Church Accounting Basics

HELPING LEADERS BECOME

B E T T E R S T E WA R D S .

CHURCH ACCOUNTING B A S I C S Presented by: AcctTwo

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CHURCH EXECUTIVE • C H U R C H A C C O U N T I N G B A S I C S

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Table of Contents

THE HEALTHY CHURCH

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The Bible has a clear definition of faith in Hebrews 11:1 — “Now faith is the assurance of things hoped for, the conviction of things not seen.”

Simply put, the biblical definition of faith is “trusting in something you cannot explicitly prove.”

As church leaders, we walk every day in faith. So, how do we marry faith and facts? The church has been put in our care, and we must be good stewards of what God has given us.

By Tammy Bunting

CHURCH AUDITS: KNOW THE 4 V’S

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At this point, I run the risk of losing your attention. Seriously, who wants to talk about audits? The definition alone — “conducting an official financial examination” — sounds like a doctor’s diagnosis. But, bear with me.

In the interest of getting straight to the takeaways, let me introduce a memory aid: the 4 V’s of church audits.

By Tammy Bunting

INTERNAL CONTROLS KEEP FRAUD AT BAY

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“What happens in accounting, stays in accounting.”

If your finance team’s motto goes something like this, you might have an internal controls problem.

By Tammy Bunting

EMPLOYEE — TO BE OR NOT TO BE

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If your church is anything like mine, you are constantly trying to navigate the requirements of our nation’s employment laws.

When researching the topic of “employee versus independent contractor,” what I find is consistently inconsistent. It’s easy to get lost in the lack of interpretation.

By Tammy Bunting

TRANSPARENCY & ACCOUNTABILITY: HOW TO LAY THE FOUNDATION FOR TRUE CHURCH ACCOUNTING STEWARDSHIP

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“And now you know the rest of the story.”

Remember the words of Paul Harvey, the legendary radio broadcaster?

As leaders of the church, we can’t depend on a CPA firm performing an audit to give us “the rest of the story.”

Transparency and accountability can be ongoing and non-invasive — but only when we build a good financial infrastructure.

By Tammy Bunting

PAYROLL: DO YOU HAVE YOUR DUCKS IN A ROW?

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One definition of “dread” is managing payroll without qualified staff. For those churches with limited resources, ministerial staffing positions must be filled first. A common sentiment among pastoral leadership regarding payroll is, How hard can it be?

Well, it is hard. And, some mistakes could lead to serious consequences.

By Tammy Bunting churchexecutive.com

C H U R C H A C C O U N T I N G B A S I C S • CHURCH EXECUTIVE

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CHURCH ACCOUNTING BASICS

The healthy church

By Tammy Bunting

The Bible has a clear definition of faith in Hebrews 11:1 — “Now faith is the assurance of things hoped for, the conviction of things not seen.”

Simply put, the biblical definition of faith is “trusting in something you cannot explicitly prove.”

As church leaders, we walk every day in faith. So, how do we marry faith and facts? The church has been put in our care, and we must be good stewards of what God has given us.

So how do we care for the church?

I sat down with Dennis Richards, executive pastor of Preston Trail Community Church in Frisco, TX, to get his thoughts.

When asked his definition of a healthy church, the first thing Richards mentions is spiritual, not financial. Richards says he believes that “doing church” is not about a beautiful building or a large staff (although he understands that neither of those are bad). Rather, a healthy church stays focused on the mission of helping people come to know Christ. “And if we don’t … well, then, we’ve missed the target.”

Those of us who are financial managers in the church seem to be more black-and-white. Don’t get me wrong: We, too, have a heart for lost souls.

But, we want a very cut-and-dried approach.

When I asked Richards if he connects the budget with the vision, he responds with a very non-financial view. “Actually, I see it as the opposite,” he explains. “We don’t connect the budget with the vision — but the mission drives the budget. If we’re not accomplishing our ministry, the budget is irrelevant. The budget may not be as large as we like, we still work within our means, but we stay focused on the strategies laid out by our leadership and make sure every dollar counts.”

