Pastor Pay, Housing Allowance & Clergy Tax
The Pastor's Pay Review: An Annual Board Agenda
Short answer: hold the pay review once a year, at a fixed meeting before the new budget year begins. Work through it in a set order: comparability data, the whole package, the housing allowance designation, the reimbursement plan, then the vote with the pastor out of the room. Minute all of it. A review isn't a commitment to an increase. It's the church deciding on purpose rather than by drift.
Most churches don't have a bad compensation process. They have no process at all. The number is whatever it was last year plus whatever the budget seemed to allow, decided in about eleven minutes at the end of a long meeting, and nobody writes down why.
That works until someone asks why. Then the board has no answer, the pastor feels judged, and a routine question becomes a conflict. It gets worse when nobody can say what the package is actually worth, which is why the whole-package view of pastor pay belongs at the front of the process.
An annual pastor compensation review fixes the drift. Here's the agenda.
Why it has to be annual, and dated
Three reasons the review needs a fixed slot rather than a "when it comes up" approach:
The housing allowance has to be adopted before the year it covers. A designation adopted in February doesn't reach January's pay, because the allowance only applies to pay earned after it's designated (IRS, Ministers' Compensation & Housing Allowance). Pin the review to a meeting that happens before the new year begins and this problem disappears permanently.
Drift is the default. Without a scheduled review, pay is adjusted when someone complains or when a pastor gets another offer. Both are terrible moments to be setting compensation.
A record made at the time is worth far more than one reconstructed later. Minutes written the same evening as the decision carry weight. A memo written two years later, once someone starts asking, doesn't.
Most boards attach the review to the budget meeting. That's usually right: the two decisions constrain each other, and it means the whole package is considered together.
The running order
Work through it in this sequence. The order matters, because each step feeds the next.
1. Confirm who decides. Read the bylaws once a year. Board? Elders? A compensation committee with delegated authority? The membership at an annual meeting? Doing this first prevents a decision the governing documents don't support.
2. Review the pastor's role, not just the pay. What changed this year: staff added, campus added, hours, scope? Compensation follows responsibility, and this is also the moment to notice that the job description is four years out of date.
3. Gather comparability data before discussing numbers. Denominational guidelines, published church compensation surveys, figures for churches of similar size and region. Bring it in writing, and note where each figure came from. That written comparison is one of the three things a board needs if it wants the protection the excess benefit rules offer (IRS, Intermediate sanctions). Reasonable compensation for pastors explains what this data is for.
4. Look at the whole package, not the salary line. Salary, housing allowance, retirement contribution, health coverage, reimbursements, paid time off. Boards routinely under-count what they provide and pastors routinely under-count what they receive. Write the whole list down.
5. Hear from the pastor, then ask them to step out. They give information and answer questions. They don't deliberate and they don't vote. Should the pastor be in the room when pay is discussed? walks through the mechanics.
6. Deliberate and decide the total. Salary first as a total figure, then how it's allocated. How to set a pastor's salary sets out a framework for that decision.
7. Designate the housing allowance for the coming year. A separate motion, naming the minister, the amount, and an effective date in advance of the pay it covers. Not a sub-clause of the salary motion. Its own vote, its own minute entry. The housing allowance hub covers the three limits that cap what the minister can actually exclude (IRS Publication 517).
8. Confirm the accountable reimbursement plan is in place and that the mileage and expense practices are actually being followed. Reimbursements paid under a plan that meets the business connection, substantiation and return-of-excess tests stay off the pastor's W-2 (IRC §62). If the plan exists but nobody substantiates anything, you don't have a working plan.
9. Vote, minute, and inform. Motion, second, tally, the note that the interested party was absent, and the time they returned.
10. Set next year's date before the meeting ends.
Ninety minutes, once a year. Most of it is items 3 and 4.
