CHURCH FINANCES 101

CHURCH FINANCES 101

Dealing with Legal and Accounting Issues

Donald Bacher, PNMC Treasurer

INTRODUCTIONS

Who are you

Congregation

Position

Why are you attending this workshop

“All church treasurers should be delegates”

RESOURCES AND WEB SITES

IRS Website: www.irs.gov

Publication 1828-Tax Guide for Churches & Religious Organizations

Oregon Secretary of State

www.filinginoregon.com

Go to: Nonprofit Organization information

Secretary of State Corporation Division Renewals

“Church and Clergy Tax Guide” by Richard Hammar

Christian Ministry Resources

http://cmr.gospelcom.net 1-800-222-1840

Financial Stewardship Resources, Inc.

Future workshop information and registration forms

www.financialstewards.org

PAYING THE MINISTER

The minister should be paid as an employee (W-2) rather than an independent contractor (1099-MISC).

Better off because:

Value of various fringe benefits will be non-taxable including the cost of employer-paid health premiums
IRS audit risk is lower
Avoids additional taxes and penalties that often apply to self-employed ministers

Ministers have a “dual tax status”

IRS considers them employees under the IRS guidelines
Employees for federal income tax report but self-employed for

Social Security

Not subject to Social Security and Medicare taxes even though

they report their income taxes as employees and receive a W-2

from their church. They pay the “self-employment tax.”

Expense Reimbursement

Reimbursement for expenses makes them tax free
Build the into the salary when possible

Common minister business expenses

Business related meals
Supplies
Robes and other ceremonial garments specifically required; not adaptable to general usage as ordinary clothing
Business gifts
Education expenses
Professional publications and books
Computer and software
Special use clothing and laundry
Long distance calls and extra phone lines for business
Professional dues (including tithe to church or denominational offices in come circumstances where it is required to maintain a minister’s credentials)
Accountable reimbursement plan requirements
Only those employee business expenses that are accounted for or are substantiated within 60-days incurred (amount, date, place and business purpose for each expense)

HOUSING ALLOWANCE

Who gets it

When received as compensation for ministerial services

Ordained, commissioned or licensed
Administers sacraments
Conducts religious worship
Management responsibilities in local church/denomination
Considered a religious leader by church/denomination

How

Written designation of the amount in advance as a housing allowance
Adopted – Must be determined by board action (in minutes) before compensation actually earned.

Safety Net Housing Allowance Designation: “If we forget to do this, then automatically we will designate 50% (or other) for housing allowance of any minister we ever hire.”

Church & Clergy Tax Guide 2006 Edition

Illustration 6-2, page 209

AMENDING THE ALLOWANCE

If your minister’s housing expenses are more than expected and will likely exceed the housing allowance, then the church can amend the allowance and make it larger.

When an amendment may be appropriate

A minister purchases a new home
Unexpected home repairs
Major remodeling
Purchase of new furnishings
Purchase of new appliances
The mortgage interest rate under an adjustable rate mortgage is increased
Prepayment of a mortgage loan
A “balloon” payment on a mortgage loan
Increase in property taxes
A tax assessment is imposed on the minister’s property to pay for public improvements
Increase in property insurance

How to amend

Proper authorization – authorized by the same group that designated the original housing allowance
In writing – recorded in the minutes
Prospective application – it takes effect on the date it is approved. It cannot apply retroactively

Pay Social Security on housing allowance – Box 14 on the W-2

It is preferred that the housing allowance be a separate check

HIRING STAFF:

EMPLOYEE VS INDEPENDENT CONTRACTOR

At least four recognized tests for determining whether a minister or lay worker is an employee or self-employed for federal income tax reporting purposes:

1. “Common Law Employee” test

An employee if:

Employer controls and directs the individual towards a specific outcome using specific details and means of accomplishing the specific outcome
Employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done
Employer may not actually direct or control but has the right to
Employer furnishes the tools and space for the work to be done

2. The “20-factor” test (see example)

3. The “7-factor” test (see example)

4. The “12-factor” test (see example)

Church & Clergy Tax Guide 2006 Edition

Chapter 2, pages 66-70ff

PERSONAL SERVICES CONTRACT EXAMPLES

RECEIPTING DESIGNATED CONTRIBUTIONS

What is a Charitable Contribution?