A “mission-squared” life As the executive pastor at his church, Richards wears many hats. When asked how he ensures programs and ministries are in line with the vision of Preston Trail, he quotes Andy Stanley: “A mission statement is what gets lived out in your halls, not what hangs on your wall.”

To this end, Richards is constantly monitoring his church’s mission, as well as its values, strategies and measurements. “It’s those things that propel not only our metrics showing how we are doing, but also drive us to the risky faith of determining our budget dollars.”

For Richards, the most difficult metric is life transformation. But by taking attendance — whether in worship (how many people at church on Sunday) or during the week in small groups — he says he can get a good picture.

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Baptism is also a key indicator of life transformation for Richards, as is the growth of the church’s serving teams and attendance of care and recovery classes. “This validates that we’re truly living out what God has called us to do,” he points out.

For Richards, this “missionsquared” life, as he calls it, is not restricted to our country, but reaches beyond our borders to the communities in less fortunate countries. “The generosity of the congregation to support our efforts, which is to engage our world, clearly establishes the unified front of our church and whether we’re getting the message out.”

As Dennis and I talked, I decide to throw him a curve ball: I ask if there are elements of the “business” of doing church that concern him.

“We have grown as an organization and are faced with new realities,” he replies. “One area is managing to the employment law. The church should be the finest example of how an organization should be run — not only its systems, but also how it manages and treats its employees.” To this end, Richards advocates that church leaders seek wise legal counsel in the areas in which they lack a clear understanding, and reach out to learn about the critical components that ensure compliance with governmental regulations and laws.

“Employment law is the most obvious, but we’re being hit with licensing issues — the sharing of pictures, for one — that can cost us mission-critical dollars in fines,” he poses. “Even though we live a risky faith, what God has called us to be, we must be great stewards of the resources we have. One of the greatest resources of any organization is its people. We must pay attention to the rules and regulations so that resource is protected.”

As we look at the business of church, we must always be mindful of God’s intent for us,” Richards concludes. “Being a healthy church can mean different things to other leaders; but no matter your definition, know your mission and understand the huge responsibility placed in your care.”

Tammy Bunting is the Director of Not-for-Profit Services at AcctTwo www.accttwo.com , which provides cloud-based financial management software and outsourced accounting for churches. AcctTwo’s solutions help churches automate processes, increase accuracy, and provide a complete financial picture.

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CHURCH ACCOUNTING BASICS

Church audits: know the 4 V’s

By Tammy Bunting Depending on your role at the church, you’ll hear the word “audit” and come to one of two conclusions:

If you’re the finance manager, you understand the need for the substantiation of the integrity of the data — even though an audit can add to your already busy workload.

If you’re the pastor, it comes down to one word: “Why?” The financials are written in what appears to be a foreign language, and they don’t seem to help as you try to make good, missioncritical decisions, anyway.

So, why pay a CPA to audit the church financials?

At this point, I run the risk of losing your attention. Seriously, who wants to talk about audits? The definition alone — “conducting an official financial examination” — sounds like a doctor’s diagnosis.

But, bear with me.

In the interest of getting straight to the takeaways, let me introduce a memory aid. Instead of the ABC’s, let’s focus on the 4 V’s of church audits: 1. Value When trying to determine the importance of the things we do, it comes down to a question of value. What’s the value added in having an audit?

What will be our return on this investment? Maybe we’ve been asked to provide audited statements to our bank, but it’s important that we understand the true value of having the audit completed. For example: • An audit provides assurance that funds received and expended are in accordance with the donor’s restrictions or the church’s mission.

• It provides a level of assurance to lenders that there aren’t any substantial misstatements of funds.

• It can protect the persons handling the funds from any accusations of misappropriation or fraud.

A common thread is assurance and protection — the value, defined.

Matthew 25:21: Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things.

