July 2019 - The Pastor's Wallet

How To Start A Side Business For Pastors: 5 Simple Steps

by Amy Monday, July 22, 2019

Picture of a computer, notebook, hands holding a coffee cup and the word DREAM with blog post title: How To Start A Side Business For Pastors: 5 Simple Steps

Side business, side gig, tent-making ministry, side hustle, part-time self-employment, side job; doing some extra work on top of your regular job has a lot of different names these days. No matter what you call it, a lot of pastors (and their spouses) see it as a good way to provide for their families when serving in a position that doesn’t pay quite enough.

We have discussed different ideas for side jobs for pastors on this blog previously and even took an in-depth look at how one pastor’s wife has used Airbnb to augment her husband’s pastoral salary. We also spent some time discussing the ethics of pastors and business and how to maintain boundaries between your business and ministry.

Today we’re going to get really practical. How do you actually go about starting your own little business on the side?

1. Pray

I know this should go without saying, but I know from time to time we all let our human nature take over and jump into things without really seeking God’s will on the matter. Like Psalm 127:1 says, though, “Unless the Lord builds the house, the builders labor in vain.” We all know this.

Before you get started, spend some time in prayer. Make sure it’s really a God-idea and not your flesh or insecurities driving you to start your own business. Then, in each step of the process below, make sure you are taking it to God for his wisdom and guidance.

2. Gather & Research Ideas

Once you get the green light from God, start brainstorming ideas. Here are some that I came up with that would be able to work around a pastor’s schedule. Here are some that are specific to the Christmas season. You can also google “side job ideas” and get 802,000,000 results in half a second.

As you come up with ideas, look for things that:

Can work around your pastoral schedule
Will not create conflicts of interest or ethical dilemmas
You would enjoy at least somewhat (it doesn’t have to be your greatest passion but you shouldn’t hate it)
There are easily identifiable people willing to pay for it
You will be able to earn enough to make the time and effort worthwhile

After you have a couple of ideas that excite you, do some research. The internet is chock full of information from personal experiences of people who have done that job to information on how the job pays, how much competition there is for it, and ideas for how to be successful doing it. In addition to researching your ideas online, seek the advice of experienced business people that you know. As Proverbs says, there is safety in a multitude of counselors.

3. Build A Plan For The Best Idea

The next step is to pick the best of your ideas based on your research and God’s guidance and then develop a detailed plan for how you’ll transform it from a thought into reality. As you get into the details, you’ll probably have to do even more research.

Things to include in your plan are:

What exact products or services will you offer?
What resources will you need?
Where can you get those resources?
How much time are you going to need to commit (and when)?
How much money will it require?
Who are you going to market to?
How are you going to market to them?
Are there any legal requirements to conduct this business?

4. Start With A Minimum Viable Product

Now it’s time to get started and actually see if this idea is going to work. It’s not time to “go big or go home,” though. You want to start small to make sure you’re on the right track. You want to start with just enough to be able to analyze the viability of your idea, called a “minimum viable product” in the business world.

If you want to get into landscaping, instead of going out and putting $8,000 worth of tools on your Home Depot card, start with just a lawnmower. Mowing lawns is enough for you to see if you will enjoy the work, if there are enough people willing to hire you, and if you will be able to earn enough to make it worth the effort. If it works out for you, it’s easy to scale up. But, if it doesn’t work out, you haven’t wasted a lot of time or effort discovering that.

5. Analyze & Refine

As I just said, you’re allowed to change your mind, even after you’ve picked an idea. It’s wise to analyze and refine the business as you go. You may only make small tweaks to your plan from Step 3 or you could decide to toss out the business idea altogether and start over at Step 1.

Every step of the way it’s important to pause and reflect on how the business is going. Take some time to look at how the business is doing financially, if there is enough of a market for it to continue and grow, if your product or service can be improved and how, how you feel about doing the work itself, and how it is affecting your family and ministry. Take stock of where you are and the potential for where you could go and don’t be afraid to make course corrections.

When it all comes down to it, running a business isn’t a whole lot different than running a ministry. It needs to be fluid. You need to always be adjusting, growing, improving, and listening to the voice of the Holy Spirit for direction.

