ECCU Blog

Does your pastor receive fees directly from individuals or families for performing marriages, funerals, or baptism services? If so, are these fees for professional service considered taxable income to the minister?

The short answer is yes. This practice has probably been going on since ministers began performing these functions. Your church may even suggest an appropriate amount for the family to give the minister.

According to the IRS (Treasury Reg. Section 1.61-2(a) (1)), “marriage fees and other contributions received by a clergyman for services” are considered income for the minister. However, since the fees for these services are paid directly to the minister from the family, the income would be considered self-employment earnings and not employee wages. Thus, this income would need to be reported by the minister on Schedule C of their income tax filings. So the church is not required to account for or report this income to the minister.

However, if your church pays other staff for functions performed, such as coordinating weddings or funerals, leading music, operating sound/technical equipment, or doing custodial work, the church is responsible to report these earnings on a W-2, since these people would all be considered employees for income tax purposes. And remember, overtime rules apply for this work as well.

I find it best to remind our pastoral staff of this requirement to report any income received for professional services so they don’t get into trouble for underreporting their income.

As you’d expect, since I’m talking about taxes here, I must offer the following caveat: This post is provided by ECCU for educational purposes only. It is not intended to be legal, tax, or accounting advice. ECCU disclaims any liability arising out of your use of or any financial position taken in reliance on information provided in this post.

 I was saddened to read some stats recently showing that fraud in the church costs more each year than what is given to missions. The numbers were $35 billion in fraud in 2012 and $23 billion given to global foreign missions. How can this be true and what can we do to combat fraud?

 According to the Center for the Study of Global Christianity at Gordon-Conwell Theological Seminary who published the 2012 Status of Global Mission, financial crime at churches is estimated to hit $60 billion in 2025 if the same trends continue.

  Here are two key things those of us who have been entrusted to steward ministry funds can do each day to combat fraud:

1.  Create an environment of “Trust, but Verify”.  We first heard this phrase from the President Ronald Reagan, who used it often when discussing U.S. relations with the Soviet Union. It suggests that we maintain an environment of trust while also verifying that information is accurate and procedures are followed. This involves accountability, dual custody, and separation of duties in the financial area of your ministry. By doing these things, you can literally eliminate opportunities to commit fraud.
2. Stay connected with your staff and volunteers.  The precursor to fraud is a motive that causes an individual to have an intense need for money. It could be a financial hardship, a gambling problem, a family financial crisis, or negative work-related feelings. Once there is a motive, the individual then just needs to rationalize that what they are contemplating is okay given the circumstances. Staying connected with your staff and volunteers and knowing what is going on in there lives will provide you not only with an opportunity to minister but also an indication of the need to monitor actions and behaviors more carefully.

 These two steps will help keep your ministry from becoming the next bad news story.

 What have you found to be helpful for combating fraud at your ministry?

The Commission on Accountability and Policy for Religious Organizations just published their report, which was presented last week to Senator Charles Grassley. The report is based on two years of work by 80 nonprofit, tax, and legal experts and leaders, including ECCU President/CEO Mark G. Holbrook. It promotes solutions to key policy issues related to financial accountability in the religious and broader nonprofit sector.

The Evangelical Council for Financial Accountability (ECFA) led the effort to form the Commission and has made the 94 page report available for review.

Among its contents, the report covers the following topics and includes 43 recommendations related to:

• Executive Compensation and Excess Benefit Transactions
• Clergy Housing Exclusion
• Churches, Accountability, and Donor Engagement
• IRS Advisory Committee for Religious Organizations
• Independent Accreditation and ECFA’s Model
• Religious Organization Examinations and Third-Party Oversight
• Examinations of Church Leaders
• Love Offerings
• Public Disclosure of Highly Sensitive Information

I think you will find this to be very helpful information which can lead all of us in the nonprofit community to better governance, accountability, and transparency without greater government oversight or regulation. I highly recommend you take a look at the report and let me know what you think.

An area often overlooked at ministries is the review and approval of senior leaders’ expenses. While we tend to trust our leaders’ integrity, small mistakes or outright abuse can lead to questions and mistrust by donors and diminish the reputation of your ministry.

 While it is more common for staff within the organization to have their supervisor review and approve expenses, this is not often true of the most senior leader. Who should review his or her expenses? The business administrator, CFO, or accountant? Or should it be the chair of the board or corporate treasurer?

 Here are some steps you can take to be sure your organization has sound practices to protect both your senior leader and your ministry.

1. Make sure your organization has a clear set of guidelines that specify appropriate expenses for your most senior leader. These guidelines should clearly distinguish between organizational and personal expenses, even addressing expenses that are appropriate for spouses. This is an important document for your board chair and senior leader to discuss, then present to your entire board for approval. These guidelines help avoid misunderstandings and prevent reimbursement of questionable expenses.
2. As a part of the annual budgeting process, be sure the board is aware of and approves the expense budget for your senior leader. This should be in addition to the overall annual budget of the organization.
3. Create a process for the board chair or corporate treasurer to review and approve all expenses incurred by the senior leader each month. This process should be easy and consistent, and it should enable the board chair or corporate treasurer to immediately address any questions.

Taking these steps will help to ensure that your board has taken adequate responsibility and oversight to protect the organization and senior leader from scandal.

Besides someone who attended a past Financial Forum for Ministries, presenters for the upcoming forum are in the best position to tell you what to expect. So I asked them. Actually, I emailed three questions to each presenter for the 2012 forum. We’ll publish their responses over the next few weeks.

First up is John Thornton, professor and Leung Chair of Accounting Ethics at Azusa Pacific University. He will speak at each of the four 2012 forums about the impact of ethics on accounting. Here are John’s responses.

MBG: How will your presentation help attendees better serve their ministries?

John: In Christian ministries, where trust is a premium, it is easy to drop your professional skepticism and become lax about accountability. Even the best organizations with the best leaders are susceptible to deception related to wealth. Consider Judas, one of Jesus’ 12 disciples and overseer of their funds. He not only liked to dip into the bag for his own benefit, but ultimately chose money over God, selling out Jesus for financial gain. We will look honestly at the challenges and importance of accountability.

MBG: What are three important takeaways attendees will learn during your presentation?

John: Attendees will gain a historical perspective on the financial misdeeds done in God’s name. We will look at how to recognize potential ethical dilemmas in your own organization, learn basic approaches to resolve them, and discern how to choose the best alternative. Finally, attendees will learn how our faith in a just God gives us the moral courage to do the right thing, even at great personal cost.

MBG: How will the format of the forum make it an even more valuable learning experience?

John: In this interactive presentation, we will learn together from the experiences of our peers as we consider best practices in financial accountability. This rich context and interaction goes beyond what you learn by reading a textbook.

Next up will be John Butler, attorney and tax counsel with CapinCrouse LLP, who will be presenting on current legislative and tax issues affecting ministries.

Follow this link to learn more and sign up for the financial forum in your area.