2. Vigilance Preparing for an audit is a little like doing laundry when you have kids: As soon as everything is folded and put away, you find another mile-high pile of dirty clothes. And you certainly can’t leave all the dirty clothes until the last minute or someone will walk out of the house with damp jeans.

So, how do we prepare for the audit all year long? After all — like that laundry — it’s easier to keep things organized than to get them organized.

To that end, here are five things to keep current (and accurate) year-round: 1) C reate your internal controls. Document and follow them … every time!

2) R econcile donated funds. Prove that all funds are being used as stipulated by the donors. churchexecutive.com

3) Segregate duties. Make sure more than one person is involved in the handling of money.

4) Set accounting controls. Make sure your system is user-friendly and accessible. Banks are reconciled every month!

5) H ave adequate insurance coverage.

3. Verification When the auditors come knocking at your door, don’t panic. You’re ready for them.

Their job is to verify what you’ve been preparing all year. Before the formal audit begins, the audit firm will send out confirmation forms to banks and insurance companies. The confirmations provide them with an independent verification of bank balances and the coverage levels of your insurance policies.

Once the confirmations are delivered to the audit firm from the institutions, the auditors will be ready to get started. The purpose is to be sure that all monies have been distributed and allocated accurately and as approved.

To that end, here’s a quick list of key areas they will review and verify.

• Cash and cash equivalents • Gifts, both restricted and unrestricted • Disbursements and any outstanding payables • Fixed assets Ultimately, the goal of the audit is so that the auditor can express an opinion on two primary aspects: 1) that the financial statements are fairly presented, and 2) that they are in accordance with generally accepted accounting principles (GAAP).

4. Vision A common misconception is that auditors prepare and produce the financial statements, and we (the “auditees”) get the job of decoding the results. In actuality, the only part of the audited financials that belong to the auditors is the “opinion” — the rest is yours.

The Statement of Activities must be presented in a way that speaks to the mission of the church, and not just as a collection of numbers.

Make sure your church’s summary of the activities is presented in such a way that it tells the reader you’re fulfilling your mission and growing the church.

An audit brings assurance to the data integrity; but the value-add is evident in the summation of the church’s activities, plus the validation that the church’s visionary goals are being accomplished.

Tammy Bunting is the Director of Not-for-Profit Services at AcctTwo www.accttwo.com , which provides cloud-based financial management software and outsourced accounting for churches. AcctTwo’s solutions help churches automate processes, increase accuracy, and provide a complete financial picture.

C H U R C H A C C O U N T I N G B A S I C S • CHURCH EXECUTIVE

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CHURCH ACCOUNTING BASICS

Internal controls keep fraud at bay

By Tammy Bunting

“What happens in accounting, stays in accounting.”

If your finance team’s motto goes something like this, you might have an internal controls problem.

Internal controls are put in place to clearly define proper procedures for finance and accounting team members, to minimize risk, and to alleviate suspicion. Even churches must mitigate risk and ensure that policies and procedures are in place and functioning as intended.

In our May / June 2015 issue article, “Church Audits: Know the 4 V’s,” we discussed the importance of keeping things organized, which in turn supports efficiency and accuracy. It can be somewhat overwhelming for pastors to focus on the eternal welfare of his or her parishioners and keep a pulse on financial affairs, specifically when it comes to defining good internal controls. Maintaining organized business operations is extremely important, but it must not intrude on mission-critical efforts.

So, where should you focus your attention?

As a pastor or church administrator, think of establishing internal controls as “staying organized” but … on steroids. The process won’t be easy, but it will be worth it. And, once policies and procedures have been defined and documented, the crucial piece is execution.

Operating successfully within your predefined internal controls is a bit like playing a board game: There are specific rules that govern how the game is played. No player can simply do whatever he or she wants; rules ensure that the game is played fairly and that no one player has a bigger advantage than another.

