UUA OFFICE OF CHURCH STAFF FINANCES
25 Beacon Street, Boston, MA 02108; 617/742-2100, ext. 404; FAX 617/742-2875
Rev. Ralph Mero, Director, rmero@uua.org

COMPENSATION MANAGEMENT
FOR
UU ORGANIZATIONS

Introduction

Congregations and other religious bodies that pay people for their services often don't think of themselves as true employers. Because they are engaged in religious rather than commercial activities, congregations may perceive themselves as somehow different from usual employers. However, religious organizations are customarily subject to the same laws and regulations that govern other employers, with a few unique exceptions where their employees are ordained, licensed, or commissioned to perform sacerdotal rites or services of worship.

Religious organizations are permitted to consider an applicant's religion in the process of hiring, but they must generally observe the anti-discrimination laws applicable to other employers with the same number of employees.

Employee status

An employee is a person who is hired for wages, whose performance is supervised by the employer, and whose employment can be ended at any time. Several classifications of employees. are "temporary", "probationary", "regular", "exempt", and "non-exempt." In addition, there are persons hired for work who are not considered employees, and these generally fall in the classifications of "extra and casual labor," or "independent contractors."

"Temporary" employees are persons engaged for a limited period of time. Most temporary employees today work for agencies and are provided for short-term work or to fill in for vacancies. These "temps" are actually employees of the agency rather than the company that pays the agency for their services.

Some other workers without employee status are considered "extra and casual labor." These are persons engaged for only a brief period of non-professional work that is often of a physical nature. Teenagers who mow lawns or provide baby-sitting often fall in this category, although their earnings should be reported to the IRS if they exceed $600 per year.

"Probationary" employees are usually persons in the first 30 to 90 days of service during which their suitability for ongoing employment is under review. "Regular" employees are persons who have moved through the probationary period and whose future employment is open-ended at the discretion of the employer and their own willingness to continue in the job. It is incorrect to refer to regular employees as "permanent" employees unless there is a contract that guarantees them continued employment subject to dismissal for reason agreed upon in advance.

"Exempt" employees are persons in management or administrative positions who are paid a salary and who often work more than 40 hours per week to complete their duties; the terms of their employment are exempt from the fair labor practices regulations. "Non-exempt" employees are persons who are not managers or administrators, and whether they are paid hourly wages or monthly salary, the terms of their employment are regulated by law.

"Part-time" and "full-time" employment designations refer to the number of hours worked in a typical week; federal law considers 40 hours of work per week as "full-time," although employers are free to set the number of hours for full-time employment at fewer. Many employers consider a "nine to five" day as full-time. Federal law also requires that non-exempt employees be paid 150 percent of their hourly base pay for any hours worked in excess of 40 hours per week. Many employers seek to avoid overtime pay by providing compensatory time off within the same or next pay period. Increasingly employers are permitting "flex time" schedules for the convenience of the employee and employer, and to build employee morale.

It is increasingly customary for employers to pay benefits for regular full-time employees, as well as for part-time regular employees who work more than half-time. This is in contrast with independent contractors, who are self-employed professionals engaged for a specific service or task, who do not require supervision or instruction, and for whom benefits are not paid. In typical church situations, a secretary, sexton, or administrator is usually an employee; an accountant or consultant is usually an independent contractor. Music Directors who work only a few hours a week are frequently treated as independent contractors; however, those who work full-time or whose primary employment is for the congregation should be considered employees.

All of this is complicated by the fact that ordained clergy are considered by the IRS as having dual tax status: they are employees for purposes of income tax, and self-employed for purposes of social security.

The UUA recommends that full-time religious professionals work 12 units of service per week, a unit of service defined as one morning, afternoon, or evening devoted to service for their employer-congregations. Many encourage their professionals not to work more than six units consecutively. Twelve units per week is considered full-time, whether this constitutes more or less than 40 hours per week.

Taxes

Like other employers, congregations are required to report the earnings of their employees on W-2 forms to the Internal Revenue Service. The same applies to ministers, except that congregations are exempt from the requirement of withholding income tax on ordained, licensed, or commissioned clergy.

Congregations are responsible for the timely withholding and payment of income and social security taxes on all their non-ordained employees, and they can be penalized for non-compliance. Information must be obtained on a W-4 form at the beginning of employment indicating the number of exemptions to which an employee is entitled.

Ordained clergy ordinarily pay their own estimated income tax quarterly using form 1040ES. If a congregation is withholding taxes for other employees, a minister may exercise the option of having income tax withheld and submitted for him or her too. This may save the minister the burden of filing quarterly estimated taxes, but it does not reduce the amount of taxes ultimately due on April 15th. Tax rates for ministers are the same as for all other taxpayers.

