Document Sample

  A Presentation for Seniors

Lutheran Theological Seminary
        at Gettysburg

Rev. Dr. Marty Stevens, CPA
    22-23 January 2008
          Ancient prebends
• Prebend = the right to an income from the
  temple in return for the performance of
  services connected with the cult
• Quantity and quality depended on age,
  status, and type of work performed
            Ancient Prebends
• Dates, barley, beer, a share of the sacrificial
  offerings, wool, shoes, blankets, and water-
• “Sale of his entire share in the cook’s prebend,
  his entire share in the buckets of the goddesses,
  his share in the tail meat of the ox and the
  pertinent hides, his entire share in the …-s of the
  goddesses, and his entire share which he owns
  with his brothers and partners which pertains to
  the cook’s prebend.”
     Compensation for Priests
“And this will be the just due of the priests:
  from the people, from the ones offering the
  sacrifice, whether bull or lamb, he will give
  to the priest the arm and the jaws and the
  stomach. Your first grain, your new wine,
  and your fresh oil, and the first of the
  shearing of your flock you will give to the
  priest.” Deut 18:3-4
         Modern prebends
• You need enough compensation to live on
  AND you are being supported by the
  resources of the people of God. Personal
  stewardship matters.
• We are called to be servant leaders or
  lead servants, not bosses or employees
• This is a CALL, not a job
 Compensation – CASH
  + Salary
  + Housing Allowance or Parsonage Allowance
  + Social Security (SECA) Allowance
  + Other Income - CASH

+ Compensation – BENEFITS
  –   Medical Insurance                   Reimbursed Expenses
  –   Pension Plan                            Travel
  –   Vacation                                Continuing Education
  –   Other Days
                                              Official Meetings
• Check minimum salary guidelines for the
• Pay attention to categories and definitions
• Some first-call congregations do not offer
  the minimum; this is worth a conversation
  with the Bishop
• Ask for some recognition of “first career”
• Regular personnel reviews and salary
  adjustments; if not at minimum, ask for
  early review
          Housing Allowance
• Clergy are entitled to a special tax loophole --
  amounts spent on housing are excluded from
  your taxable income. You receive the funds but
  you do not declare the funds as taxable income.
• YOU decide this amount, not the congregation!
  Often Synod guidelines list an amount, but YOU
  decide the amount you will declare as housing
• The Congregation Council MUST approve each
  year the amount you designate and it must be
  recorded in the official minutes
• Estimate amount for upcoming calendar year:
  • sum of rent or mortgage principal and interest
  • Utilities (electricity, gas, fuel oil, water & sewer, trash
    collection, cable, phone, internet)
  • Furnishings (furniture, appliances, rugs, curtains,
    durable goods)
  • Real estate property taxes, property insurance
  • Maintenance costs for house and yard (lawn mower,
    weed eater, grass seed, fertilizer, paint, major repair
          Housing Allowance
• Keep track of all “Housing Allowance”
  expenditures during the calendar year
• Compare your Estimated/ Declared amount with
  the Actual amount
• NON-TAXABLE amount for IRS purposes is
  smaller of estimated allowance designated at
  beginning of year OR actual expenditures at end
  of year
• (Total is also limited by fair market value
  Housing Allowance – practically
• Make a good estimate of your eligible
  housing expenses for the calendar year
• Add some amount to the estimate (10%-
  15%) as a cushion
• You want your approved housing
  allowance to be at least as much as your
  expenditures, but not too much more than
  your actual.
• Parsonage generally considered to be worth
  30% of salary (when comparing call packages)
• Congregations may provide furnishings and/or
  utilities allowance that is treated as “housing”
• Congregations may provide equity allowance
  (synod guidelines typically 1%-3%) Deferred
  income held in investment account, taxable
  upon distribution
Example: A pastor earns an annual salary of
$42,000 and designates $12,000 as housing
allowance in January. When the pastor totals all
receipts on housing at the end of the year, the
actual amount spent on housing was $10,500.

How much can the pastor exclude from taxable
income as non-taxable housing allowance?

