Navigating the IRS Maze: Avoiding Financial Pitfalls - Key Tips for Churches

Are you ready to safeguard your church's financial health? Today we finish our 3 part series on Navigating the IRS Maze: Tips for Church Financial Compliance by discussing the most common pitfalls churches should be aware of when it comes to financial compliance, as well as the importance of seeking professional guidance. I’m so glad you have joined me today!

First, here is today’s episode quote by Craig Groeschel. In his fabulous, latest book “Think Ahead,” Craig says “You are successful when you do what you need to do today.”

Now let’s round out Parts 1 and 2 with today’s discussion of another critical aspect of compliance. From avoiding the commingling of funds to reporting taxable income, get ready to empower your church with the knowledge it needs. In addition, we’ll take a look at the need to seek professional guidance when necessary.

Commingling Personal and Church Finances:

The commingling of personal and church finances is a pitfall that can lead to significant problems if not addressed promptly. When church staff or leaders use church funds for personal expenses and plan to reimburse the church later, it blurs the lines between personal and organizational finances.

You wouldn’t think this would need to be said; but, I have seen this scenario  many times:  a staff member will use the church credit card to pay for personal expenses and then want to simply reimburse the church later for the charge. No. No. No. Not only does this practice lack transparency, but it can also have serious tax implications. As mentioned in Episode 63, if this is not handled appropriately and in a timely manner, the expense SHOULD become taxable income to the staff member and the credit card usage should be revoked until retraining in how to properly use the church credit card.

I know this may sound extreme; however, we are all grown-ups and should abide by the rules, especially as those who are held to a higher accountability as ministers of the Gospel. Keeping church funds separate from personal funds is essential for maintaining financial clarity, accountability, and compliance with tax laws.

Failure to Report Taxable Income:

Another common stumbling block is ministers failing to report taxable income, particularly housing allowances. Housing provided to ministers is considered taxable income by the IRS; therefore, failing to report it accurately can result in penalties and legal consequences. Many tend to think that since housing allowance is not subject to Federal income tax that it’s tax-free – It is NOT.

Housing allowance is subject to Self-Employment taxes (SECA). Even though ministers are responsible for reporting and paying their SECA taxes, churches can help alleviate some of the stress by doing voluntary Federal withholding and remitting the taxes on behalf of the minister in the form of 941 deposits and reporting.  Church leaders must understand their obligations regarding reporting taxable income and ensure compliance to avoid potential financial and legal repercussions.

Importance of Professional Guidance:

Church finances differ from those of traditional nonprofit organizations in several aspects, including tax treatment, reporting requirements, and governance structures. Given the unique complexities of church finances, seeking professional guidance is crucial for ensuring compliance and effective financial management.

Professional Bookkeepers, CPA’s and EA’s with expertise in nonprofit organizations, especially churches, can provide valuable insights tailored to the specific needs and challenges faced by churches. Not everyone understands the unique nuances of church finances and minister taxes, which is why this podcast and my firm exist. I opened my firm because I had church treasurers getting notices from the IRS and ministers getting audited and receiving $1,000’s in IRS penalties and interest because their tax returns were incorrectly filed by the CPA.

Just because someone has letters behind their name, does not mean they are the right choice for your church or your tax preparation. PLEASE do your due diligence and research before choosing the right financial advisor. Price should NOT always be the top consideration. Remember the saying…. “You get what you pay for.”  In addition, attending training seminars or workshops focused on financial education for church leaders can enhance the understanding of relevant laws, regulations, and best practices. 

In summary, maintaining financial compliance in church operations requires consistency, transparency, and a commitment to understanding and fulfilling the legal and tax obligations for the church. By avoiding common pitfalls like commingling funds and failing to report taxable income church leaders can safeguard the financial integrity of their organizations. Also, seeking professional guidance when needed will enable all church staff members to do what they are called to do without worrying about the business side of the church. 

So until next time my friend, let’s all strive to make an impact and not just an income. Take care and remember to always look your best, do your best and be your best.

To hear the podcast episode for this topic check out the Church Finance and Minister Tax podcast on your favorite podcast app or here.