Understanding Clergy Compensation 2014 (in progress)


Table of Contents

Click on any of these topics to jump to that section. Use Ctrl-F (Cmd-F on a Mac) to search for any word on this page.

  1. Clergy Compensation Is Complicated
  1. Mandated Clergy Compensation
  1. Determining Part-Time Compensation
    • Full-time clergy living in church-owned housing (Full time, in rectory.xls attached above)
    • Full-time clergy living in own home (Full time, in own home.xls attached above)
    • Part-time clergy living in church-owned housing (Part time, in rectory.xls attached above)
    • Part-time clergy living in own home (Part time, in own home.xls attached above)
    • Calculating the Social Security offset (Social Security offset.xls attached above)
  1. RSVP: Retirement SaVings Plan
  1. Establishing A Housing Allowance
    • Worksheet for calculating housing (Housing Allowance Worksheet.xls attached above)
  1. Examples of Housing Allowance Resolutions
  1. Housing Equity Allowance
  1. Social Security Offset
  1. Pension Assessments and Benefits
  1. Disability Benefits
  1. Medical and Dental Insurance
  1. Parental Leave Policy
  1. Sabbatical Policy
  1. Business Expenses
  1. Discretionary Fund Guidelines
  1. Letters of Agreement
  1. Forms

1. Clergy Compensation Is Complicated

Did you know?

  • Clergy are considered self-employed for Social Security purposes (SECA, not FICA), but are considered employees for federal and state income tax purposes (W-2, not 1099).
  • The value of clergy housing, or Cash Housing Supplement, is not subject to federal or New Jersey state income tax, but is taxed for Social Security purposes.
  • Clergy must participate in a defined-benefit pension plan (the Church Pension Fund) paid for by the congregation.
  • Clergy may choose to participate in a defined contribution supplemental pension plan (RSVP); these contributions are not subject to federal income tax, but are subject to New Jersey state income taxation.
  • The Internal Revenue Service and the Church Pension Fund use different formulas for calculating the value of church-owned housing.

Have we convinced you yet? Clergy compensation and benefits can be confusing. These online resources intended to help you—wardens, treasurers and, yes, clergy, too—understand clergy compensation. We welcome your comments and questions.

Please contact the Finance Office of the Diocese (973-430-9900) if you need additional assistance.

—The Bishop’s Advisory Committee on Human Resources and Benefits


2. Mandated Clergy Compensation

The Diocese of Newark’s annual convention establishes mandatory levels of compensation and benefits for clergy and lay employees of all institutions subject to the authority of the church. These are updated regularly.

The most complete and up-to-date summary of clergy compensation standards: http://www.dioceseofnewark.org/convention/clergy-lay-compensation-and-benefits-resolutions-2013.

In order to help you ascertain the full cost of compensating clergy, you will find some links on the preceding web menu page, giving examples of clergy compensation. Each assumes a mid-sized congregation with a clergy person having five years of ordained experience. Please feel free to copy the spreadsheets and adapt them to your needs.


3. Determining Part-Time Compensation

Currently, the standard of this diocese is that full-time clergy work approximately fifty hours in an average week. Compensation calculations for part-time clergy should be based on this average. For example, a half-time position would require twenty-five hours of work per week. Clergy, whether part-time or full-time, are acknowledged to be available for serious pastoral emergencies all of the time.

Bear in mind that clergy working half-time generally do not work half the Sundays, preach half a sermon, or attend half a Vestry meeting. Care must be taken to assure that the workload is appropriate; this should be carefully considered and explicitly stated in the Letter of Agreement. A priest working half-time simply cannot do everything expected of a full-time priest.

Clergy working part-time are compensated based on the applicable percentage of full-time compensation. For example, a half-time position would require one-half of the minimum cash stipend. Some benefits, such as health and dental insurance, would be paid in full. Clergy who live in church-owned housing—even if working part-time—would receive the full benefit of the housing with full utilities paid and would owe SECA tax on the fair-market rental value.