                                designated amount or the actual.
                             Answer: $10,500, the smaller of the
    Social Security Allowance
• Employees of a business are responsible
  for FICA tax (Federal Income Contribution
  Act). Normally the employer pays 50% and
  the employee pays 50%. In 2007 the rate
  was 12.4%.
• Pastors are self-employed for Social
  Security purposes and are required to pay
  15.3% SECA tax (Self-Employment
  Contributions Act) on full salary (including
  amounts designated as housing
          SECA Allowance
• Many synod guidelines suggest a
  minimum of 50% = 7.65% (“employer’s”
  portion); some pay the full amount.
• Whatever is paid to you is included in your
  total defined compensation.
• The actual calculation of SECA tax due is
  done on Schedule SE (more later).
+ Base salary (taxable amount)
+ Housing allowance (non-taxable amount)
+ SECA allowance paid to you

= Total Defined Compensation
For purposes of calculating benefits
             Other Income
• Interest and dividend income
• Fees received for weddings, funerals, etc.
  Check congregational policy. Consider
• Bonuses; Christmas gifts that are collected
  by congregation-wide solicitation
         Cash Compensation

Salary                $42,000
Housing Allowance     (12,000)     Spent on housing
Taxable salary         30,000

Set aside for taxes    ( 7,500)

                                  Food, clothing,
                                     entertainment, student
Usable Cash           $22,500        loan pmts, car pmts,
                                     charity, etc.
   Compensation - BENEFITS
• Medical Insurance – coverage in the ELCA plan
  for pastor or pastor and family
• Pension Plan – 10% to 12% of defined
  compensation contributed by congregations;
  your additional pre-tax contributions are tax-
• Vacation – 4 weeks per year, incl 4 Sundays
• Other days – sick leave, maternity/parental
  leave, continuing education days (2 weeks, incl
  2 Sundays), sabbatical policy (min. 3 months
  after 7 years)
              Cost of Benefits
• Very helpful calculators at
• Defined Compensation Calculator
   – You input Base Salary of $30,000
   – You input Housing Allowance of $12,000
   – Calculated SECA of $2,800
   – Calculated Defined Compensation of $44,800
          Cost of Benefits
• Benefits Contribution Calculator
• Input Defined Compensation and make
  choices for benefit levels
• Single coverage, 10% pension, Lower
  Susquehanna means benefits cost the
  cong $11,247/yr
• Family coverage, 12% pension, Lower
  Susquehanna means benefits cost the
  cong $20,439
      Compensation Package
• Most congregations have a “bottom line”
  amount in mind for the cost of the pastor.
• Use the calculators to move money
  between line items.

Medical – Member only 4,632       11,592   Medical – Family
    Pension Plan 10% 4,008         4,001   Pension Plan 12%
  Other (Disability, etc) 1,282    1,067   Other
       Total Benefits $9,922      16,660   Total Benefits

         SECA 7.65%      2,848     4,424 SECA 15.3%

Compensation – Cash 37,230        28,916 Compensation - Cash

     Salary Package $50,000       $50,000 Salary Package
      Reimbursed Expenses
• Travel
  – Reimbursement of actual business mileage
    (commuting mileage is not included) OR
  – Estimated auto allowance agreed on in
    advance; compare with actual mileage and
    settle account at end of year
  – Either way, keep a log of daily mileage!
  – Receipts for other travel expenses (parking,
• Moving Expenses
      Reimbursed Expenses
• Continuing Education
  – Minimum 50 Contact Hours per year, report to
    Bishop annually
  – Annual amount (minimum $700) cumulative
    for specified number of years
  – Continuing Education Covenant with
• Publications
  – Annual amount for books and periodicals
    (minimum $100)
       Reimbursed Expenses
• Official Meetings
  Costs related to attending Synod and
  conference meetings, area ministers’
  association, etc.
• Entertainment
  Costs related to meals with business colleagues
  or parishioners. Consider carefully.
• Supply pastors for Sundays away from parish or
  preachers on special occasions (Homecoming,
  Rally Day)
          CLERGY TAXES
Publication 517 Social Security and Other
 Information for Members of the Clergy &
 Religious Workers
               BASIC RULE:
Clergy are considered EMPLOYEES for
  Federal and State Income Tax purposes
  (pay income taxes)
and SELF-EMPLOYED for Social Security
  purposes (pay self-employment tax)

