The IRS scrutinizes churches and ministries, so it’s imperative that you run a ‘tight ship’ in the finance department. Over time, ships get leaky if you don’t maintain them, so here are indicators that your ship may be ‘leaky’ and need fixing:
- Not reporting all taxable income for church staff. Examples include love offerings, gifts of property, expense allowances (such as for a car or entertainment), reimbursements for self-employment social security for pastors, and paid benefits (such as life insurance). All of the examples must be treated as regular taxable income. Failure to report allowances as income can result in a 200% fine on the allowance amount, (an excess benefit transaction) plus penalties and interest. And, board members who approved the allowance are subject to personal fines of up to $10,000.
- Unsubstantiated expenses. Expenses reimbursed on an expense report must include the place, time, amount, business purpose and business relationship of all present. If expenses are reimbursed but unsubstantiated, then the amount needs to be reported as taxable income to the person who received the reimbursement.
- Not accounting correctly for special events. If the church awards prizes for raffle drawings, a Form 1099 or W-2G is needed if the amount of the prize exceeds $600 and is at least 300x the wager. You need to get a payment from the winner that’s treated as withholding and deposited with the IRS if the prize, less the wager or price of ticket, amount is $5,000 or greater. (These are general rules; please talk with us or refer to the IRS for specifics.) If the church issues a receipt for a dinner fundraiser, a distinction is needed regarding the hard cost of the dinner in relation to the entire ticket cost.
- Not having detailed records for housing allowances for ministers. It’s important to keep updated records regarding the designation of housing allowance for ministers. This means documenting the designation in board minutes and keeping records to show that it is reasonable. The church is responsible for record keeping with regard to the designation, but the minister is ultimately responsible for record keeping of the actual expenses and the non-taxable portion.
Compliance is an ongoing task. Be sure to stay on top of your recordkeeping and talk with a Salmon Sims Thomas advisor whenever you have questions.