4. RSVP – Retirement SaVings Plan

Many clergy take advantage of an optional program made available by the Church Pension Group called RSVP, a 403(b) retirement plan that lets you save for retirement in a tax-effective way. This flexible savings plan allows both pre-tax and after-tax contributions. Your investment grows tax-deferred until the money is withdrawn, usually after age 59-1/2. In 2013, you may contribute up to $17,500 before taxes if you are under age 50, and an additional $5,500 (total $23,000) if you are 50 or older. If you have at least 15 years of service with the Episcopal Church, you may elect to contribute even more, according to an IRS formula. Clergy who wish to participate voluntarily elect to receive a lower cash stipend, with the difference contributed by the congregation to the cleric’s RSVP account. These funds MUST come from the employer (or payroll provider), not from the cleric’s own bank account.

Contributions to this tax-deferred account are not subject to federal income taxes until they are withdrawn, usually after retirement. These contributions are not subject to SECA tax. However, the state of New Jersey does not have a deferral provision; these voluntary employee contributions are subject to state income taxes in the year of the contribution.

This account is also used for church employer contributions for the housing equity allowance. The combined total that you and your employer contribute may not exceed 100% of your salary or $51,000, whichever is less. Employer contributions are not subject to state income tax until withdrawn and are not subject to SECA tax.

More information can be found here: http://www.cpg.org/productsservices/rsvp1.cfm

Many financial institutions provide competitive 403(b) programs. Our only caution is that you be sure you understand them thoroughly before you open an account. Two advantages to RSVP are that 1) their only customers are Episcopal clergy and lay employees, and 2) funds withdrawn from RSVP after retirement are eligible for the housing allowance exclusion provisions available to clergy, subject to some limitations, which will not be available through most commercial institutions.


5. Establishing a Housing Allowance

For clergy who own or rent their own home, the congregation provides a Cash Housing Supplement. The amount of this allowance should be sufficient to provide housing adequate for the clergy family within the geographic area of the church.

Regardless of whether the cleric lives in church housing or a private residence, a portion of total compensation can and should be declared as a Housing Allowance for tax purposes.

It is the responsibility of the clergy—and not the vestry, wardens, or congregation—to ascertain the amount of a housing allowance and to ensure that the amount has been expended appropriately. Clergy have the means to declare any unspent housing allowance as taxable income on Form 1040; if they spend more than the declared housing allowance, they cannot address the tax consequences of this.

This cash Housing Supplement plus a portion of the cash stipend (if requested by the clergy) should be designated by the Vestry or Executive Committee as a “housing allowance” in accordance with the Internal Revenue Code Section 107. This then allows this portion of the cleric’s compensation to be exempt from federal and state income taxes, within limitations noted below. Sample resolutions can be found below. The designation must be voted upon prior to the performance of services for which payment will be made and explicitly noted in the minutes of the meeting. Most vestries plan to approve this housing allowance designation at the December meeting each year.

The clergy person should tell the vestry (or Executive Committee) the amount to be designated in the resolution. He/she is solely responsible for tracking qualified housing expenditures and declaring any excess “housing allowance” as income. The maximum amount of “housing allowance” that is excludable from taxable income is the lowest of the following three amounts:

  • The fair market rental value of the house (fully furnished),
  • The actual amount spent to provide housing (including furnishings and utilities), or
  • The amount designated in the vestry designation.

A worksheet provides a list of allowable expenses and a format to use to determine appropriate excludable amount. This is found on the web page above.

Key Point

Remember: churches cannot designate a housing allowance retroactively. Housing allowance may be amended during the year for the balance of the year if housing expenses, or the fair market rental value, changes.

Key Point

Retired clergy are eligible for a housing allowance exclusion as long as the following conditions are satisfied:

  • A portion of a retired clergy person’s pension income is designated as a housing allowance by the church pension board of a denominational pension fund;
  • The retired clergy person has severed his or her relationship with the local church and relies on the fund for a pension.

The Church Pension Fund designates all retirement benefits paid to ministers (through the clergy plan, as well as the 403(b) plan [RSVP]) as eligible for the housing-allowance exclusion. It is the responsibility of the cleric to determine the eligible housing expenses.

