Hey, Fletch: Is Our Church’s Overall Budget for Salaries Too High?

Church Law & Tax | 4/17/2019 | Staff
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In this recurring Q&A, longtime executive pastor and XPastor.org founder David Fletcher takes on readers’ questions about finances, staffing, communications, and more. Submit your questions using the subject line "Hey, Fletch" to editor@churchlawandtax.com.

I had someone tell me that the personnel percentage of our overall budget is too high and could be considered unreasonable compensation. Is excessive or unreasonable compensation something to monitor on a per employee basis or an overall budget basis?

Church - Percent - Percent - Budget - Salaries

When a church has more than 65 percent or 75 percent of its budget going to salaries and benefits, it may be in a poor financial posture for unexpected expenses. It may be difficult or impossible for that church to get a bank loan. The bank will ask, “How are you going to pay it back? Where is the money going to come from?” Three-fourths of a budget going for compensation could be considered poor stewardship and a disproportionate allocation of resources, but it is not what is meant by “unreasonable compensation.”

Excessive or unreasonable compensation is what is paid to an individual. GuideStar, an information service for nonprofits, has an article titled “What You Need to Know About Nonprofit Executive Compensation.” It offers these pertinent insights:

IRS - Organizations - Executives - Compensation - Standard

The IRS permits tax-exempt organizations to pay executives “fair and reasonable” compensation. However, there is no universal standard defining fair and reasonable. What’s fair and reasonable at one nonprofit may be a gross under- or overpayment at another.

In another article titled “The Private Inurement Prohibition, Excess Compensation, Intermediate Sanctions, and the IRS’s Rebuttable Presumption,” GuideStar offers general information about IRS regulations for 501(c)(3) public charities. These public nonprofits file IRS Form 990, which churches are not required to file. This means that salaries for nonprofit executives...
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