Frequently asked questions
The responses to the following frequently asked questions are based on our best research and the wise counsel of professionals in the field. However, we strongly encourage congregational leaders to be in regular conversation with a professional tax preparer and/or accountant.
Are there best practices for how church funds should be handled?
Normal handling of funds in the congregation involves several steps. Some general principles:
- No individual should be required or allowed to handle the congregation's income alone at any time.
- It is preferred that no cash be stored in the church.
- It is preferable for several people to be involved on a rotating basis in handling income.
- All income transactions (receipts and disbursements) should be properly recorded and verifiable. It is understood that the recording of income/gifts from individuals of the congregation is a confidential matter and such records are only available to the Pastor, Financial Secretary, and the Stewardship Committee when required.
- It is suggested that the pastor (or the pastor’s spouse) should not serve in the position of treasurer and pastor should not have check signing authority over any church account.
Suggested Steps in Handling Income
- Immediately following the service, two persons carry the contents of the offering plates to a room for counting or placed in an adequate safe for counting the following day. Church funds/offerings should never be taken to a private home for counting.
- The envelopes are immediately opened by at least two persons. Envelopes are marked as to intent and purpose if for other than undesignated offerings.
- Balances between envelope totals and cash/check totals are reconciled.
- A summary report outlining the various accounts income is to be credited to, is prepared and initialed by at least two persons.
- A deposit slip is prepared and at least two persons bring the deposit directly to the bank.
- A copy of the deposit slip and the summary report are given to the treasurer and to the financial secretary.
- Persons in the above steps should be rotated periodically. It is best if the treasurer and the financial secretary are not personally involved in the above procedure.
- The term of office, served by the treasurer, should be limited to a specific period of time.
- The successor to the treasurer should not be from persons of the same family nor should this office be rotated between the same individuals serving as financial secretary and treasurer.
- Persons involved in handling income should not be involved in any way in the handling of expenditures.
- Funds collected from other activities (fundraisers, special events, etc.) should be directed to those responsible for recording and making bank deposits of these funds. A copy of the deposit slip and summary report is given to the treasurer and financial secretary.
- Members should be encouraged to make their offering by check, not cash.
Suggested Steps in Handling Expenditures
- Bills and obligations should be approved for payment. This approval should be indicated in writing by the person responsible. In larger congregations, a purchase/approval form may be used to approve payment and identify the account to be charged. In all cases, expenditures should be supported by original invoices and/or receipts, not photocopies.
- Check is prepared.
- Check is signed by persons authorized under the bank account agreement. Dual signatures are recommended. The pastor should not be an authorized signer.
- Blank checks should never be signed in advance, under any circumstance.
- Check number is written on invoice/support document to prevent duplicate payment, and check is mailed.
- At least three persons should be involved in the above four steps, even in a simple system.
- Savings and/or Investment Accounts - if the Financial Secretary and/or Treasurer is authorized to initiate fund transfers to/from these accounts via telephone, it is suggested that a verification notice (written form) be developed indicating that on a specific date such transfer took place (and for what purpose) and signed by the President of the congregation. This form to be retained in the files of these accounts.
Bank statement reconciliation should be prepared by persons other than the treasurer or anyone else having check signing authority. This procedure should be reviewed and initialed by a person other than the treasurer.
If a computer is being used in your accounting and record keeping system, the software program for financial accounting and check writing should be a double entry program and provide a bank reconciliation program for deposits and withdrawals (cancelled checks).
What does the IRS have to say about gifts to a local church?
Generally taxpayers who itemize may deduct contributions of money or property made to charitable organizations. The Revenue Reconciliation Act of 1993 has changed the way donors can substantiate their donation. Prior to 1993, all a donor needed to support a deduction was a canceled check. For contributions made after December 31, 1993, the following new rules apply.