Similarly, financial operations require a set of rules that must be followed. Everyone must read the rules and understand them before the “game” starts; that way, no one player has the opportunity to circumvent them. This is important, because if your family is anything like mine, there’s always someone who tries to change the rules at the most opportune time so they can take advantage! Usually, a few turns go by before we say, “Wait a minute — you cheated!”

So, how do we begin to define these rules, document them, and ensure they’re followed? Start with a list of checks and balances. To that end, let’s take a look at four categories that are key to any internal controls policy. #1: Cash #2: Authorization #3: Reconciliation #4: Oversight What follows is a short list of requirements within each category that will help you mitigate potential risks at your church. Risk refers not only to fraud, but also to errors.

It is always a good idea to meet with your CPA firm to establish this list for your organization, to understand how it should be documented, and how best to communicate the procedures to your staff.

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Cash • Separate the receiving of cash / checks from the record-keeping functions.

• When opening the mail, endorse or stamp checks “for deposit only” and list the checks on a log before turning them over to the person responsible for compiling the deposit.

• Make sure the same person isn’t authorized to write and sign checks.

• Require paychecks to be distributed by a person other than the individual authorizing or preparing payroll checks.

Authorization • Require purchases to be authorized by a designated person.

• Separate purchasing functions from payable functions.

• Require supervisors to approve employee timesheets.

• Establish a policy that mandates credit cards are for business use only.

Prohibit the use of credit cards for personal purposes with subsequent reimbursement.

• Set account limits with credit card companies and suppliers.

Reconciliation • Reconcile bank accounts every month.

• Require the reconciliation to be completed by someone other than the person with check-signing responsibilities, or require a supervisor review of the reconciliation.

• Initial and date bank statements or reconciliation reports to document that a review was performed.

• Reconcile credit card statements monthly. Follow bank reconciliation review protocol.

Oversight • Establish a governing body that monitors the operations and management on a regular basis.

• Require an explanation of any significant variances from the budgeted amounts.

• Document the approval of financial policies and procedures, as well as major expenditures, in board meetings.

• Require independent auditors to represent and explain annual financial statements to the governing body and to provide management letters to this group.

The list above represents a selection of key elements in establishing a minimum of internal controls and is by no means all-inclusive. A welldesigned internal control structure can increase operational performance by improving your church’s overall efficiency and effectiveness, as well as reducing risk.

No church is exempt I have been involved in the church my whole life. Starting at 3, under my father’s leadership, I participated in planting a church, along with another family. Because of that experience, being a part of a church family means something very personal to me.

As an adult, I discovered that, unfortunately, churches are not immune to fraud. The ultimate cost is not just dollars, but also a loss of trust that hurts the church and stays with it forever.

A lack of internal controls can provide someone with the opportunity to access money for his or her own use. Take the time to put the “rules of the game” in place so that trust within your church stays protected.

Trustworthy staff members who have the church’s best interests at heart will appreciate the value these protections provide.

Tammy Bunting is the Director of Not-for-Profit Services at AcctTwo www.accttwo.com , which provides cloud-based financial management software and outsourced accounting for churches. AcctTwo’s solutions help churches automate processes, increase accuracy, and provide a complete financial picture.

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CHURCH ACCOUNTING BASICS

EMPLOYEE — to be or not to be

Why does it have to be so complicated?

So, let’s get down to it: If an intern receives anything of value from the church (or expects to receive anything of value), then he or she is an employee. This includes housing, food allowances and so on. Cash compensation is not required for the intern to have employee status in the eyes of the IRS. If the intern is serving for a course credit at his or her educational institution and has received nothing of value, then he or she is not considered an employee.

By Tammy Bunting If your church is anything like mine, you are constantly trying to navigate the requirements of our nation’s employment laws. When researching the topic of “employee versus independent contractor,” what I find is consistently inconsistent. It’s easy to get lost in the lack of interpretation.

As church leaders, we run into several areas where the lines are blurred.

We have clergy, employees, contractors and interns, not to mention volunteers. In all cases, for federal employment tax purposes — oh and by the way, we are not exempt from the labor laws just because we’re churches — there are rules that apply, and we must adhere to them.