Self-employment tax does not apply to any retirement benefits received by clergy (except possibly retirement benefits paid from a nonqualified deferred compensation plan). Self-employment tax does apply to earned income, including the value of housing, if provided after retirement.


6. Examples of Housing Allowance Resolutions

Resolutions such as these should be approved annually, before the start of the new year, and whenever changes are requested by the cleric. Items in italics or (parentheses) should be replaced by the actual names, dates, amounts, etc.

1. For a cleric who lives in church-owned housing

The following resolution was duly adopted by the vestry of St. Swithin’s at a regularly scheduled meeting held on December 13, 2013, a quorum being present:

Whereas, Section 107 of the Internal Revenue Code permits a minister of the gospel to exclude from gross income the rental value of a rectory furnished to him/her as part of his/her compensation, and a church-designated housing allowance paid to him/her as part of his/her compensation to the extent used for actual expenses incurred in maintaining the rectory; and

Whereas, (name) is compensated by St. Swithin’s exclusively for services as a minister of the gospel; and

Whereas, St. Swithin’s provides (name) with rent-free use of a church-owned rectory as compensation for services that he/she renders to the church in the exercise of his/her ministry; and

Whereas, (name) incurs expenses for living in church-provided housing; therefore it is hereby

Resolved, that the annual compensation paid to (name) for calendar year 2014 shall be $50,000, of which $5,000 is hereby designated to be a housing allowance pursuant to Section 107 of the Internal Revenue Code, and it is further

Resolved, that the designation of $5,000 as a housing allowance shall apply to calendar year 2014 and all future years unless otherwise provided by the vestry.

2. For clergy who provide (rent or own) their own home

The following resolution was duly adopted by the vestry of St. Swithin’s at a regularly scheduled meeting held on December 13, 2013, a quorum being present:

Whereas, Section 107 of the Internal Revenue Code permits a minister of the gospel to exclude from gross income a church-designated allowance paid to him/her as part of his/her compensation to the extent used by him/her for actual expenses in owning or renting a home; and

Whereas, (name) is compensated by St. Swithin’s exclusively for services as a minister of the gospel; and

Whereas, St. Swithin’s does not provide (name) with a rectory, therefore, it is hereby

Resolved, that the total compensation paid to (name) for calendar year 2014 shall be $65,000 of which $15,000 is hereby designated to be a housing allowance; and it is further

Resolved that the designation of $15,000 as a housing allowance shall apply to calendar year 2014 and all future years unless otherwise provided.


7. Housing Equity Allowance

Clergy who live in church-owned housing do not have the opportunity to benefit from the build-up of equity in their homes that is available to those who own their own homes. This affects their ability to purchase a home for retirement. For that reason, the diocese mandates that the congregation pay into a tax-deferred account (such as RSVP) an amount equal to at least 2% of the Total Clergy Compensation each year. This is called a Housing Equity Allowance.

It is recommended that this amount start at 2% and grow to 10% of Total Clergy Compensation over time. The amount contributed is included in the pension fund assessment calculation (but not in the pension fund’s calculation of the value of housing), and is not subject to SECA tax. It is a deferred compensation payment and, therefore, is not subject to federal income taxes until withdrawn, usually after retirement. Because these are employer contributions, they are not subject to state taxes until withdrawn.

To calculate the Total Clergy Compensation, please see the appropriate examples above.


8. Social Security Offset

Clergy are considered employees for income-tax purposes (compensation is reported on an IRS form W-2) but are taxed as self-employed persons for Social Security purposes. This is called SECA, which is named for the Self-Employment Contributions Act. For lay employees, the Social Security FICA tax is 7.65% deducted from the employee’s paycheck and 7.65% paid by the employer. For clergy, the employer/congregation does not pay this FICA tax, but the individual pay 15.3% SECA tax (note that 15.3% is exactly double 7.65%). Both FICA and SECA are taxable up to a maximum earnings amount, which is $113,700 for 2013 and is periodically adjusted by Congress.

The Diocese of Newark mandates that clergy compensation be enhanced by an amount equal to 50% of the clergy person’s estimated SECA tax to compensate for this additional tax. It should be noted that this compensation enhancement is also considered taxable income. A spreadsheet outlines the calculation of the Social Security offset; it may be found on the contents page, above.