By law, social security taxes are shared equally between employers and employees, with each party responsible for 7.65 percent of the salary; this is true for all of a congregation's non-ordained employees. Since ministers are considered self-employed for purposes of social security, clergy pay their own estimated Self Employment tax (SECA) quarterly via form 1040ES.

Where a minister chooses to have the congregation withhold and submit income tax as a voluntary option, the amount withheld and paid should be sufficient to cover the SECA tax as well.

Currently, SECA is 15.3 percent of the minister's salary and housing allowance. Realizing that clergy income is usually less than that of true self-employed professionals, some congregations pay their ministers what amounts to a bonus of 7.65 percent of the salary and housing allowance in lieu of the employer's share of social security. These dollars are also subject to both social security and income tax. Like many Protestant denominations, the UUA urges its member societies to provide this "in lieu" equivalent to their ordained ministers.

Benefits

More employers today offer basic insurance, vacation, sickleave, and other benefits for their regular full-time employees, and these are usually pro-rated for persons who work half-time but less than full-time. The law does not require that such benefits be offered, but it is often in the best interests of the employer to pay benefits in order to retain skilled people and avoid turnover.

The UUA urges its member congregations to implement the salary and benefits Guidelines adopted by the Association in 1995. Benefits coverage should be determined in advance of salaries and clergy housing allowance, and should not be the subject of bargaining about compensation.

Through the Office of Church Staff Finances, the Association offers group insurance as follows:

Group Dental Insurance coverage is available for employees of UU organizations who work 1,000 per year. The policy provides preventive exams and partial payment for major dental work up to a limit of $1,500 per person per year.

Group Term Life Insurance is available to persons employed by UU organizations and community based ministers under most circumstances. The unisex premium is based on age and provides face values from $20,000 up to three times annual earnings to a maximum of $200,000. Benefits are reduced beyond age 64. Individuals are eligible to enroll within the first 30 days of employment, or at other times by showing adequate evidence of insurability.

Long Term Disability Insurance provides income protection equal to 60 percent of salary (plus clergy housing allowance where appropriate), after 90 days of disability up to age 65. The monthly premium cost is 1.2 percent of the amount insured and is available to those employed by UU organizations and community based ministers under most circumstances.

Individuals may be enrolled by their employers within the first 30 days of employment with no open enrollment period beyond this point; participation later requires evidence of insurability.

Benefits received under a long-term disability insurance policy are exempt from income tax if the employee has paid the premium from taxable income. Thus it may be beneficial for the employee to pay the premiums directly, or reimburse the employer for that amount, or for the employer to include the amount of the LTD premiums in the wages reported on form W2. Most congregations self-insure the salary, housing allowance, and benefits of religious professionals for the first 90 days of disability until LTD benefits begin.

The Association offered medical insurance until the policies were canceled on August 31, 1998.

Vacation, etc.

The UUA urges congregations to provide one month of vacation time as a minimum for all full-time religious professionals; this should be pro-rated for persons who work half-time but less than full-time. Ministers commonly receive an additional month of "on call" or study leave per year, during which they are relieved from regular daily duties but are expected to respond to emergencies. Realizing that some amount of illness is almost inevitable, paid "sick days" are often accrued at a rate of one day per month of employment, up to a maximum of 12 days; again, pro-rated for part-time personnel.

Many employers permit some unpaid personal leave, maternity leave, paternity leave, etc., for regular employees. Pension, vacation, and other benefits usually do not accrue during days of personal leave, although the employee may maintain insurance coverage at his or her expense.

The UU Organizations Retirement Plan

The UUA sponsors a 401(a) qualified retirement plan through which congregations may contribute on behalf of employees age 21 and over who work 1,000 hours or more, and who have been employed one year. This is a defined contribution plan, and participants are fully vested with assets in individual accounts. All contributions are made by the employer-organizations. The recommended contribution is 14 percent of salary, plus clergy housing allowance in the case of ministers earning less than $80,000 annual salary. Fourteen percent of earnings invested over 30 years at an eight percent rate of return should provide 75 percent of pre-retirement income.

Contributions to the retirement plan become taxable when withdrawn upon retirement. Funds can also be withdrawn or rolled over to an IRA when an employee resigns, upon disability, or when claimed by a beneficiary following a participant's death. Except in the above circumstances, withdrawals prior to age 59 and 1/2 are subject to a ten percent income tax penalty. Loans are permitted only for reasons of medical emergency.

The Fidelity Investment Tax-Exempt Services Co. was selected in April 1999 to be the new record-keeper, administrator, and to manage invested funds. FITESCO is the largest provider of retirement plan services to religious organizations and administers hundreds of plans sponsored by non-profit organizations.

