Ten common missteps churches make regarding finances, Part 1
For the individual, the need for accurate financial record-keeping is made sharper during tax season, but it’s a year-round requirement for churches. I asked Tony Neal of GBC Church Financial Services if he could share some recurring mistakes he sees regarding church finances as he and state missionary Keith Hamilton travel across Georgia.
These get into some detail. If you have questions, contact info can be found at the link above.
Providing incorrect income tax documentation to staff – Only temporary or contract workers receive 1099, not ministers or part-time employees who are hired with the intent to continue employment longer than 12 months and do not have a business offering their services to the public. If hired to work with intent to be there as the regular person for the position the minister or other staff must receive a W-2. Incorrectly treating a part-time employee as a contractor can lead to penalties, interest, and back taxes for the employer.
Failing to have a budget – Churches are non-profit organizations and need to adhere to government standards to maintain their status and continue to not be required to file tax returns such as the 990 other non-profits are required to submit or to also keep the non-profit status. The church needs to have a spending plan that is followed. The budget should reflect the desired direction of the church as a whole and not be hidden or spending take place at the discretion of one person.
Failing to provide 1099 for contractors – If the church sets up a contract or asks someone to provide a service who is not in an ongoing employee/employer relationship with the church, the church must provide them a 1099 if they pay them over $600 in a calendar year.
Withholding SS and Medicare taxes for ministers as if they were regular employee – Ministers are considered dual status for tax purposes. They are employees and receive a W-2, otherwise they couldn’t receive benefits, reimbursements, etc. However, for Social Security and Medicare tax they are considered self-employed. Confusing, but true. Therefore, the dual status description means the church cannot match and withhold these taxes but instead the minister must pay the whole of these taxes himself – both the employee and employer side – as if self-employed. The tax is balanced and settled from his 1040 on form SE, but he sends in (or the church can send in) additional federal withholding to offset the SE tax at year-end so the minister doesn’t incur a penalty for under-withholding or exceeding the limit for tax payments prior to filing his 1040. Also, the church should consider paying the minister its side of the Social Security and Medicare, although it just increases his taxable income as it’s taxable to him.
Failing to make timely payroll deduction and deposit requirements to government – Churches must obtain instruction on how much to withhold from employee-submitted W-4 (Federal)/G4 (Georgia), then withhold accordingly from each paycheck depending on how the employee filled out the forms. The withheld monies must be submitted to appropriate government agencies in a timely manner as required with dates varying from every two-week, month, or quarter depending on size of staff and which tax submitting. Churches also tend to think since ministers can’t have Social Security and Medicare withheld and matched that they do not have to do it for non-ministerial employees, which is wrong. All non-ministerial employees must have Social Security and Medicare withheld, matched and sent in along with Federal and State withholding requirements.