For clergy living in rectories or vicarages, housing value for IRS purposes is the FAIR MARKET RENTAL VALUE of the housing provided. For clergy living in their own homes (whether rented or owned), housing value for IRS purposes is the actual cash payment for housing (housing supplement plus utilities).


9. Pension Assessments and Benefits

Retirement benefits are provided to all clergy in the Episcopal Church by the Church Pension Fund. By canon of the Episcopal Church, congregations must pay assessments to the Church Pension Fund on behalf of their clergy. Assessments are calculated at 18% of Total Clergy Compensation. Participation in the Pension Fund provides many more benefits that pension alone. Full details are available at www.cpg.org. In summary, benefits include:

Lifetime pension based on years of participation and highest average compensation,

Life insurance,

Disability benefits, short- and long-term,

Benefits for a surviving spouse or named beneficiary/partner after the death of the cleric,

Benefits for surviving dependent children after the death of the cleric, and

Medical insurance supplementary to Medicare.

Sample Pension Assessment Calculations

1. Clergy receiving a cash housing supplement:

Cash Stipend

$50,000

Housing Supplement

23,000

Utility Allowance

5,000

Social Security (SECA) Offset

    5,967

Total Clergy Compensation

$83,867

Pension Rate

18%

Pension Assessment

$15,115

 
2. Clergy living in a rectory or vicarage:

Cash Stipend (a)

$50,000

Utility Expense (b)

4,000

Social Security (SECA) Offset (c)

8,542

Housing Pension Value (a+b+c) x 0.3
For pension purposes, the pensionable value of housing for those living in a rectory or vicarage is 30% of the total of cash salary, utilities, social security offset, and other cash compensation, not including the Housing Equity Allowance.

18,763

5% Housing Equity Allowance (d)

   4,065

Total Clergy Compensation

$85,370

Pension Rate

18%

Pension Assessment

$15,367


10. Disability Benefits

For clergy who are unable to work because of illness or injury, the Church Pension Fund provides long and short-term disability benefits as part of the pension fund package. Short-term disability benefits begin after 30 days and are intended for those who expect to be able to return to work. Long-term disability benefits are for those who have a total disability that is expected to continue for life. In essence, the cleric retires from active ministry and begins receiving a retirement benefit with a disability supplement, described below (taken from the Pension Fund website):

Disability Retirement, or Long-Term Disability Benefits:

  • Before age 65, the benefit provides 70% of the total compensation you were receiving before the onset of your disability, regardless of the number of years you served. After age 65, the benefit is equal to the retirement benefit you would have received if you had worked until 65.
  • To qualify for the enhancement, you must be an active participant in the clergy pension plan (that is, clergy on whose behalf assessments are being paid and are up-to-date). A physician must certify that your disability is total and continuing, and CPF's Medical Board must concur. Until you reach age 65, CPF's Medical Board reviews your disability at least once a year to determine whether benefits should continue. If you are still disabled at age 65, benefit payments continue for life.
  • The benefit is for total disability only and initially does not provide partial disability coverage. However, after you have received total disability benefits for one year, a reduced benefit may be possible should you return to work part time.

Example: How the enhanced disability benefit works

Cleric, age 52 at date of disability
Total Clergy Compensation before disability

$60,000

HAC (Highest Average Compensation)
Credited service: 17 years at time of disability retirement
Total projected credited service to age 65: 30 years

$54,000

Cleric would receive:
Lifetime monthly disability benefit (current benefit formula)
Retirement benefit, with cost of living increases when granted

$2,447.50

Plus disability benefit enhancement
Additional benefit to age 65, cost-of-living increases when granted

$1,052.50

Plus disability bridge benefit: $17.50 x Credited Service per month

$525

 

Short-Term Disability: https://www.cpg.org/linkservid/A7F6F3D3-B6CE-2C83-0DF0F1B427C3E884/showMeta/0/?label=A%20Guide%20to%20Short%2DTerm%20Disability%20%28Clergy%29


11. Medical and Dental Insurance

Diocesan policy mandates that the congregation provide medical and dental insurance to the cleric and his/her family, if required. Information about plans from which clergy may choose is available here: http://www.dioceseofnewark.org/hr/enrollment-application-rates-plan-comparisons.

