Two important considerations–the amount of the salary and the use of “salary reduction agreements.”
1. Salary. Total salary packages are as described in Mandir Staff Compensation.
2. Salary reduction agreements. Many churches have established “salary reduction agreements” to handle certain staff expenses. The objective is to reduce a worker’s taxable income, since only the income remaining after the various “reductions” is reported on the worker’s W-2 or 1099 form at the end of the year. It is important for Mandirs to understand that they cannot reduce a worker’s taxable income through salary reductions unless specifically allowed by law.
a) Housing allowances. Federal tax law permits clergy who own or rent their homes to exclude from gross income that portion of his or her compensation actually spent on their home (furnished, including utilities). This amount must be designated in advance as a “housing allowance” by the church board. Note: these exclusions apply only to priests and only for compensation from services performed in the exercise of their priestly duties. The housing allowance exclusion is for federal income tax purposes only. Priests cannot exclude the housing allowance when computing social security taxes.
b) Cafeteria plans. Cafeteria plans, including “flexible spending arrangements” can be used if several conditions are met. A cafeteria plan is a written plan established by an employer that allows employees to choose between cash and a “menu” of nontaxable benefits including employer-provided medical insurance premiums, group-term insurance, and dependent care.
c) Tax-sheltered annuity contributions. Salary reduction agreements can be used to contribute to a priest’s tax-sheltered annuity (403(b) annuities, SEPs and other plans), so long as the salary reductions meet certain conditions.
d) Equity allowance. Priests who live in Mandir-owned housing are denied the ability to accumulate equity in a home. Many priests who have lived in parsonages often face retirement without housing. To avoid this potential hardship some churches increase their priest’s compensation by an amount sometimes referred to as an “equity allowance.” Some churches place the allowance directly in a priest’s tax-sheltered retirement account.
3. Accountable business expense reimbursement policy. This is available to both priests and lay staff members alike. Under such an arrangement a Mandir (1) reimburses only those business expenses that are properly substantiated within a reasonable time as to date, amount, place, and business purpose, and (2) requires any excess reimbursements (in excess of substantiated expenses) to be returned to the church. This includes the use of a personal automobile for the service of the Mandir.