Church accounting and taxes

[Gail in Virginia]

A local church had some of their members attend a seminar put on by a firm that is an "expert" on accounting for churches and other religious organizations. They now are questioning how they do things, which is probably good. They have asked us to come and explain exactly what they should be doing, and while I thought that I had a pretty good grip on the subject, some of the questions they are asking make me wonder since I am sure they are points raised by the expert.

For example, they wanted to know if it is "illegal" for them to have more bank accounts than an operating account and a building fund. To the best of my knowledge, they can have as many accounts as they can keep up with, but does anyone know why this question would arise?

They also asked if it was true that church payroll cannot be more than 32.6% of the total income, and I have no idea where that specific percentage came from. Do they actually have to retain the envelopes of member pledges for 7 years? I am pretty sure my church throws them away once they are entered into the computer.

There were other questions that were more in line with what I think of as normal questions for a church to ask, but I wondered if anyone on this board had any thoughts about these questions.

[JohnH]

1) They can have as many bank acocunts as they can keep up with.

2) That's the first time I've ever heard of a percentage for payroll. It's unrealistic and totally irrelevant to the real world. The percentages paid to staff for a 20-member church meeting in someone's home would be quite different than those numbers for a 10,000 member church meeting in a brand new building with tons of overhead & debt service.

3) I do recommend that churches keep offering envelopes for 7 years. It isn't a requirement, but if a church member gets into a wierd audit situation, it's nice to be able to provide the source documentation for their contribution records. It has noithing to do with rules & regulations, but everything to do with good stewardship & a high degress of financial accountability on the part of the church.

[MAMalody]

I totally agree with the prior response you have been given.

I have run into that group before and have talked to a one of their "attorneys." I sure wish they would discontinue those seminars.

1. They can have as many bank accounts as they wish. It is not unusual, especially for larger churches, to have six or seven accounts. Obviously, what the right and left hand are doing is harder to keep track of but it is not illegal. (I don't recommend this many accounts but it is a church specific decision.)

2. The payroll percentage issue is a joke also. There are two things that could be issues here. (a). When a churches payroll reaches 40% of receipts it normally begins to infringe upon other ministries and if it reachs 60% it normally will shut down the church. ( There are some compensation guidelines for "overly compensated pastors." They are not percentage based, although that could be looked at.

3. While there is no requirement form retaining offering envelopes I also recommend that they keep them for at least four years if not seven.

While I do not profess to know everything there is about church, clergy and religious workers tax laws, I do specialize in that field. In fact, I don't do any other type of tax returns. Just from what you have presented it would appear that you could have done a better job doing the seminar than the presenter did.

[Lion EA]

In a treasurers' seminar I attended in my diocese of the Episcopal Church, they did recommend fewer rather than more bank accounts for control purposes. More accounts with volunteers elected annually can have signature cards out of date. Some accounts -- specifically mentioned were clergy discretionary accounts -- might be a bit too well hidden for audit purposes. And, speaking of audits, our church audits must cover ALL bank accounts; so to keep the audit cost and time down, the speaker recommended fewer accounts. It also makes more efficient use of volunteers when you're trying to have someone reconcile accounts who isn't a signer or even a depositor on those accounts.... You get the idea. Speaker was pushing for one account, running everything through. We did consolidate some accounts and are down to three: one operating, one nursery school (which has their own board and fund raising but operates under the church's tax ID, and one for capital funds that has a higher interest rate for funds not drawn on often.

Churches and other not for profits need to use their funds for their stated mission and not excessively for one or a few individuals. That can be a problem for a small church with a highly paid pastor. I've seen examples of how the percentage of budgets can add up with items on different lines (rectory expenses, pension, salary, health premiums, etc.) to be a bit lopsided to the clergy and a bit skimpy to mission. Maybe those folks remember the example numbers more than they remember the principal behind the numbers.

And, yeah, I can't get our church to save the envelopes, either! Wish they would. Had a heck of a time getting the nursery school to store their payroll records with the church's instead of at some one's house!

Have the parishioners list the items of concern. Help them prioritize. Then tackle a couple of items each year.

[kcjenkins]

And on the envelopes issue, if you point out that the purpose of storing them is to protect the CHURCH workers for accusations of wrongdoing, inflating someone's deductions or shorting them, etc, it usually gets a more favorable hearing than when you are just talking about doing it to help the congregation. After all, you are often talking about CASH, and the whole point is to protect the church employee or volunteer from being accused of siphoning off some cash from the donations. That's an argument that will be listened to most of the time.

[JohnH]

Great point KC.

I guess people's willingness to do a little extra work is better motivated by reminding them that you're trying to help them keep THEIR ox from being gored rather than someone else's.