Enrollment and termination are coordinated by the Finance Office of the Diocese; forms may be found here:


12. Parental Leave Policy

Adopted by 128th Annual Convention in January 2002

RESOLVED, that the 128th Convention of the Diocese of Newark mandates the granting of parental leave in conformance with the resolution passed by General Convention in 2000, to wit:

A member of the clergy who has been employed by the church for at least one full year and is the designated "primary child-care parent" is entitled to leave for the birth or adoption of a child for a minimum of eight weeks with pay. Up to eight additional weeks may be taken without pay. The member of the clergy may elect to use vacation leave or sick leave during this latter period.

A member of the clergy who has been employed by the church for at least one full year and is the “non-primary-care parent” is entitled to leave for the birth or adoption of a child for a minimum of two weeks with pay and up to ten additional weeks without pay.

A member of the clergy employed by the church for less than one full year is entitled to the same numbers of weeks leave. Pay during this period is negotiated between the church and the cleric.

Supporting Information

In 1998, the diocese established the principal that parental leave was a right for new parents, mandating six or eight weeks leave with pay (depending on birth circumstances) and six additional weeks negotiated with the vestry. The resolution would update our policy to conform with what was passed by General Convention.


13. Sabbatical Policy

Adopted by 128th Annual Convention in January 2002:

RESOLVED, that the 128th Convention of the Diocese of Newark recommends that each parish and mission plan annually for the financial implications of the clergy coverage necessary so that full-time clergy can take a minimum three-month sabbatical every five-to-seven years.

Supporting Information:

The diocese has long suggested that clergy be eligible for a sabbatical every five to seven years. Many clergy find, however, that when actual plans for a sabbatical are being made, a principal stumbling block is that the church does not have funds available to pay the cleric’s salary and pay for the clerical assistance expected during the sabbatical time. This resolution would encourage every congregation to set aside money in each year’s budget for this eventual purpose.

Some congregations are able to financially support clergy with additional funds for sabbatical travel or study or both. That is certainly encouraged as well. At a minimum, every congregation prepare for the funds necessary for clergy supply.

One addition note: sabbatical time is in addition to vacation time, sick time, and time set aside for continuing education. Often, clergy planning a sabbatical will plan for vacation, continuing education, and sabbatical time to be taken contiguously.

To read the full diocesan clergy sabbatical policy online: http://www.dioceseofnewark.org/bishop-office/clergy-sabbatical-policy


14. Business Expenses

Though not a compensation item, it is important for every congregation to set aside a budget line item to reimburse the cleric for expenses incurred on behalf of the congregation’s business. For instance, clergy will often use their own car to drive to the hospital to visit parishioners, will meet with the wardens for breakfast or lunch meeting, and pay for pizza for the youth group on a Friday evening. All of these are business expenses of the congregation, and the cleric should be reimbursed for them. The diocesan guidelines mandate a minimum to be designated for this purpose annually. A more complete list of what constitutes reimbursable business expenses can be found in the Tax Guide for Episcopal Ministers published by the Church Pension Fund and available at: http://www.cpg.org/productsservices/taxresources.cfm

The best way for clergy to handle business expenses is to have the employing church adopt an accountable business expense reimbursement arrangement. Under such an arrangement,

  1. A church agrees to reimburse clergy (and other church workers, if appropriate) for those business expenses that are properly substantiated as to date, amount, place, and business purpose, and
  2. Clergy are required to return any excess reimbursements (in excess of substantiated expenses) to the church.

Reimbursements of business expenses under such an arrangement are not reported as taxable income on the minister’s Form W-2 or Form 1040, and there are no deductions to claim. In effect, the minister is reporting to the church rather than to the IRS.