Must satisfy these six requirements:

A gift of cash or property
Claimed as a deduction in the year in which the contribution is made
The contribution is unconditional and without personal benefit to the donor
The contribution is made “to or for the use of” a qualified charity
The contribution is within the allowable legal limits

Up to 50% of the donors adjusted gross income
Non-cash property equals the fair market value

The contribution is properly substantiated

Less than $250

A cancelled check
A receipt or letter from the church showing the church’s name and the amount and date of the contribution, or
Any other reliable written record showing the name of the church and the amount and date of the contribution (e.g. offering envelopes)

$250 or more

Not cumulative
A written acknowledgment from the church or other charity (donors cannot substantiate individual cash contributions of $250 or more with cancelled checks)

The acknowledgement must contain:

Name of charity

Amount of cash contribution

Description (but not the value) of non-cash contribution (a good faith estimate of value)

Statement that no goods or services were provided by the charity in return for the contribution

Description and good faith estimate of the value of goods or services, if any, that the charity provided in return for the contribution

Statement that goods or services, if any, that the charity provided in return for the contribution, consisted entirely of intangible religious benefits (e.g. admission to a religious ceremony)

What constitutes a tax deductible contribution?

A gift is not considered a contribution “to” a charity if the facts show that the charity is merely a conduit to a particular person.

The test in each case is whether the organization has full control of the donated funds, and discretion as to their use, so as to ensure that they will be used to carry out its functions and purposes.

If the taxpayer’s contributions to the fund are distinctly marked by him so that they may be used only for a specific individual or are received by the fund pursuant to a commitment or understanding that they will be so used, they may NOT be deducted by the taxpayer.

For purposes of determining that a contribution is made to or for the use of a charitable organization rather than to a particular individual who ultimately benefits from the contribution, the organization must have full control of the use of the donated funds and the contributor’s intent in making the payment must have been to benefit the organization and not the individual recipient.

Deductible if:

The purpose is an approved project or program of the church (e.g. building fund)

Not deductible if:

Donor specifies that it must be spent for a specified individual unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church’s exempt purposes.

Examples include:

Benevolence funds

Policy – welcome to make “suggestions,” but any suggestions are deemed advisor rather than mandatory and that the board has full control and discretion.

Scholarship funds

Specifying a particular student will not be deductible

Must benefit a “large and indefinite class of beneficiaries”

Foreign Missionary

OK if designate a specific missionary as long as church has full administrative and accounting control over the funds (act as a missions agency)

DEPOSITS AND EXPENSES

Goals: 1. Protect your staff who handle church funds

2. Protect the church’s assets

Survey by Church Law & Tax Report indicates churches have suffered embezzlement:

3% of smaller churches (0 to 100)
15% of large churches (751 to 1000)

What can be done?

Separate duties for internal control purposes – different people

doing jobs will reduce chances of errors and potential for theft.

Collect offering/count offering
Sign checks
Bookkeeping
Contribution records
Approval for payment

Regularly reconcile (MONTHLY)

CASH RECEIPTS (Guidelines)

In general

Restrictively endorse all checks “for deposit only” immediately
Make deposits as soon as possible
Prohibit cashing checks or paying expenses out of currency received

The individuals responsible for counting the deposit

Suggest more than 2 people always in control of funds
Sign count sheets
Keep count sheet so you know who made counts

CASH DISBURSEMENTS

Those having access to modify or adjust accounting records or handling cash should not also be a signer of checks

All paid invoices should be marked as paid, together with the date paid and the check number, and filed (if you use voucher checks, the bottom voucher should be attached)

Payments should be made from ORIGINAL invoices, not from statements, to avoid duplication of payment (Mennonite Publishing House is a good example)

4. Payment should only be made when approved by department head

YEAR-END CHECKLIST

1. Housing allowance

2. W-2 forms

3. Notice to donors

4. Handling end of year contributions

Checks written in December 2005 and deposited in the mail in December 2005 but not postmarked until January 2006, and not received by the church until January 2006

Checks written in December 2005 and deposited in the mail and postmarked in December 2005, but not received by the church until January 2006

Checks written and deposited in church offering in December 2005 but “postdated” to January 2006

Checks written and deposited in church offering in January 2006 but “backdated” to December 2005

Checks written in December of 2005 and deposited in church offering in January 2006

Report

for

2006

Report

for

2005

Type of contribution

RECORD RETENTION

How long should I keep church records?

The following are MINIMUM requirements

Form W-2 At least 4 years after filing the return

Form W-4 At least 4 years after filing the return

Form 941 At least 4 years after filling the return

Form 1099-MISC At least 4 years after filing the return

RETENTION POLICY & PROCEDURE

Develop a records retention policy

Reasons to keep church records

1. Legal requirements

2. Litigation

3. Needs of the organization

4. Historical importance

BACKUP

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Donald Bacher

PNMC Treasurer

1650 Main Street SE

Albany, OR 97322

HOME (541) 926-2789

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