Independent contractors or employees?

By law, workers are either independent contractors or employees, with no in-between. In determining the difference between the employee and the independent contractor, you must examine the relationship between the worker and the organization. A worker is an employee if: (1) you have the right to direct and control what work is accomplished and how the work is done, and / or (2) you control the financial and business aspects of the worker’s job.

Are interns independent contractors?

There remains a bit of confusion about how interns are classified, when they can and should be compensated for any of their involvement, and what the tax implications are.

Leadership development remains an important issue. The involvement of young people in the church, and the church’s involvement in the professional and spiritual growth of the next generation, is key.

Therefore, we need to be sure we are following the IRS guidelines for independent contractors.

The IRS defines independent contractors as individuals who have their own legal entities, do not require supervision or direction in completing a project, and who provide their own tools to do their work. In most churches, internships do not meet these requirements. churchexecutive.com

Suggestions Here are some tips for organizations interested in establishing internships: • The work should be an integral part of the student’s course of study.

• The student may receive credit for the work or the work is required for graduation. (This is optional and determined between the business, student and institution.)

• The student might be required to prepare a report of his or her experience and submit it to a faculty supervisor.

• The employer should receive a letter or some other form of written documentation from the school stating that it sponsors or endorses the internship, and that the internship is educationally relevant.

• Learning objectives should be clearly identified.

• The student should not perform work that other employees perform, unless applicable to the internship.

• The student should be in shadowing / learning mode.

• The employer should provide an opportunity for the student to learn a skill, process or business function, or learn to how to operate equipment.

• There should be an educational value to the work performed; it should relate to the courses the student is taking in school.

• A staff member should supervise the student.

• The student should not provide benefit to the employer more than 50 percent of the time worked.

•T he employer should not promise a job to the student upon completion of the training or upon completion of schooling.

The bottom line: do not let the rules and regulations around Interns deter you from investing in the future leaders of our church.

Just remember that when establishing a working relationship with anyone at the church, keep it simple and don’t get buried in the legislation.

Look at the behavior and the control in the relationship. If you manage where and how the work is done, with what tools, and set the compensation for the job, you have an employee.

Tammy Bunting is the Director of Not-for-Profit Services at AcctTwo www.accttwo.com, which provides cloud-based financial management software and outsourced accounting for churches. AcctTwo’s solutions help churches automate processes, increase accuracy, and provide a complete financial picture.

C H U R C H A C C O U N T I N G B A S I C S • CHURCH EXECUTIVE

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CHURCH ACCOUNTING BASICS

& ACCOUNTABILITY How to lay the foundation for true church accounting stewardship

By Tammy Bunting

“And now you know the rest of the story.”

Remember the words of Paul Harvey, the legendary radio broadcaster?

As leaders of the church, we can’t depend on a CPA firm performing an audit to give us “the rest of the story.” Transparency and accountability can be ongoing and non-invasive — but only when we build a good financial infrastructure.

By creating easy to manage accounts and measuring performance against expected outcomes, we ensure accountability and transparency in our churches.

There are two main areas we can focus on to learn how to develop financial awareness which, in turn, result in financial statement transparency and accountability: 1) Chart of Accounts — reporting criteria 2) Inspecting what we expect Simplify your Chart of Accounts I don’t think we give enough credit to the Chart of Accounts for being the source of our transparency challenges!

With modern accounting software, you can achieve the insights you need to understand and validate financial statement data and documentation. Today’s financial tools should simplify the chart of accounts and allow us to “tag” transactions with not only the “what” but the “why” and the “where.” With a flexible financial foundation, you can add context to your data easily. We need to raise our expectations in church finance; our software should keep it simple and understandable.