An accountable business expense reimbursement arrangement should be established by the church in an appropriate resolution. In adopting a resolution, pay special attention to the following rules:

  1. Condition the reimbursement of any expense on adequate substantiation. This will include written evidence for all expenses, and receipts for expenses of $75 or more. The evidence must substantiate the amount, date, place, and business nature of each expense. The key point is this: a church must require the same degree of substantiation as would be required for a deduction on an income tax return.
  2. Expenses must be substantiated, and excess reimbursements returned to the church, within a reasonable time. Expenses will be deemed substantiated within a reasonable period of time if they are substantiated with 60 days. Excess reimbursements will be deemed to be returned to the employer within a reasonable period of time if they are returned within 120 days.
  3. Business expense reimbursements cannot be funded under an accountable plan out of the clergy’s own salary (for example, through salary reductions).

(Taken from 2013 Tax Guide for Episcopal Ministers, which may be found online at https://www.cpg.org/linkservid/8AA9B309-D15F-6432-A2D52B49AF1B8DDB/showMeta/0/)


15. Discretionary Fund Guidelines

Discretionary funds are not compensation to the cleric, but constitute an important and often misunderstood financial item to the congregation. The following guidelines were ratified by the Diocesan Council in December 1997, with updates as of November 2003.

Discretionary funds have been in use within the Episcopal Church for decades if not centuries. Yet the Canons of the Church do not mention discretionary funds by name. The basis for discretionary funds apparently comes from Title III, Canon 14(f), first approved in 1814; it provides for a special offering for the poor to be administered by a member of the clergy as almoner, the person charged with giving alms to the poor. The canon further provides for the appointment of “a responsible person” if the parish is without a rector.

In recent years there has been a great deal of review of the appropriate use of discretionary funds. The following, which are based upon Episcopal Church guidelines, are the guidelines for discretionary funds in the Diocese of Newark.

  1. The discretionary fund is a fund of the parish or mission. It is the discretionary fund of the parish/mission. The funds belong to the church and remain with the church once the priest ceases to be the rector/vicar.
  2. All donations for the discretionary fund should be made to the church, deposited in a church account and then transferred to the discretionary fund. The only deposits made to the discretionary fund should be checks drawn on a church account. There may be rare occasions where direct deposits to the discretionary fund are necessary. Such transactions should be extremely rare and the nature of the transaction should be shared with a warden or the treasurer.
  3. The discretionary fund should be audited annually along with the rest of the church's finances. Such an audit should be conducted in accordance with the audit requirements of the Diocese of Newark.
  4. Episcopal Church guidelines permit the use of the discretionary fund for expenses “related to the exercise of ministry not otherwise provided in the church’s budget,” so long as the vestry/executive committee gives prior general approval for such a use of the fund. This could include the purchase of books, journals, and related expenses, but should not be used for the general operating expenses of the church. While such a use of the discretionary fund is permitted, it is recommended that such items be provided through a budget line entitled “rector or vicar’s expenses” rather than being paid out of the discretionary fund.
  5. If the discretionary fund is maintained as a separate account, the priest should keep detailed records of the funds transactions. When checks are written to cash, the priest should keep a private record of what is done with the proceeds. Monthly the bank statement for the account is to be submitted to the treasurer for verification that all deposits made into the account came from disbursements from a church account. The treasurer should make a notation on the bank statement and file it with the church's financial records.
  6. The primary use of discretionary funds is to assist the poor of the congregation and the larger community. Wherever possible it is preferable that payments for rent, utilities, medical care, and the like be made directly to the provider rather than to the individual or family.
  7. The Canons provide for funding for discretionary funds to come from the un-designated “alms and contributions” at one service per month throughout the calendar year. In practice this has traditionally meant the loose offering at one service. Some congregations also provide funding through the church budget. Churches also may have a policy that all fees for weddings, funerals, and baptisms be deposited in the discretionary fund.

16. Letters of Agreement

The most up-to-date templates for Letters of Agreement can be found online at http://www.dioceseofnewark.org/clergy-transition.


17. Forms

Enrollment Forms

Church Pension Fund

Episcopal Church Medical Trust

Retirement Savings Plan (RSVP)

Termination Forms

Resource Date: 
Dec 4, 2013