What Percent of Tithes and Offerings Should a Church Spend on Personal, Administrative, Overhead, Ministries, Etc.?

As with many areas of finances, the answer depends upon the specific circumstances and vision of the church. In every case, we recommend budgeting as a financial best practice that will improve financial accountability and stewardship. When creating a budget, we recommend surplus based budgeting which means that the plans should provide a surplus at the end of the fiscal period… In other words, spend less than you take in.

As to developing specific spending by category, one way to consider is to look at the lending guidelines for obtaining a loan. Our research indicates that lender guides for personnel cost should be in the range of 33% to 45% of total income. Personnel costs includes all salaries, wages and benefits of the staff. If the church has a loan, lending guidelines dictate no more than 33% of total income be allocated to debt service meaning payments of principal, interest and fees on the debt. Keeping overhead / administrative cost low is always prudent so we recommend a range of 5 to 20% of total income for administrative cost. Spending for worship services, ministries, care, benevolence and missions will need to be considered in the budget process after considering personnel and administrative overhead cost without creating a deficit financial position. The specific spending percentage for each of those categories can be in the range of 1% to 25% depending upon the vision, passion, and outreach for the church.

Another way to consider is to look at your ministry costs (Worship services, Pre-School, High School, Care, Benevolence, Missions, etc.) just like a company would look at their “Cost of Goods Sold”.  In other words, FIRST start with your expenses for those categories.  Then, look at all of your non-salary overhead costs (Things like your building, office supplies, meals, etc.).  Then, reserve 10% for cash flows.  Finally, whatever is left is what you can / should spend on personnel.

There are several ways to look at this and we’re happy to help think through this with you.

What is the scoop on PPO, HMO and HSA?

What is HMO?

HMO stands for Health Maintenance Organization. This form of health insurance combines a range of coverages in a group basis. Doctors and other professionals are paid a flat monthly fee whether you see them or not. You pay the same amount every month, as long as you see doctors within the approved network. If you need to see a professional outside the network, you will first need a referral from a primary physician within the HMO, and then there may be additional fees to see a doctor outside of the network. Any visit, prescription, or additional care must be approved by the HMO in order to be covered. Kaiser Permanente is an example of an HMO.


What is PPO?


PPO stands for Preferred Provider Organization. This is a health care organization composed of physicians, hospitals, or other medical specialists who provide health care services at a reduced fee. If you see a doctor within the network, you’re responsible for only a small fee. Within the PPO, you have some flexibility to see any doctor you choose. You can see out-of-network professionals if you’re willing to pay a higher price. There is often a copayment, deductible, and coinsurance, but you typically do not need approval from your primary doctor before seeing a specialist. A PPO is similar to an HMO, but the doctors are paid whenever you see them as opposed to a flat monthly fee. Ultimately, in a PPO, you have flexibility to see doctors—within or outside of the network—with less “red tape.”


What is HSA?


HSA stands for Health Savings Account. This is part of an employee’s health plan, and both the employee and the employer can make deposits into the account. The individual employee has the freedom to utilize these funds to pay for a variety of medical expenses, such as insurance co-pays, deductibles, and over-the-counter medications. In fact, you can even use HSA money to pay for cosmetic surgeries, glasses, dental work, etc. Nearly every medical expense can be paid with HSA money. The HSA account operates like an IRA—it earns interest. If you don’t use the money, you can take it out (tax deferred) when you’re 59 ½ years old. In order to setup an HSA, you must have an HSA-qualified insurance policy. This usually means you’re going to pay a higher deductible.

What is a medical sharing plan? Is it a good idea?

There are several “Health Care Sharing” options, but none of them provide “Credible Coverage”. 

Here’s how they work :

Each person or family is required to pay a monthly fee (this is NOT a premium). This monthly fee pays the health care costs of other families in the program. When you need health care, the money comes from this fund as well. In addition to their monthly fees, members are encouraged to give further money in order to help pay for the treatments of others. This is necessary because medical costs are high and the monthly fees are low.


None of these organizations will guarantee that your medical bills will be paid. This is very different from traditional insurance, and it can get very dangerous.

Take this example :

Couple A needs emergency care. Upon arrival at the ER, they present their card, and the hospital discounts the bill per the prearranged discounts. The hospital sends the bill to the health share company, who then examines the bill to determine if they will share the expense. (This is often a faith-based option, so several moral issues will preclude services being shared. If the health problem involves tobacco, alcohol, or a sexually transmitted disease, the bill is not likely to be covered.)


If the health share company accepts the bill and agrees to pay for the services, Couple A is required to pay the deductible. Then, the remainder of the bill is published for other members to contribute those extra dollars we talked about earlier. Obviously this will take some time!


