Now to one who works, wages are not reckoned as a gift but as something due.
Romans 4:4 (NRSV)
According to The Book of Discipline of The United Methodist Church, the primary responsibilities of the annual meeting of the charge conference shall be to review and evaluate the total mission and ministry of the church, receive reports, and adopt objectives and goals recommended by the church council that are in keeping with the objectives of the United Methodist Church. One of the specific tasks assigned to the charge conference is the setting of clergy compensation.
In the North Alabama Conference, a pastor’s annual compensation is reported to the Conference on the Pastor’s Compensation Profile form. Compensation must be allocated according to the following components: base salary (net of any voluntary personal contribution to the United Methodist Personal Investment Plan (UMPIP) and withholdings for dependent health insurance), UMPIP contribution, utilities/housing allowance, professional expense, and dependent health insurance. In addition, the provision of a parsonage or a housing allowance in lieu of parsonage is reported on the Pastor’s Compensation Profile.
Base salary means the pastor’s regular gross wages paid by the church for service, reduced by any personal contributions to UMPIP and any withholdings for family health insurance. Base salary does not include any amounts paid by the Commission on Equitable Compensation since these amounts are separately reported on the Pastor’s Compensation Profile.
UMPIP contributions must be separated between before tax amounts and after tax amounts. (Pastors may have before tax contributions to UMPIP, after tax contributions to UMPIP, or both.) UMPIP amounts are withheld from the pastor’s pay and remitted to the General Board of Pension and Health Benefits. Base salary amounts and UMPIP contributions after tax should be included in Box 1 of the pastor’s Form W-2 at the end of the year. UMPIP contributions before tax should be reported in Box 12a on Form W-2.
The utilities/housing allowance is the amount paid to the pastor for utilities expenses and incidental housing expenses incurred by the pastor at the primary place of residence. In most cases, the primary place of residence is a parsonage. However, the primary place of residence may be a house that is owned or leased by the pastor. In any event, the utilities/housing allowance component does not include any amount designated as a housing allowance in lieu of parsonage.
Utilities/housing allowances should be based on reasonable, estimated costs of utilities and incidental housing expenses. It is not necessary for pastors to provide their churches with copies of invoices or other receipts for these expenses. A pastor should not receive a utilities/housing allowance for expenses incurred at a second home. In other words, only the primary residence is eligible for a utilities/housing allowance. Utilities/housing allowance amounts and housing allowances in lieu of a parsonage are not usually reported on Form W-2, but may be reported in Box 14 on Form W-2.
Professional expense must be separated between allowance amounts and accountable reimbursement amounts. The most common professional expense is travel, including mileage. A professional expense amount paid on an allowance basis should be paid to the pastor in full during the year, does not require the pastor to provide the church with copies of invoices or receipts, and should be included in Box 1 on Form W-2.
A professional expense amount paid on an accountable reimbursement basis should be paid to the pastor on the basis of actual expenses incurred by the pastor, is “use or lose it” (meaning that any amount not used to reimburse actual expenses by the end of the year cannot be given to the pastor), and should not be reported on Form W-2.
Individual health insurance is required for all full-time clergy in the North Alabama Conference, is not reported to the Conference on the Pastor’s Compensation Profile, and is not taxable. Additional premiums paid to the Conference for coverage of dependents are reported on the Pastor’s Compensation Profile and are usually not taxable to the pastor. Employer pension contributions are not included in the Pastor’s Compensation Profile since these amounts are paid by the Conference.
Careful consideration of clergy compensation helps many pastors reduce their taxes and enables the Conference to contribute the proper amount for clergy pensions. Also, accurate reporting of clergy compensation helps ensure local church askings for the Conference budget (apportionments) are calculated correctly.