Churches, Pastors and Religious Organizations
Most Church accounting is done by bookkeepers with the Church Treasurer reviewing the records on regular basis. Problems can arise when either the bookkeeper or the Treasurer is not fully trained or educated on the particularities on the accounting process.
Most churches use the cash basis of accounting, basically checkbook accounting. Contributions are recorded as revenue, when bills are paid expenses are recorded. So far, all is well. Since the church does not file 'income tax' returns, all seems well. Problems do occur though: Payroll tax returns have the most errors for our new clients. First off, many churches do not realize that payroll tax returns are due for all paid employees, including Pastors. Pastors can have a housing allowance which is not subject to income tax but it is subject to social security. There are special rules on how to calculate the housing allowance depending on if the church supplies the parsonage, the Pastor is renting the home or if the Pastor is purchasing a home. There are limitations on housing allowances as stated in the "Clergy Housing Allowance Clarification Act of 2002".
The second largest error that we see is the lack of accounting for "love offerings". If a collection is taken up to give to someone or group that income must be tracked. The money should be totaled and a check given to the individual/group after the individual or group fully completes a W-9 form (click here). You must have one of these forms on file for every individual or group that performs a personal service, unless they are an employee. At the end of the calendar year, you send a Form 1099 Misc to each and every individual or group that you have paid $600.00 or more. This form is due to the vendor by January 31st and to the IRS by February 28th.
Donation receipts are the third error. Some churches only give donation receipts to members, and will not issue a receipt to non-members for any monetary contribution. A donor must have a bank record and written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on their federal income tax return. A Church must send a separate written acknowledgement for any contribution of $250.00 or more before the donor can take the tax credit on their return. The IRS has issued Publication 1771 (click here) which details this clearly. Another failure is not giving receipts for donations of property to anyone. These are required to substantiate the deduction and to allow the donor to the charitable contribution deduction.
The church treasurer has the critical role of maintaining the business integrity of the church. The treasurer must stay current on federal, state and local laws that affect the church with regards to taxes, reporting and filing requirements. The treasurer is responsible for the payment of all bills, invoices and charges, oversees the financial recordkeeping and prepares financial reports for the church board and others and files all required tax forms.
Pastors should complete a housing allowance worksheet each December for the following year. That worksheet should list the estimated expenses that are covered by the housing allowance. The Pastor should then give the Church Board a letter stating what he/she is asking for the housing allowance. The Board then reviews it and when it is accepted, they prepare a board resolution accepting it. In January, the pastor should true up the actual expenses to get the actual number. This could be balanced through the churches books or on the Pastors personal income tax return. Pastors do get a "double deduction" of Mortgage Interest and Property Taxes if they use the housing allowance. The church reimburses the Pastor for this expense and the Pastor gets to claim the deduction on their personal tax return.
We can provide (depending on your needs):
- Accounting and outsourced financial management
- IRS problem resolution
- QuickBooks Accounting Support & Training
- Reviews & Compilations
- Staff Training
- Tax Services
- Sales & Use Taxes
- Temporary Living Expenses
We have years of experience in working with Churches and Pastors. Put our expertise to work for you by calling Carol at (704)583-9090.