This is another posting in the MinistryCPA Top 10 series:
Being the treasurer can be a big task, especially when you are new to the position. There are many different aspects of church finance, from internal financial reporting to church payroll. Today we are going to cover 10 questions that we receive from new treasurers.
1. How do I create a budget?
Budgets are largely based on the previous year’s performance. Budgets should be created with the help of old financial statements as well as people who will be using the funds. A budget committee can be formed from church members, board members, and pastors to help plan what the church will require for different ministry expenses. These numbers can then be put into budgetary financial statements to help show the financial position of the church at the end of the year.
2. What policies should be in place to protect people in the ministry regarding cash receipts and disbursements?
Cash receipts is an area that needs to be carefully monitored in any organization. In a church, there are a few different actions that can be taken to help ensure that the collection process is well documented. First, there should be multiple people involved in the collection process. This helps to decrease the temptation to take money. Second, there should be some type of verification process that is written down to ensure that the amount of money collected matches the amount of money that is put into the bank and posted to the financial records. These documents can be used to help keep track of who handled the money, and the amounts that were received and passed on to the next person.
Cash disbursements are just as important as cash receipts, and there are a variety of steps that can be taken to ensure that expenditures are legitimate. Ultimately there are three important matters when examining disbursements 1) expenditures were authorized, 2) the goods were received, and 3) the invoice was for the correct quantity and price that was determined on the authorization form. First, there should be some type of authorization process for expenditures, a well-documented process can help to show who signed off on an expense and where the money went. Receipts are a great way to keep track of purchases because they include items such as how many items were charged in the transaction and the price of those items. The receipts should also be matched against the authorization to ensure that all items that the organization was charged for were authorized.
3. How should we pay our pastor and church staff?
Payroll factors that should be considered are salary, housing allowance, insurance (health, life, disability, etc...), retirement plan, and all the associated taxes such as Medicare, self-employment tax, and social security tax. The church should decide on a plan to determine how it wants to pay each employee, and what benefits it wants to include as part of his or her employment. The pastor should also be aware of the types of tax that he may be exempt from and how to claim exemption. Since a pastor is a dual-status employee that means he must pay his self-employment tax. Other church staff positions are not subject to this rule unless they meet criteria that classify them as clergy. The treasurer should know which employees are dual-status employees, and which ones are not.
4. What end-of-month and end-of-year procedures should be done?
At the end of every month and year, certain procedures should be carried out. Every month the treasurer should go through the bank statement and credit card statement to reconcile them with the accounting records. At the end of the year, the treasurer should also perform any year-end adjustments and closing entries, and create the financial statements for the year. These actions will help to represent what has happened to the organization financially over the year.
5. What reports should be created for the congregation and leadership?
Like any other organization, a church should have basic financial statements such as the statement of activities (income statement) and the statement of financial position (balance sheet). These documents help to show the financial condition of the church. Other useful documents that could be utilized to show the change year after year include a common size balance sheet, a budget to actual comparison of the balance sheet and income statement, or a comparative income statement. These statements help people to understand how the year compares to other years. The main purpose of financial statements should be understandability for people. Many people do not have a strong background in finance, so treasurers should try to make the statements as simple and easy to understand as possible.
6. What records do I need to keep, and for how long?
This is a short list of some of the documents that a church needs to keep. However, it is not a comprehensive list since different churches are in different situations.
1. 7-Year Records
a. Bank statements
b. Credit card statements
c. Receipts
d. Acquisitions and disposition of property
e. Contributions
f. Accounts Payable
g. Accounts Receivable
h. Payroll tax records
2. Permanently
a. Articles of incorporation
b. Tax-exempt documents
c. Constitution/Bylaws/Statement of Faith
d. Annual corporate reports
e. Church minute book
f. Insurance records and payments
g. Completed tax documents (W-2s, 1099s, etc...)
h. Financial statements
i. General ledger detail
j. Employer identification number
k. Church membership
l. Property deed
7. How do we handle charitable contributions?
Churches need to track when they receive a contribution and who gave that contribution to the church. There are different programs available to help with donor tracking, or the treasurer could use a program such as Excel. This must be done to help prepare accurate financial statements and provide donors with a year-end contribution statement. For donors to deduct charitable contributions they need to have some type of documentation of the amount that they gave, the documentation must include the name of the church, the name of the donor, and a statement saying that nothing was exchanged for the contribution. Year-end receipts help donors to collect the tax benefit that they receive for their giving.
8. How do we handle designated giving?
Designated giving is best classified as an equity account. When designated contributions are classified as income, the income statement and financial statements incorrectly represent the amount of money that the church has available for use. If the designated funds are put into an equity account, then the income is comprised of funds that can be utilized for any purpose, and the designated funds are set aside for only the designated purpose. This approach also carries the balance of the designated fund over from year to year so that it is easy to verify the balance of each fund.
9. Does my church need an audit?
While there is no requirement by the government for churches to have an audit, there are a few other reasons that a church may need an audit. A church may need to execute an audit to acquire a loan or grant. Another reason may be that the church's bylaws require that an audit be performed regularly. If a church has a private school, then an audit may be necessary if that school is part of a voucher program. In other cases, a church may want to have an audit performed occasionally to make sure that the procedures are being followed and that all the funds are being applied to the correct accounts.
10. Do I need to file government reports?
A church may not be required to file all of these forms, but this list gives a good idea of most of the forms that a church could potentially deal with.
1. W-2s for church employees
2. 1099s for non-employees
3. Form 941 for quarterly federal payroll reporting
4. 990-T for unrelated business income if it exceeds $1,000
5. Form 8274 for employer Medicare and Social Security exemption
6. Form 4361 for opting out of self-employment tax (the individual basis for ministers)
7. Form 5578 for racial nondiscrimination if no 990 is filed, and only for churches with a private school
8. State-required forms
While this list represents the top 10 questions we receive from new treasurers, we recognize that there is certainly more to consider. Please leave your thoughts and suggestions in the comments below, including topics that you would like us to cover. Contact us if we can help you address any of the questions discussed above.
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