Professional Expenses

Professional expenses for clergy include travel, equipment, books, periodicals, robes, or other "tools of the trade," plus the cost of meetings and meals with clients, conference expenses, professional dues - in short, the costs of "doing business." Employees are not expected to pay costs connected with their employment in most commercial, corporate, or academic environments. The same applies to professionals serving religious societies. Congregations should budget for professional expenses in such a way that they will not be confused with salary. There is no "set percentage" of a minister's total compensation that should be designated professional expenses; the appropriate amount will vary greatly depending upon the style of ministry and the stage a minister may be in his or her career.

Professionals commonly advance their own funds for these expenses, and then submit a monthly request for reimbursement to the treasurer or bookkeeper, which is paid in a separate check. This is called using an Accountable Reimbursement System. Some professionals use a separate credit card exclusively for these expenses, however receipts or other documentation should also be available. IRS rules require receipts for expenses over $75.

Initial travel from home to one's employer-church is commuting, and is not allowed as a professional expense. Other travel to meetings, hospitals or members' homes is allowable if necessary for the completion of one's duties. Tax law suggests keeping a daily log of all auto travel in order to claim reimbursement or to list it as an itemized deduction.

Meals or lodging are a professional expense only when away from home overnight, but meals that are part of entertainment of someone connected with one's work are a professional expense. Thus entertainment of members of the congregation, either at home or elsewhere, is reimbursable.

Space in a home office space is not a reimbursable professional expense. However, the supplies and equipment used in such an office may be taken as a professional expense, including office equipment such as personal computers.

It is wise to anticipate as accurately as possible the amount necessary for professional expenses. If, at the end of the organization's fiscal year, the employer is agreeable to reallocating unspent funds designated for expenses, this may be done, but dollars shifted from professional expenses to salary must be reported as wages on the W-2 form, and the employee is responsible for income tax and social security tax on these funds.

It is important that employers not treat professional expenses as a "salary reduction scheme" in order to help an employee avoid income taxes. It is not permissible for an employee to receive a fixed amount per month for professional expenses in addition to his or her salary and make no accounting to the employer for the expenses claimed. Such pseudo-professional expense allowances must be reported as taxable earnings.

Clergy Housing Allowance

Funds paid by religious organizations to ordained clergy for the expenses of providing a home in connection with employment as a minister are exempt from income tax, but not from social

security tax. The amount of the clergy housing allowance must be designated in advance of payment, and must be referenced in the minutes of the governing body or congregation. A specific line item in the annual church budget should be clearly labeled Clergy Housing Allowance, and paid to the minister in a separate check in order not to confuse it with salary.

The maximum amount that may be designated as housing allowance is the lesser of the fair rental value of the house, plus the cost of furnishings and all expenses, or the amount actually spent, including furnishings and all expenses. Fair rental value can often be obtained from local real estate brokers. Mortgage interest paid through a clergy housing allowance is deductible on an annual tax return. There is no established percentage of compensation or salary that is appropriate for a clergy housing allowance; the amount is determined by the formula above.

When a new minister is called to a congregation, the amount of the allowance should be included in the original employment agreement, but it is permissible to set the amount for a six month preliminary period, until the actual housing costs will be better known. If circumstances change, the allowance may be modified, but increases cannot be made retroactively.

The amount excluded from gross income cannot exceed the amount spent "to provide a home." This can include rent or mortgage payments, utilities (including telephone and cable TV), repairs, furniture and furnishings, household supplies, property taxes, and all other costs of rental or home ownership, except for food and domestic help.

If actual housing expenses exceed the amount designated in advance, the discrepancy cannot be corrected after-the-fact. If the amount spent is less than the amount received, this overage must be reported to the IRS by the minister as "unexpended housing allowance" and constitutes taxable income.

Retired clergy, like employed clergy, are entitled to a clergy housing allowance, and the portion of a pension distribution used to provide a residence is exempt from income tax. It is very advantageous for clergy of any denomination to use denominationally-sponsored qualified retirement plans as their primary means of saving for retirement. Retired UU ministers receive an annual form from the Association Treasurer to attach to their 1040 tax returns.

Parsonage Allowance

If the employer provides a church-owned parsonage, the fair market value of the residence constitutes an "imputed income" on which the minister must pay social security tax. If the minister pays any of the costs of utilities, repairs, maintenance, etc., then a clergy housing allowance to cover these should be designated. Increasingly, congregations are tiring of the expense of parsonage maintenance, and ministers are preferring to own their own property to accumulate home equity.