I think there’s nothing more frustrating for financial committees or boards of directors than to look at financial statements that are either too summarized or too complicated to understand the results. By simplifying 8

CHURCH EXECUTIVE • C H U R C H A C C O U N T I N G B A S I C S

the Chart of Accounts and using dimensional components, modern accounting software introduces an entirely new way to track and report on financial and operational data. With a flexible foundation, you gain quick access to the insights necessary to ensure confidence in the data presented. Having access to changing cash amounts (by multiple levels of ministry), and having the ability to view fluctuations between budgets or years at any level (presented weekly or monthly) eliminates any question about the accuracy of the data.

Although we value the need to present GAAP financial statements, and to have a certified public accountant identify any material weaknesses, our goal is to have financial data validated and trends assessed on a regular basis. Any unusual changes can be quickly identified and addressed accordingly.

Inspecting what we expect Being good stewards of the resources God has provided isn’t just something we hope we can do — it’s something we’re expected to do.

Measuring performance brings greater awareness to ministry operations.

By determining the expected outcomes and measuring performance against them, we can bring any significant variances to the forefront.

How can we help our church leaders get the broad perspective they need to gain insight and confidence in dollars and the impacts? This is where I believe analytics come in. Analytics refers to the discovery and communication of meaningful patterns in data. When looking at the measurements of impacts — and not just dollars spent — you gain insight.

By clearly defining a positive trend or successful community impact, you’re able to make results-driven decisions.

Accountability is simply the willingness to accept responsibility. It can become tricky if you’re responsible for managing something over which you don’t have full control. Dealing with church finances can be challenging when you feel detached from the numbers and their impacts.

When things are moving at the speed of light and change is just a normal day-to-day event, accountability can appear to be thrown out the window.

This is where allocating funds ahead of time comes in handy. Creating budgets can establish a baseline from which to work.

Some ministry leaders literally break out into a sweat at the mere mention of budgets. They shouldn’t. Budgets allow you to have some control over what you spend. A monthly budget can help you decide how to spend your money and prevent unexpected purchases.

Accountability doesn’t mean “perfection.” Focus instead on being willing and flexible enough to accept what it’s going to take to be accountable.

Transparency made simple If financial statements aren’t “used” (meaning no one understands the data), then they’re just numbers on a sheet of paper. To have full transparency, the goal in presenting financial data is to provide “useful” information. That means: clearly stated financial performance and cash flows, presented in such a way that they validate whether or not mission efforts are being met or better yet, exceeded.

Managing finances under defined budget parameters, and reporting any variances, will give the governing body the assurance that the church’s financial status is stable.

Disclosing cash flows and forecasts based on current trends and future expectations satisfies the need for further clarity and demonstrates accountability.

Most important: keep it simple. Don’t let the numbers take over.

Tell the story; show what matters; summarize the right data; and project accurately.

Tammy Bunting is the Director of Not-for-Profit Services at AcctTwo [ www.accttwo.com ], which provides cloud-based financial management software and outsourced accounting for churches. AcctTwo’s solutions help churches automate processes, increase accuracy, and provide a complete financial picture. churchexecutive.com

CHURCH ACCOUNTING BASICS

Payroll: Do you have your ducks in a row?

By Tammy Bunting

One definition of “dread” is managing payroll without qualified staff. For those churches with limited resources, ministerial staffing positions must be filled first. A common sentiment among pastoral leadership regarding payroll is, How hard can it be?

Well, it is hard. And, some mistakes could lead to serious consequences.

The relationship between the employee and employer has its challenges. First, it’s highly regulated at both the federal and state levels.

There are countless rules you need to know, and some can open the door to costly mistakes.

On the flip side, we value our employees — and paying them is not only our responsibility, but our privilege. So, how can we safeguard one of our greatest assets in fulfilling our mission: our employees?

Let’s start with Luke 20:25: “And He said to them, ‘Then render to Caesar the things that are Caesar’s, and to God the things that are God’s.’”

Making sure the government gets what it’s due is a fact of life that existed even in Jesus’s day, so I think it warrants a discussion.

Are your ducks in a row?