Substantiation of single contributions of $250 or more
Any single contribution of $250 or more can no longer be substantiated by a canceled check. Donors will not be allowed a tax deduction for an individual contribution (cash or property) of $250 or more unless they receive a written acknowledgment from the charitable organization that satisfies the following requirements:
- The receipt is in writing
- The receipt identifies the donor by name
- For donations of property, the receipt describes the property but does not state a value of the property
- The receipt shows separately each individual contribution of $250 or more
- The receipt states whether or not the charitable organization provided any goods or services to the donor in exchange for the donation, and if so, the receipt includes an estimate of the value of those goods and services
- If the charitable organization provides no goods or services to the donor in exchange for a contribution, or if the only goods or services the organization provides are "intangible religious benefits," then the receipt must contain a statement to that effect. An appropriate statement would be "No goods or services were provided to you by the church in connection with any contribution, or their value was insignificant or consisted entirely of intangible religious benefits."
- The receipt must be received by the donor on or before the date the donor files a tax return claiming the deduction
"Quid pro quo" contributions of more than $75
A quid pro quo contribution is one that is a payment that is partly a contribution and partly a payment for goods or services received in exchange for the contribution. For every quid pro quo payment the charitable organization receives it must provide a written statement to the donor that satisfies the following conditions:
- The statement informs the donor that the amount of the payment that is tax-deductible is limited to the excess of the contribution over the value of any goods or services provided by the charitable organization
- The statement provides the donor with an estimate of the value of goods or services furnished by the charitable organization.
Gifts for Special Projects
- Gifts for designated or special projects are deductible if the governance authority approves those special projects before you issue the tax-deductible receipt. Gifts for the support, work, or outfit of a BIC missionary are also deductible. Gifts for the support of participants in a summer mission project or other special effort of the church are usually tax-deductible.
There is some question as to whether gifts from parents for their own children in these programs are tax-deductible. If the parents generally support other youth in the church, if their support is only a portion of the total given, or the church maintains control over the funds and disburses them for appropriate ministry costs, you can issue a tax-deductible receipt. However, the IRS will probably challenge the church’s approval of a special project if it is based on the specific request of the just one donor.
What’s this thing called “pastor’s housing allowance?”
One of the few significant tax advantages left for clergy is the ability to exclude from federally taxable income the rental value of a parsonage or that part of compensation that is used to provide a home. (Internal Revenue Code section 107)
Who qualifies for the Housing Allowance?
- Must be employed by the church (or agency of the church)
- Must be ordained, commissioned, or licensed
- Administers the sacraments
- Conducts religious worship
- Has management responsibilities in the church or denomination
- Considered to be a religious leader
- The benefit is made available to the minister as compensation for services.
- All of these need not apply.
What kind of expenses can be used when calculating the housing allowance exclusion?
- Mortgage or rent payments
- Real estate taxes
- Property Insurance
- Down payment on a home
- Furnishings & Appliances (purchase & repair)
- Remodeling & repairs
- Yard maintenance & improvements
How much of the Pastor’s salary can be used as the housing exclusion?
Only the lowest of the following can be used when the pastor files his federal income tax return:
- The fair rental value of the home.
- The amount actually used to provide a home
- The amount officially designated as the housing allowance.
How is the difference between the designated housing allowance and the lower of the three amounts handled?
- If the allowance exceeds the lower of the actual expenditures or the fair rental value: the pastor needs to include the difference on Form 1040 as "other income."
- If the actual expenditures or fair rental value exceed the allowance: the difference cannot be taken as an additional deduction on the pastor’s tax return. It is lost.
How is the Housing Allowance declared?
- It should be adopted by the church council or congregation
- It should be in writing
- It should be in advance of the calendar year or in advance of a new pastor starting employment (If a congregation fails to designate an allowance in advance of a calendar year, it should do so as soon as possible in the new year. The allowance will operate prospectively never retroactively.)
What about the pastor living in a parsonage?
Those clergy living in church-owned parsonages are already having the fair rental value of their home excluded from their income. In addition they can request their church council to establish a "parsonage allowance" out of their salary that is used for such things as utilities, repairs and furnishings for the parsonage.
How is the Housing Allowance handled on the W-2?
The housing allowance (or the value of living in a church-owned parsonage) is always excluded from federal income. This means the congregational treasurer excludes this value from Box 1 of the W-2. The treasurer can however put this amount in Box 14 of the W-2 which is merely an information box.
