church-goer, why don't you give you pastor or pastors an extra word of thanks this week. That goes a long way.

with infinite hope, Jim