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Do Pastors Pay Social Security And Medicare?

by Amy Monday, July 15, 2019

So, you’re entering the ministry and you’re excited. You’re excited to devote your life to God’s work. You’re excited to make an eternal impact on the world. And you’re excited to do your taxes in a completely new way.

No, not really. If that kind of thing excited you, you would be a CPA instead of a pastor. Even though you’re new to pastoral ministry, you’ve probably already heard a thing or two about clergy taxes from seasoned veterans. And there’s a good chance that there are conflicts in what you’ve heard.

One of the biggest areas of confusion when it comes to a minister’s taxes relates to Social Security and Medicare. There are a lot of myths floating around, both inside and outside the church. Let me see if I can clear things up for you.

How Social Security & Medicare Taxes Work

Social Security and Medicare taxes are paid by all workers and deducted directly from their paychecks. Because of this, they are often called payroll taxes. Traditionally, the employee pays half of the taxes and the employer pays half of the taxes. Self-employed people, being both employee and employer, have to pay both halves, or the total tax.

For 2019, the Social Security tax rate is 6.2% each for employee and employer and the Medicare tax rate is 1.45% each. That means that 7.65% is automatically deducted from every employee’s paycheck. Self-employed people have to pay 15.3% total.

Social Security has a wage-base limit. That means that the Social Security tax only applies to the first $132,900 of income. Above that, the Social Security tax no longer applies. Medicare taxes always apply. In fact, they actually get higher if you earn a lot. High-income earners have to pay an extra Additional Medicare Tax, so they have an extra 0.9% withheld once their income exceeds $200,000.

Do Pastors Have To Pay Social Security & Medicare Taxes?

Social Security and Medicare taxes are pretty straightforward for most people. Not for pastors, though. Both how they pay them and whether or not they even have to are very unique for pastors. Unique, meaning complicated and causing lots of confusion.

First, let’s address whether pastors even have to pay Social Security and Medicare taxes. For everyone else, it’s required. They have no choice in the matter. But, pastors have a choice. At least regarding their ministerial income.

If you can honestly say, “I am conscientiously opposed to, or because of my religious principles I am opposed to” the acceptance of public insurance, then you can opt out. You only have a brief window of time where this option is available and you have to fill out an IRS form and follow their process. And, if you opt out, it’s permanent. You can never opt back into Social Security for your ministerial income. (Though you still may be able to receive benefits even after opting out.) For more information, follow the links in this paragraph.

How Do Pastors Pay Social Security & Medicare Taxes?

Thus, at the beginning of your ministry, you have the opportunity to opt out of the Social Security and Medicare programs and their taxes related to your ministerial income. Even if you opt out, any secular jobs you hold will still be subject to payroll taxes.

But what if you don’t opt out? Does it work for you just like it does for everyone else? No way! That would be too easy!

All pastors have to pay Social Security and Medicare taxes as if they were self-employed. Even if you work for a church and receive a W-2. And you have no choice in the matter, it’s the law. Churches aren’t even allowed to withhold payroll taxes for pastors. (Some non-pastoral church employees also have to pay their taxes this way as well.) If you want to learn more about these crazy rules, follow the links in this paragraph.

How do pastors actually pay these taxes, then, if they can’t do it as employees? Well, throughout the year, you should either be paying estimated quarterly taxes or having your church withhold taxes (technically, only income taxes) from your paycheck. Then, when you file your tax return, you have to fill out Schedule SE to calculate your Social Security and Medicare taxes.

On your tax return, your Schedule SE taxes are added together with your income taxes for your final tax bill. Because of this, even though your church can’t withhold payroll taxes for you, they can withhold extra income taxes to make up the difference. If you end up owing money, it means your church isn’t withholding enough or your estimated payments were too low. If you get a refund, it means the opposite.

There you have it, that’s how Social Security and Medicare taxes work for pastors. If you have further questions, ask them in the comments or send me a quick email!

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Should You Keep A Mortgage Just For The Housing Allowance & Mortgage Interest Deduction?

by Amy Monday, July 8, 2019

Keep your mortgage so you don’t lose your housing allowance and mortgage interest deduction!