Form 1040 is used to remit Federal Income
 tax and SECA tax
  Understanding “Tax Liability”
The tax form is organized as follows:
  - Deductions from income
  = Adjusted Gross Income (line 37)
  - Deductions and Exemptions
  = Taxable Income (line 43)
           Tax Liability (line 63)
        - Tax payments during year (line 72)
        = Tax owed or refunded (line 73 or 76)
           (write a check or receive a check)
     Getting started for first call
1. Determine your 2007 tax liability (line 63 on Form 1040)
2. Estimate your 2008 tax liability using the 2007 forms and

Amount to be reported on W-2
  Taxable salary 2008                    $30,000
  Employer’s SECA                          2,800
     2008 W-2 Box 1                       32,800

Call begins July 1, so use 50% = $16,400
      Estimated Tax Liability
The law requires that a taxpayer pay in
  during the year the smaller of:
- 90% of the current year’s tax liability OR
- 100% of the previous year’s tax liability

Otherwise, the taxpayer is subject to an
 underpayment penalty
             An Example…
Calculated tax liability (line 63) for 2007 is
Estimated tax liability for 2008 $3,423
Minimum required payment during the year
 of 2008 is smaller of:
     90% of 2008              $3,081
 or 100% of 2007                $125
  Managing 2008 taxes in 2008
Amt owed for 2008 is $3,423 or $570.50 per month
    for 6 months of call
Set aside at least this much every month in a
    savings account – consider Mission
    Investment Fund for this
1. Make an estimated payment of $125 on Sept
    15, 2008 (due date of first estimated tax
    payment); Write a check to the IRS on April 15,
    2009 for $3,298 ($3,423 - $125)
2. OR Make 2 estimated payments to the IRS for
    $1,711.50 each.
      Managing 2009 Taxes
In 2009, you will need to make estimated tax
  payments during the year to pay in the
  required amount
Estimated tax payments are made in 4 equal
  installments on April 15, June 15, Sept 15
  and Jan 15
Download the estimated tax voucher
  (1040ES) at
                   Tax Quiz
Jezebel accepts a call to Land of Canaan Lutheran
   Church, is ordained on July 1, 2008, and begins
   serving on the same day.
Her compensation package says she will receive a
   total annual amount of $45,000, of which $9,000
   has been designated by the congregation as
   housing allowance.
1. What should Jezebel do with respect to her
   housing allowance and compensation package?
                 meeting in July 2008.
                 Get the amount approved at the congregational council
              Answer: Estimate her eligible housing allowances for 2008.
Jezebel attended the Senior Seminar, so
   she understands the basics of clergy
   taxes. She determined her 2007 tax
   liability was $250 and estimates her 2008
   tax liability at $3,600.
2. How much should Jezebel set aside each
    month as taxes?
3. What is the minimum amount Jezebel
    must pay to the IRS during 2008?
                start call)
                $3,600 2008 est) on Sept 15 (first pmt date after
             Answer 3: $125 (smaller of $125 2007 liability or 90% of
                              Answer 2: $600 ($3,600/6 mos of call)
4. Jezebel had estimated housing expenses
  for July-Dec at $4,000. At the end of 2008,
  Jezebel calculates she spent $3,500 on
  housing expenses. What effect does this
  have on the amount to be reported on line
  7 of Form 1040?

                        be added to amount reported as income
                     Answer: $500 Excess allowance will have to
Jezebel completes her 2008 Form 1040 and
  calculates her final tax liability of $3,850. (She
  had estimated a tax liability of $3,600.)

5. Does she owe any underpayment penalty
   because she underestimated the amount of her
   2008 tax liability?

6. How much does she owe in taxes and by when?

                               Answer 6: $3,725 ($3,850 - $125) on April 15.
            Answer 5: If she paid in $125 (100% of 2007 liability), no penalty.
Answer: Owes smaller of 100% 2008 liability ($3,850) or 90% of 2009 liability
   ($9,000). Minimum payments are $962.50 on April 15, June 15, Sept 15,
   2009 and Jan 15, 2010 ($3,850/4). Be sure to set aside $833.33 per
   month to pay taxes($10,000/12), since a payment of $6,150 will be due
   April 15, 2010 ($10,000-$3,850).
              2009? How much and when?
            7. Does Jezebel owe payments during
       be $10,000.
     Jezebel estimates her 2009 tax liability will
          My best advice:
• Ask clergy colleagues in the area to
  recommend a CPA who has worked with
  clergy taxes
• Be familiar enough with clergy taxes to
  have reasonable confidence in what the
  CPA is doing on your behalf
• Keep in your contact