This month, Church Windows Church Management Software has solicited the help of a true professional for our monthly subject. Mary Lou Turnbull has more than 10 years’ experience with Church Windows, but also more than 20 years’ experience helping churches who use any (or no) software package.
Top Compliance Challenges in Church Accounting
1/ Unique Nature of Fund Accounting
Many treasurers and volunteer board members enter the church governance arena with little or no background in fund accounting. Some may have owned their own businesses or held senior management positions in the profit world. The Balance Sheet of their local church or synagogue may look very different than the typical business.
The main difference between profit and non-profit accounting can be identified in the “equity” section of the Balance Sheet. Instead of distinguishing Retained Earnings (the cumulative profit and loss over years in business), the church reports on Fund Balances. These designated funds are reported separately to assist with keeping directed donor gifts in the right place. The IRS requires that monies given for a specific purpose be spent for that purpose. There are so many regulations regarding charitable donations rules that we suggest that you check with an accounting/legal professional to substantiate your compliance in this area. (churchlawandtax.com)
2/ Remitting Correct Payroll Taxes
This can be one of the most confusing areas of church accounting. Officers and directors of church boards may believe that the church doesn’t have to pay taxes of any kind. To clarify, there are certain exemptions that religious institutions enjoy. In many states, a church is not required to pay sales tax, property tax or unemployment insurance. These exceptions do not apply to payroll taxes.
Just like regular businesses, churches are required to withhold federal, FICA/Medicare, state and local taxes from their W-2 employees. The church must also calculate and remit the 7.65% employer share of FICA/Medicare. It gets a little trickier when calculating and remitting minister withholdings. Some clergy benefit from a housing allowance which may not be included in federal, state or local taxable income. Also, because ministers are considered self-employed for Social Security, churches are not required to take out FICA and Medicare from clergy paychecks. Check with your specific taxing agency on the rules and regulations for your church.
3/ Internal Controls
This challenge is probably the most crucial element in church accounting. Checks and balances are especially important in ensuring that the church’s funds are protected from fraud and misuse. You can have the right software and the best procedures and policies manual but without proper oversight and accountability, money can be misappropriated or directed to the wrong account. Churches, especially small ones, are often forced to stretch limited budgets to cover administrative functions. Volunteers may serve in positions where they have little or no experience. Sometimes one person is in a position of doing it all.
With this in mind, consider the three elements of the fraud triangle—opportunity, motivation, and rationalization. Imagine a church volunteer, experiencing financial pressure at home and at the same time feeling unappreciated for the endless hours she works at the church. Given the right opportunity to “borrow” money, the perfect scenario for fraud has just been created.
Fraud studies have shown that the best prevention is having ongoing oversight by impartial parties. If you lack the proper individuals to act as a “second pair of eyes”, consider hiring an outside firm to spot check your books and offer expertise in best practices and proper protocol. A few hundred dollars is money well spent when you consider the alternative of thousands of dollars in IRS fines or recovering from the effects of a fraud occurring at your church.
Mary Lou Turnbull is a Certified Church Administrator (CCA) and Certified Fraud Examiner. She was employed by a church software company for over 12 years where she traveled across the country, training churches on accounting and payroll. After receiving her forensic accounting degree in 2011, she started her own accounting business working specifically with churches. Her practice centers on assisting churches to get their financial records in order as well as fraud prevention. Contact her at email@example.com or 614-898-7139.