What to bring to the meeting
| Document | Why it's on the table |
|---|---|
| Current compensation summary | The whole package on one page, not just salary |
| Comparability data | The basis for the decision, in writing |
| Job description | Confirms scope actually matches pay |
| Last year's minutes | Shows what was decided and whether it was implemented |
| Housing cost estimate from the pastor | Sets a realistic designation amount |
| Draft housing allowance resolution | So the vote can happen in the meeting |
| Accountable plan and recent expense records | Confirms the plan is real, not just adopted |
If the treasurer prepares this packet a week ahead, the meeting is short. If nobody prepares it, the meeting becomes a discussion about what information the board wishes it had.
A worked example of the package view
A board believes it pays its pastor $55,000. Here is what the one-page summary actually shows:
- Cash salary: $40,000
- Housing allowance designated: $15,000
- Retirement contribution: $2,400
- Health coverage: $9,600
- Reimbursements paid under the accountable plan: $3,100
Two things become visible immediately. First, the church's real cost isn't $55,000. The benefits and reimbursements are substantial and the board hadn't been counting them. Second, the $3,100 of reimbursements isn't compensation at all; it's repayment of expenses the pastor incurred doing the job, and treating it as part of "what we pay the pastor" is a category error that quietly makes the salary look larger than it is.
Getting these categories straight is most of what a good review does. It doesn't tell you what the number should be. It tells you what the number currently is.
How churches get this wrong
Setting the housing allowance as a percentage of salary. The designation should track the minister's actual housing costs, capped by fair rental value. A percentage is a convenient shortcut that produces a figure unrelated to either limit.
Adopting the salary and forgetting the designation. The single most common miss. Two motions, always.
Reviewing pay in the same conversation as a performance complaint. Combine them and neither one goes well. Handle performance separately.
Letting one person decide. A treasurer who "just handles it" is exposing themselves and the church.
Minutes that say "compensation was discussed." That records nothing. Record the data used, the motion, and the vote.
Treating a review as a promise. A review is an examination. Sometimes the outcome is no change, and saying that plainly in advance keeps expectations honest on both sides.
When the answer is no
Some years the church genuinely can't increase pay. Handle that on purpose too:
- Say it directly and early, rather than letting the pastor infer it from silence.
- Show the budget reasoning. A pastor who sees the numbers usually understands them.
- Look at the non-cash levers. Time off, a study week, a conference, a properly working reimbursement plan. Several of these cost little and are felt immediately.
- Minute it anyway. "The board reviewed compensation and determined no change for the coming year" is a real record of a real decision.
A church that reviews carefully and holds pay flat is in a far better position than one that never looks.
Common questions
When in the year should the review happen?
At whatever meeting precedes your new budget or calendar year, with enough margin that the housing allowance designation is adopted before the first payroll of that year. Many boards use their November or December meeting.
Should the review be tied to a performance evaluation?
Keep them separate but sequenced: evaluation first, at a different meeting, then compensation. Merging them turns a pay conversation into a referendum on the person.
Who should gather the comparability data?
Whoever is not the pastor. A treasurer, a committee chair, or a board member willing to spend an hour on it. The point is that the board can show where its numbers came from.
Our board is three people. Is that enough?
It can be, provided the pastor isn't one of the three deciding, and your quorum still works when an interested member recuses. If it doesn't, fix the structure. A small compensation committee of non-employees is the usual solution.
Do we need to review an associate pastor's pay too?
Yes, and each minister who qualifies needs their own named housing allowance designation. Same agenda, same meeting, one set of motions per person.
What if the pastor asks for a specific number?
They can tell the board what they need and why. The board should still gather its own comparability data and decide without them present. Both things can be true at once.
---
Run the review without improvising it. The Pastor's Pay Checklist is the step-by-step worksheet for structuring salary, housing and reimbursements correctly: the packet your treasurer prepares and the board works through. $29, instant download.
*Faith Docs provides self-help document templates, not legal advice. We are not a law firm. For representation, consult a licensed attorney.*
The document for this, ready to fill in.
Faith Docs sells the fill-in-the-blank templates churches actually need — drafted by church attorneys, yours to download the moment you buy.
Browse all documents →