How many times have you heard that advice? A reader recently asked me about it. Is that really good advice?

I know for most people, keeping a mortgage just for the mortgage interest deduction doesn’t make financial sense (though a lot of people do it). But you pastors have an amazing benefit in the ministerial housing allowance. It made me wonder, could the housing allowance be enough to turn the tables and make a mortgage worthwhile?

Example Mortgage

I decided to calculate it out to see for myself and to share with you. Here are my assumptions for this exercise:

Home Price: $200,000

Loan Amount: $160,000 (20% down payment avoids private mortgage insurance)

Mortgage Type: 30-year fixed rate

Mortgage Interest Rate: 5%

Income Tax Rate: 12%

Based on those assumptions, I calculated out the amount you would save in taxes with the housing allowance and mortgage interest deduction as well as the total amount of interest you would pay over the life of the loan.

I also looked at the opposite extreme, paying cash for the house, but that’s not a very realistic alternative for most people. Because of this, I figured out what the numbers would be if you made bi-weekly payments. The idea behind biweekly payments is that you make a mortgage payment every other week instead of monthly so by the end of the year you’ve made an extra payment, 13 instead of 12. Here are the numbers:

Calculations

Minimum Payments

Annual Principal & Interest Payments: $10,306.98

Total Interest Paid Over Life Of Loan: $149,209.25

Loan Paid Off In: 30 Years

Bi-Weekly Payments

Annual Principal & Interest Payments: $11,165.96

Total Interest Paid Over Life Of Loan: $121,723.99

Loan Paid Off In: 25.25 Years (I rounded it to 25 for my calculations)

No Mortgage

Annual Principal & Interest Payments: $0

Total Interest Paid Over Life Of Loan: $0

Loan Paid Off In: 0 Years

Now, there are a lot of other things that count towards the housing allowance besides just principal and interest payments. You have property taxes, homeowners insurance, utilities, furnishings, etc. However, those are all the same regardless of whether or not you have a mortgage. Here we are only looking at the effects of a mortgage, so those are the only numbers I included.

Here is how total loan costs compare between the three situations:

	30-Year Fixed Rate	Biweekly Payments	Pay Cash
Total Interest Paid	$149,209.25	$121,723.99	$0
Tax Benefit Of Housing Allowance*	$37,105.13	$33,497.88	$0
Mortgage Interest Deduction**	$17,905.11	$14,606.88	$0
Cost of Loan***	$94,199.01	$73,619.23	$0

*Tax Benefit Of HA calculated as 12% of annual principal and interest payment multiplied by the duration of the loan.

**Interest Deduction calculated as 12% of the total interest paid.

***Cost Of Loan is calculated as the total interest paid less the tax benefit of the housing allowance less the mortgage interest deduction.

Other Factors To Note

There are other factors that will affect how this would apply to you personally:

You have to itemize your deduction to receive a benefit for paying mortgage interest. With the new higher standard deduction, it is possible that you will not itemize and receive this benefit.

Being in a lower tax bracket will decrease your tax savings and a higher tax bracket will increase them. For 2019, the 12% rate applies to singles with a taxable income of $9,701 – $39,475 and married couples with a taxable income of $19,401 – $78,950.

Having a lower interest rate will decrease the overall cost of the loan and a higher one will increase the cost.

Your housing allowance is limited by the fair market rental value of the house. If it is less than your biweekly payments then you will not save as much in taxes as in my calculations above.

What About Opportunity Costs?

So, if you took out this mortgage you would save $55,010.24 in taxes over the next 30 years. That’s great! Except that it will cost you $149,209.25 in interest. That’s essentially giving the bank $3 in order to avoid giving the government $1. Without a mortgage, you may pay more in taxes but you pay less overall.

Those calculations make paying off the mortgage as fast as possible the clear winner. But, as with most things financial, it’s not quite as simple as that. There are opportunity costs involved. An opportunity cost is basically what you miss out on by not making another choice.

You see, ditching your mortgage is obviously best if you’re just going to be spending or sitting on your money. But, what if you invest it? What if you put $160,000 into the stock market when you got your mortgage? Would you still end up worse off financially 30 years later?