Compliance to IRS rules and regulations can be an arduous task at the best of times. Add in the ever-changing rules by which we operate and manage our payroll, and you’ve got enough confusion to pretty easily find yourself in some hot water with the IRS. Case in point: In 2010, the IRS initiated the Employment Tax Research Project (ETRP). The purpose was to review payroll practices in four main areas: worker misclassification, fringe benefits, executive compensation, and payroll taxes. The reason was to find weaknesses and open the door for audits and penalties. Employment tax continues to be a hot button for the IRS. The goal is to collect more taxes and assess penalties for those in violation.

Misclassification of workers The misclassification of workers has recently been a topic of discussion among many accounting and tax professionals. The U.S. Department of Labor has proposed new regulations designed to expand overtime protection for workers. Taking the time to review your employee classification will help you understand if these new regulations put you at risk or will impact your organization. #1: Review worker classifications of employees to ensure that exempt versus non-exempt determinations are accurate. churchexecutive.com

#2: Review worker classifications of employees to ensure that exempt versus non-exempt determination are accurate.

It’s always a good practice to review job descriptions and make sure the job functions and descriptions are in line with each other.

This also holds true for those who fall under the ministerial exception.

You must be able to clearly identify a worker’s classification and — in the minister’s case — defend the non-employee status. Churches that incorrectly treat paid workers as ministers could violate federal payroll reporting obligations, possibly leading to IRS penalties.

Fringe benefits How you value fringe benefits for income tax purposes can be complicated. Presenting gift cards to staff is a common practice in churches. Gift cards are often viewed as non-taxable by church staff, but they’re equivalent to cash and must be included on the W2.

Just because a certain fringe benefit is taxable doesn’t mean you’re not allowed to offer it. Go ahead and give gift cards. Just remember to add the value to the employee’s taxable wages.

Another example of a taxable fringe benefit is covering the cost for spouses of senior leadership to accompany the employee when traveling on church business. Just because these benefits are taxable doesn’t mean they shouldn’t be offered. Just remember: It’s the church’s responsibility to include the benefit as taxable on the W2.

Executive compensation The IRS is charged with enforcing the Federal Private Inurement Prohibition, which strictly forbids a tax-exempt organization’s decisionmakers from receiving unreasonable benefits from the nonprofit’s income or assets. Excessive compensation could be in violation of the IRS ruling and can potentially result in fines and penalties. Without going into specific detail on the regulations governing executive compensation, I recommend you ensure that your compensation policy is in compliance with the IRS rules and be prepared to defend to the IRS that the compensation is appropriate. It’s always a good idea to connect with a consultant to perform a compensation study that can provide you with a report documenting your policies and proof that you’re operating within the proper guidelines.

Payroll taxes For those of us working in the back office of a church, there’s nothing worse than being on hold with the IRS. If you mess up your payroll taxes, it can take years of conversations and letters going back and forth to get it corrected.

If you’re processing your own payroll, be sure to file your tax deposits on time. When preparing the W2s at year’s-end, make sure the information is correct. Mismatching names and Social Security numbers is one of the most common W2 filing errors, resulting in earnings not being properly credited to employees and problems with Social Security payments.

Ignoring other taxable items — including the fringe benefits mentioned above — can also cause issues when reconciling your taxable wages.

How hard can it be … right?

Churches aren’t exempt from following and executing proper payrollrelated procedures every time. Be informed. Ignorance isn’t bliss — and it’s not an excuse! There are professionals available to help you set up, manage and audit all things relating to payroll in your organization. Take advantage of their expertise, and get all your ducks in a row.

Tammy Bunting is the Director of Not-for-Profit Services at AcctTwo [ www.accttwo.com ], which provides cloud-based financial management software and outsourced accounting for churches. AcctTwo’s solutions help churches automate processes, increase accuracy, and provide a complete financial picture.

C H U R C H A C C O U N T I N G B A S I C S • CHURCH EXECUTIVE

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