What are the payroll tax obligations for a church?
Every congregation, as an employer, must report to the Internal Revenue Service with regards to the income paid to each employee. These 10 steps will prepare you to meet this obligation.
- Employer Identification Number (EIN). Every congregation should have one. If you happen to be a new congregation then you must secure an EIN from the Internal Revenue Service before any payroll related payments are made. To obtain one, your congregation must complete Form SS-4, Application for Employer Identification Number, available from your local IRS office or online at www.irs.ustreas.gov. Once you are assigned a number your congregation should automatically begin receiving:
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 8109, Federal Tax Deposit Form
- IRS Publication 15, Circular E - Employer’s Tax Guide
- Determine whether each worker is an employee or self-employed. In most cases, individuals who perform services for a congregation are considered employees of the congregation. If in doubt, congregations should treat workers as an employee since penalties can be assessed against a church for treating a worker as self-employed who the IRS later reclassifies as an employee. The IRS has developed 20 criteria to assist in classifying a worker as self-employed or an employee. Generally a self-employed person typically is engaged in a specific trade or business and offers his/her services to the general public. A self-employed worker would not be subject to the control of an employer with respect to how a job is to be done.
- Have each employee complete a W-4 Form. Have each self-employed individual complete a W-9 Form. The W-4 Form for employees will give the congregation the necessary social security number, address of the employee, and the information required to withhold the correct amount of federal income tax. Remember that any W-4 forms which claim more than 10 withholding allowances needs to be reported to the IRS. The W-9 Form for self-employed individuals will give the congregation the address and social security number of the individual. This information is needed when filing 1099s for these individuals at year-end. If a self-employed worker performs services for your congregation and earns at least $600 for the year, but fails to provide you with his/her social security number, then the congregation is required by law to withhold 31% of the amount of compensation as "backup withholding."
- Compute each employee’s taxable wages. This of course means each employee’s salary taxable wages also include the following:
- Cash Christmas gifts from the congregation.
- Social security offsets given to any clergy employees.
- Imputed interest on low-interest (or no-interest) loans that the congregation might make to any employee.
- Personal use of a church-owned vehicle.
- Any business expense reimbursement given under a nonaccountable business expense reimbursement arrangement. For example: a car allowance is given to an employee every month, but the congregation requires no record keeping or accounting for how the car allowance was spent. The total given as car allowance is considered taxable wage and at year end would be included on the W-2.
- Bonuses or any cash gifts
- Forgiven debts
- Most reimbursements of a spouse’s travel expenses.
- Determine the amount of income tax to withhold. IRS Publication 15 (Circular E) gives you two ways to calculate the correct amount of income tax to withhold. One way is called the wage bracket method in which you use the withholding tables in the Publication 15. The other way is the percentage method in which the number of allowances claimed by the employee are multiplied by an appropriate value given in Publication 15. Make sure to secure a new Publication 15 each year so that you have the most up-to-date withholding tables and percentages.
NOTE: Normally federal income taxes are withheld only on the wages of the non-clergy. Clergy are exempt from withholding. A clergy can however ask to have federal income taxes withheld (but not FICA). To do this a clergy needs to fill out the W-4 giving you a certain dollar amount that he would like to have withheld.
- Withhold FICA taxes from non-minister employees’ wages. Congregations must withhold 7.65% of each employee’s wage and also match this amount with their own funds. This 7.65 percent rate is composed of two items: (1) a Medicare hospital insurance tax of 1.45% on all taxable wages and (2) an "old-age, survivor and disability" tax of 6.2% - refer to your current year’s tax guide to determine what the maximum taxable wage is for this category.
- The Congregation must deposit the taxes it withholds. As pointed out above, there are three components of federal payroll taxes: (1) federal income taxes withheld from the employee’s wages (2) the employees’ share of FICA taxes and (3) the employer’s share of FICA taxes. These dollars must be deposited according to the deposit status that the IRS determines for each congregation. In November of each year the IRS notifies every employer of their deposit status for the next year. The different rules are as follows:
- If withheld taxes are less than $500 at the end of any calendar quarter, the congregation need not deposit the taxes, but rather send them directly to the IRS with each quarterly 941 Form.