Non-ordained religious professionals

Directors of Religious Education, Administrators, Music Directors, and other religious professionals who are not ordained, licensed, or commissioned should be accorded the same status as professionals in other business, corporate, or academic organizations. Their work is critical to the health of the congregation, and they make vital contributions to worship, Lifespan religious education, and the financial well-being of the body.

These professionals are entitled to full or pro-rated benefits, depending on the percentage of time worked. They are increasingly afforded expense allowances covering travel, professional society dues, continuing education, and other costs in connection with the performance of their duties.

There is a long-standing and regrettable tradition in many religious organizations of underpaying Directors of Religious Education by not compensating them for the number of hours actually worked. Many such educators have been paid half-time wages - or less - when their real service has been at the three-quarter level - or higher. DREs and other religious professionals have also been denied insurance, vacation, and other benefits on the basis that "they work only part-time." This may help explain why there has been such a high turnover in these positions; until recently the usual term of a DRE in UU congregations was about three years.

Since 1995, there has been a growing sentiment in UU congregations that DREs and other professionals must be fairly compensated for their work. Guidelines for salaries and benefits are available on the uua.org website, and the District Compensation Consultant Project administered by the Office of Church Staff Finances can provide trained compensation consultants to visit with local congregations about this issue. Matching grants from the UU Congregation at Shelter Rock to other churches are administered by the Liberal Religious Educators Association to help congregations bring the compensation of their DREs up to recommended levels.

UU Music Directors often belong to the UU Musicians Network, and guidance for their compensation can be found in the salaries recommended by the American Guild of Organists. Many Administrators of UU congregations join the Association of UU Administrators. Suggested salaries for Music Directors and Administrators are included in the Clergy and Church Staff Compensation Report published in June 1997.

Benefits, professional expenses, and retirement contributions should be included in every employer-congregation's budget and should be clearly identified. Contributions to the retirement plan and premiums for group health and life insurance should be paid directly by the society's treasurer. Premiums for long-term disability insurance should be treated as described above.

For further information

IRS publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, is available via www.irs.ustreas.gov or 703/321-8020. Also recommended is IRS Publication 1828,

.

The annual Church and Clergy Tax Guide by Richard Hammar, CPA, is considered an authoritative guide by many religious groups. It may be purchased from Christian Ministry Resources, PO Box 2301, Matthews, NC 28106, 800/222-1840, for $14.95 plus shipping. It is recommended that every UU congregation obtain a copy. This complete 200+ page guide contains a sample clergy tax return and also details professional expenses, church reporting requirements, social security, and other tax matters.

Meadville Lombard Theological School provides complimentary copies of the Minister's Guide to Income Tax to new ministers who request this information. This booklet also contains a sample clergy tax return. Contact MLTS at 5701 So. Woodlawn Ave., Chicago, IL 60637-1602, 773/256-3000.

SAMPLE EMPLOYMENT PHILOSOPHY FOR
UU ORGANIZATIONS

Increasingly, Unitarian Universalist congregations are realizing the need for a statement that summarizes the underlying philosophy toward their role as employers. The following is offered as a sample that local congregations might adapt to their individual situations.

1. Our employment philosophy will be consistent with the Mission Statement of our congregation and the Principles and Purposes of the Unitarian Universalist Association, especially our respect for the inherent worth and dignity of all persons.

2. Persons will be hired on the basis of ability, experience, attitude, and character without discrimination in regard to age, gender, affectional preference, race, creed, national origin, religious affiliation, or marital status. Nor will persons be rejected on the basis of physical disabilities, so long as they would be able to perform the necessary functions of the position for which they are applying. Some positions may require familiarity with the culture and dynamics of a UU congregation or the Unitarian Universalist religious movement.

3. Affirming the value of diversity, the UUA practices positive affirmative action by intentionally recruiting and hiring women and persons of color, and it encourages its member societies to also open doors of employment to qualified members of groups that have experienced long-standing and persistent discrimination.

4. Persons will be compensated according to the contribution of their work to the overall mission and program of the congregation. Wages and salary will be reviewed annually with the objective of providing maximum compensation consistent with sound business practices and in accordance with the compensation Guidelines recommended by the UUA.

5. After six months of employment, persons who work 1,000 hours or more will receive pro- rated benefits such as medical, dental, term life insurance, long-term disability insurance and paid holidays. They will also accrue vacation leave. After one year of employment, they will be eligible for enrollment in the UU Organizations Retirement Plan.

6. The governing board will give full consideration to any complaints that may arise in the everyday conduct of our religious organization, and we will make prompt and fair adjustment to the extent practicable.

7. All employees will be encouraged to suggest how their work might be improved, and they will be informed in advance of the criteria upon which their performance will be evaluated.

8. We will provide an office and work environment that are comfortable, orderly, and safe, and situations of harassment or intimidation will not be tolerated.

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