Not necessarily. If you invest your money rather than pay off your mortgage you may end out ahead. It’s a possibility, though, not a guarantee. The end results will depend upon your discipline, the investment decisions you make, and the way the market behaves.

What Should You Do, Then?

Wouldn’t life be easy if the internet could just tell you the best decisions to make about everything?

I’m sorry, but I’m not God, so I can’t tell you what’s best in your situation. I can only suggest things to think through as you make your decision:

Consider your priorities; how does your desire to be debt free compare with your desire to maximize your finances?
Consider your habits; would you have the discipline to invest your extra money instead of spending it?
Consider your risk tolerance; do you have the guts to keep your money invested even if the market tanked?
Consider various scenarios; what rate of return do you need in order to make investing instead of paying down the mortgage worthwhile for you? 5%? 8%? 12%? Is your required rate of return realistic?

Remember, the math clearly shows that giving $3 to the bank to keep $1 from the government is unwise. However, you may have other opportunities that make giving $3 to the bank worthwhile. Talk to your spouse, pray through it, do the math, and I wish you the best of luck!

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What To Do About Your Housing Allowance If You Move During The Year

by Amy Monday, July 1, 2019

Summer is in full swing and that means house listings are skyrocketing and people are moving. This has been on my mind as our neighbors behind us just sold their house and we have yet to meet our new neighbors. Hopefully, they’ll be nice!

Moving is a big undertaking. Packing your things, transporting them, figuring out the logistics of it all, and trying to make sure nothing gets dented or dinged or forgotten in the process. It’s a lot of work, both mental and physical. In addition to all of the usual chores of moving, pastors have to think about their housing allowance as well. I’ll give you a hand and lay it out for you. If you’re a pastor with a housing allowance, this is what you need to do when you move:

Calculate Your New Expenses

Are your expenses going up or down? You need to calculate your expenses and find out. If you need a calculator to help, we have one. This should be fairly easy if you’re not making any big changes. However, if your living situation is changing dramatically, then this might be a several month process as you get used to your new lifestyle and get a better handle on your actual expenses.

It’s important to figure out how your expenses are changing, though. If they are going down and you don’t adjust your housing allowance accordingly, then you will have to add the excess back into your taxable income at the end of the year and you could end up with a large tax bill. If the opposite is the case, then you could end up paying taxes unnecessarily.

Calculate The Fair Market Rental Value Of Your New Home

Remember, there are limitations to the amount you can exclude from taxation as a housing allowance. The big one that some people forget about is that your housing allowance cannot exceed the fair market rental value of your home, even if your real expenses do. So, you need to calculate the fair market rental value of your house. Know how to do that? If not, read this article.

Request An Updated Housing Allowance

Once you’ve calculated your actual expenses and the fair market rental value of your new home, pick the lower of the two numbers and request it as a new housing allowance. If you’re not sure how to request a housing allowance from your church or denomination, ask whoever pays you.

While you might be used to requesting a housing allowance at the beginning of the calendar year, there is no IRS rule about when or how frequently you can request one. So, you can update it whenever you move. And then two months later when you figure out that your calculations were wrong you can update it again. The only limit to how much you can change and update your housing allowance is how much your church or denomination is willing to put up with.

It is important that you request your new housing allowance as soon as possible, especially if you’re asking for an increase. Housing allowances can only be paid proactively, not retroactively. That means that if you move in, buy $10,000 worth of furniture, and then request an updated housing allowance, your new housing allowance cannot cover that big furniture purchase. It needs to be both requested and approved before you incur the expenses for them to apply.

Make Sure Your Request Is Officially Approved

That brings me to my last point. Make sure your housing allowance is officially approved by your church or denomination. It’s not valid until it is. I’ve heard from pastors who thought they did everything right, but their church dropped the ball. They never made the housing allowance official, so the pastor ended up paying a bunch of unnecessary taxes.

Don’t let that be you. Follow up frequently until your updated housing allowance is approved and accurately reflected in your paycheck.

That’s how you do it. I can’t come over and scrub bathrooms or move furniture for you, but I hope this helps you at least a little bit!

If you would like to learn more about the ministerial housing allowance, watch for our new book this fall. You can also sign up for updates at the top of your screen!