- If withheld taxes were $50,000 or less during the most recent look-back period the taxes are deposited monthly–by the 15th day of the following month.
- If withheld taxes were more than $50,000 during the most recent look-back period the taxes are deposited semi-weekly. This means that for paydays falling on Wednesday, Thursday or Friday, the payroll taxes must be deposited on or by the following Wednesday. For paydays on Monday or Tuesday the taxes must be deposited on the Friday following the payday.
- Withheld taxes of $100,000 or more must be deposited by the next banking day.
- Use form 8109–Federal Tax Deposit Coupon–to deposit all employment taxes. The deposit can be made at any financial institution qualified to act as a depository for federal taxes or directly to the federal reserve bank serving your area.
- Social Security Administration
- State tax authorities
- Local tax authorities
Prepare a W-2 form for each employee as well as the accompanying W-3 transmittal form for the IRS. The W-2's are due out by January 31, the W-3 by February 28.
Box a. No need to put anything here
Box b. Congregation’s employer identification number
Box c. Congregation’s name and address
Box d. Employee’s Social Security number
Box e. Employee’s name
Box f. Employee’s address
Box 1. All wages earned by the employee for the year. Please see item 4 above for a discussion what is considered taxable wage.
Do not include that amount which is designated as housing allowance.
Box 2. The federal income tax withheld from that employee’s wages. For most clergy this box can be left blank.
Box 3. The employee’s wages subject to social security. Often this is the same amount as listed in box 1, but not always as some retirement contributions are excluded from box 1, but included in box 3. Box 3 should not list more than the maximum wage base for social security. For clergy employees, leave this box blank as they are not subject to social security.
Box 4. Report the social security taxes withheld. (6.2% of Box 3.) Leave blank for clergy employees.
Box 5. Report the employee’s wages subject to Medicare. In most cases this will be the same as box 3 except there is no maximum wage base for medicare. Again for clergy employees leave this box blank.
Box 6. Report the Medicare taxes withheld. (1.45% of Box 5.) Leave blank for clergy employees.
Box 12. Insert the appropriate code and dollar amount in this box. Some of the codes that churches might use would be eg.; C - for providing more than $50,000 in group term life insurance; E - for contributions made to a 403(b) tax shelter annuity through a salary reduction agreement; L- for the amount the church paid that equal the allowable standard mileage rate in the event the church paid at a rate higher than the IRS allowable rate. Any excess should be included in Boxes 1 & 3; P- the church reimbursed the employee’s moving expenses and the reimbursements are not included in the employee’s income.
Prepare a 1099-MISC for each self-employed worker who earned $600 or more as well as the accompanying 1096 transmittal form for the IRS. The 1099's are due out by January 31 and the 1096 by February 28.
Box 1. Report in this box the amounts paid to recipients for all types of "rents, such as equipment rentals, machine rentals, or office space rent."
Box 4 Report in this box any backup withholding
Box 7 Report in this box the amount of compensation paid to the non-employee
Do I need to file a W-2 form for the pastor?
You must file W-2 forms annually to report earnings of the pastor to:
- Social Security Administration
- State tax authorities
- Local tax authorities
How do ministers pay Social Security?
Clergy are ALWAYS self-employed for social security purposes with respect to their ministerial services, and accordingly, they pay the “self-employment tax” rather than the employee’s share of FICA taxes—even if they report their federal income as an employee. It is incorrect for churches to treat clergy as employees for social security purposes and to withhold the employee’s share of FICA taxes from their wages. Watch a video discussing this topic by clicking here.
How should we handle employee out-of-pocket expenses?
How employee out-of-pocket expenses are handled is a policy matter of each congregation and should be established by the church council. The treasurer should have a good understanding of this policy and be aware that such expenses have a direct relationship to the annual budget of the congregation.
Generally, reimbursements are taxable income unless they are made under an accountable plan as defined by the IRS and documented under IRS regulations. For more information, please consult IRS publication 463.
What’s the current standard mileage rate?
Information about the mileage rates can be found here »