Church Budget: Compensation Percentages

Whether you’ve been putting together budgets in ministry for a long time or just starting out, one thing is certain, determining the percentage of the budget that goes to compensation is complicated. The church budget sets the tone for the upcoming fiscal and allocates limited financial resources based on the church’s mission, vision, and values. While most people want to think that all their donations go to support missionaries in Uganda or local food banks, operating a church and crafting a budget is far more complex than allocating funds for outreach. The truth is most churches spend between 45%-55% of their budget on compensation alone. Because that is such a large portion of the budget pie, it’s important to know what budgetary line items make up compensation.

Compensation in a Church Budget

Simply stated, compensation is the money an employee receives from the employer in the form of salary or wages, and for pastors, housing allowance. Here’s a general breakdown of the compensation chart of accounts (COA) sub-categories for most church budgets:

  • Salaries: This sub-category must include both non-exempt (often labeled as salary) and exempt employees’ (or hourly) annual wages.
  • Housing Allowance: This sub-category consists of any amount paid to licensed or ordained ministers for qualified housing expenses per IRS regulations. It’s important to note that money allocated as housing allowance is not considered taxable income.
  • Benefits: This sub-category contains the employer portion of benefits such as medical, dental, vision, short-term disability, long-term disability, and life insurance.
  • Taxes: This sub-category lists the employer portion of the FICA tax and any other employer-paid amount of state or local taxes.
  • Retirement: This sub-category covers the employer portion toward a retirement plan like a 403(b) or 403(b)(9) plan.

Healthy Compensation Percentages

Despite what many parishioners want to believe about their donations, churches spend about half of the entire operating budget on compensation. Paying the pastor and other staff members shouldn’t be a big surprise for mature Christians that read their Bible. In his letter to his protege Timothy, the Apostle Paul wrote, “For the Scripture says, “You shall not muzzle an ox when it treads out the grain,” and, “The laborer deserves his wages.” (1 Timothy 5:17-18 ) Many church budgeting experts agree that a healthy church spends between 45% – 55% of the church budget on compensation. These percentages are not absolutes but make a great barometer to check the overall conditions of the church budget and staff compensation. There are healthy churches, especially more seasoned or mature churches, that tend to run on the high end or even exceed these percentages. At the same time, church plants and smaller churches can run well under these recommended percentages and are perfectly healthy.

As church leaders begin to put their annual budgets together, savvy churches will keep a close eye on their compensation percentage. The percentages may reveal that compensation is at unhealthy levels and action is required in the form of restructuring (reductions in the workforce), increasing pay, or adding staff. Knowing the baseline of healthy church compensation percentages provides insight into the differences.