I have seen it countless times, a group of people get together and decide to start a church. They find a pastor, a secretary and someone to act as the treasure. Get a building, and start having church services.
Every time I see this, I have the same reaction. I cringe. Not because they started a new church. But how they are overseeing the administrative side of the house. Or more truthfully, how they are NOT overseeing the accounting functions of a church. We have found that when we work with these churches, mostly of 200 members or less, that they are doing what they were taught, correctly. Or that they are doing what they think is the right way to do things, however between the dream of starting something new and refreshing to the first service there are several key factors and steps that were neglected.
Here are a couple of examples
The bylaws do not protect the pastor, or the church, they have not filed the proper paper work. These small churches use a ledger book, and pay the pastor a “Love Offering “. and in many cases the “love offering “are not reported as income by the pastor or the church. This is very dangerous.
First the bylaws. Churches are Nonprofit organization, and as such they must adhere to laws that govern nonprofit organizations. These laws are designed for protection, as well as accountability. By laws, we written correctly provide detailed descriptions of the Mission, Vision, and Purpose of the organization, as well provides detailed descriptions of each officer, as well as their role and responsibilities to the church. Bylaws should also include the qualifications of membership, how to remain a member, as well as how membership can be lost, and arbitration information should a conflict arise within the organization.
Now the ledger books, while nothing wrong per se, they do present a chance for the books to be changed, they can be lost, damaged or destroyed. Also, if the treasurer leaves, the next person may not be able to read the handwriting from the person who started them. In some cases, churches are a step above the ledger books and use excel to keep track of income and expenses. This is a step up, but still is not sufficient for accurate, result, and report driven accounting. The formulas can be wrong, and if they are, the entire results are inaccurate. Entries can be entered on a spread sheet incorrectly, again the results are everything being calculated wrong. The first thing we do when we work with a church or nonprofit is enroll them in an automated, or computerized accounting and management system, not only are these systems more accurate they are more effective way of managing donors, contributions and finances.
Paying the Pastor. This is a huge one for me because I happen to be both, a pastor and an accountant. As a pastor, I know what it means to “live by the gospel” or “to not muzzle the mouth of the ox” or any other verse or saying we can think of when it comes to getting paid. (I will share my thoughts on this in more details later). As an accountant, I know what the laws require. The IRS states that any compensation received for services is considered income. This includes “love offerings “are taxable. More information can be found here. Issuing a pastor a 1099 leaves the pastor responsible for both portions of Social Security and Medicare, as well as a self-employment tax. This causes undue financial stress on the pastor. We recommend to all the churches that we work with that the pastor is put on some type of payroll system and taxes are withheld each pay period and submitted to the IRS, State and in some areas local agencies. There is small amount of work to be done to set this up properly but the benefits to the pastor are tremendous. Back to the 1099’s there seems to be this myth floating around out there that if a person makes less than $600.00 a year that a 1099 is not required. Guess what, they are. The rule is this ANY INCOME RECEIVED IS TO BE REPORTED TO THE IRS. We will have a more in depth post regarding pastor and clergy salaries posted in the near future, in the meantime should your organization need our assistance with any of these topics please do not hesitate to contact us.