Is your religious congregation meeting its financial responsibilities?
- July 10, 2019
- Posted by: Hood & Strong
- Category: IRS
Churches, synagogues, mosques and other religious congregations are subject to many of the same financial requirements as other nonprofit organizations are. And other requirements and responsibilities are unique to these congregations. Here’s an overview of areas you should be mindful of.
Stay alert to employee-related rules
Your religious congregation must comply with IRS rules and federal and state laws. For example, when it comes to wages, most clergy should be treated as employees and receive W-2 forms. Typically, you’re not required to withhold Social Security, Medicare and federal withholding taxes. However, clergy are subject to self-employment tax on wages and must pay federal income tax on their earnings. A parsonage (or housing) allowance can reduce income tax, but not self-employment tax.
Also keep in mind that proper employee classification has been on the IRS’s radar screen in recent years. Your congregation must determine which of your workers are employees and which are independent contractors. Depending on many factors — for example, their responsibilities, work location and form of compensation — individuals you consider independent contractors may need to be reclassified as employees. For most nonclergy employee wages, you must withhold Social Security and Medicare taxes.
Other rules apply
Like other not-for-profits, your congregation needs to pay close attention to unrelated business taxable income (UBTI). If your organization regularly engages in any type of business activity that’s unrelated to its religious mission, be aware of certain tax and reporting rules. For example, do you sell items from a bookstore attached to your place of worship? Such income could be considered UBTI. Paid parking for employees, along with certain other fringe benefits, is also considered UBTI starting in 2018.
Activities such as raffles or traditional bingo games that are run by all-volunteer labor have been granted a specific exemption from income tax (although other IRS reporting may be required). A 990T filing is required only if unrelated business income exceeds $1,000.
In another area, your organization shouldn’t devote a substantial part of its activities attempting to influence legislation — that is, lobbying. If you do so, you could risk your tax-exempt status and face potential penalties. Of course, terms like “substantial” and “attempting to influence” are open to interpretation. But specifically endorsing candidates, supporting candidates for office financially, or sponsoring events that might be interpreted as partisan is strictly prohibited.
What about internal controls?
All organizations, including religious congregations, need strong internal controls. Faith groups are particularly vulnerable to fraud because they generally foster an environment of trust. But keep in mind: Even the most devout and long-standing members of your congregation are capable of embezzlement when faced with extreme circumstances, such as bankruptcy or gambling problems.
Pay special attention to collections. To ensure employees and volunteers can’t help themselves to cash and checks, require that at least two people count cash in a secure area and verify the contents of offering envelopes. Next, they should document their results in a signed report.
For even greater security, encourage your members to make electronic payments or sign up for automatic bank account deductions. Also, ensure authorized disbursements by requiring that a nonaccounting employee or trustee receive and review bank statements. All checks above a specified amount should require dual signatures.
Other measures to prevent fraud
While internal controls are critical to preventing fraud in religious organizations, a comprehensive risk-reduction program contains other elements as well. For example, always perform background and credit checks on employees and volunteers who’ll be entrusted with financial matters. Additionally, maintain adequate insurance coverage to protect against possible loss. Review it regularly as your organization grows and your needs change.
Your congregation also should have an investment policy that describes procedures for handling donated stock and other securities. At least once a year, take an inventory of the congregation’s securities, valuables and equipment.
Many religious congregations don’t hire independent accountants, because they aren’t required to file income tax returns. That doesn’t mean that your organization will never need independent financial advice. Independent CPAs can be engaged to perform a variety of services that provide assurance to your congregation and the community.