So, after Couple A has received their emergency care, the hospital sends a bill for the remaining amount due. The sharing hasn’t been fully funded, so the couple must pay out-of-pocket and hope that their sharing community will pay for the rest of it. In the worst-case scenario, the bill may be sent to collections. The couple may be sued because they cannot afford to pay the bill while the health share company tries to gather funds.

FURTHERMORE...

There are many hospitals and medical providers that will not accept a patient if they are on a medical sharing program like this.  A simple internet search will pull up many examples of people being denied treatment because the hospital or doctor will only accept insurance.

Here's just 1 example that happened right here in Metro Atlanta : 

Local hospital denies mothers faith based healthcare coverage


Here’s the bottom line: health share companies can put you under undue financial risk. Traditional healthcare is available, and these insurance companies operate under laws and regulations to protect you and your family.

What is a good working capital or cash reserve target for a church?

Working capital is the amount of cash needed to cover current operating expenses, payroll, rent, and debt service without relying on income. Although Church income [offerings] come in each Sunday, the amounts are not predictable and can vary significantly depending upon the time of year, politics, or even the weather. In addition, conditions in the economy can also impact church income as employment conditions fluctuate. Furthermore, in our transient society, people change jobs and move much more frequently than in the past so member giving is subject to a high degree of change. So it is prudent to have a working capital reserve of funds on hand to manage finances through uncertain times. Each church will have different requirements based upon size and types of financial obligations and fixed commitments but our recommended working capital target is 3 months operating expenses set aside as a reserve fund. Operating expenses are things like payroll, rent (mortgage), utilities, office supplies, other loan payments, any other contractually agreed expenses, and ALL ministry expenses.  We view this as proactive and prudent financial management.

Umbrella Liability Insurance

Umbrella liability insurance is additional insurance coverage that rests on top of primary commercial general liability, automobile insurance and workers compensation insurance. Make sure the Umbrella provides additional coverage on the existing Sexual Misconduct and Professional Liability policies as well.

Cost – Can be purchased in increments of $1,000,000. We recommend that you consider Umbrella Liability by the time your church reaches 2 years old.


Stock Donations

Likely because of our current economy, we have had an increasing number of requests to make stock donations to churches. If you’re interested in setting up an account to receive stock donations, just contact us and let us know! Here is a great write-up that will help understand the benefits of this type of donation.


Why give stock?

There are significant tax advantages in giving appreciated stock held for more than one year. The donor may take the full fair market value of the stock gift as a charitable deduction on his or her income taxes and neither the donor nor the church has to pay the long-term capital gains tax, which is 15% of the net appreciation of the stock.

The maximum deduction you may take within a given tax year is 30 percent of your adjusted gross income. If you are unable to take the entire deduction in one year, you may carry the excess deduction forward for five additional years. The long-term capital gains tax rate is reduced to 5% for those in the 10 percent tax bracket.
Illustration between 1) selling appreciated stock first and then giving the proceeds and 2) giving appreciated stock outright:

Sell First vs. Giving Stock

Market Value                                      $15,000           $15,000
Hypothetical Cost Basis                      ($5,000)           ($5,000)
Gain                                                    $10,000            $10,000
Capital Gains Tax (Assuming 15%)      $1,500              $0.00
After Tax Proceeds to Church             $13,500            $15,000
Donor’s Charitable Deductions           $13,500            $15,000

So, what about online giving?

In recording tithes and offerings for churches (I’m a bookkeeper), I’ve started to ponder the whole giving electronically thing (or e-tithing). I thought I’d bring the discussion to the Ps20 world in hopes that some pastor or wise lay man or woman could settle the issue and I can go on my merry way.

In the spirit of full disclosure (yes, I know I am supposed to give in secret), I tithe electronically. I like the ease of it, the convenience, the consistency, the no-brainer aspect. I don’t have to wriggle in my seat as the offering plate (or bucket in my case) approaches and think about the clothing purchase I made earlier this week and start bargaining, “God, how about $50 less for your Kingdom?” (In case there was any doubt, I am not a saint and still need to practice the Give-Save-Spend mantra.) The tithing exercise has turned into an annuity, coming straight out of the bank account, as any other bill would, before I get my oftentimes greedy hands on it. Obviously, churches aren’t complaining about this. Churches love consistent giving, without which forecasting is nearly impossible. When church attenders go out of town on a summer vacation, for example, roughly forty percent of those contributions missed are not made up. So giving through systematic electronic withdrawals appears to be the solution from the church’s perspective.

But what about from the heart of the giver? Does giving my first fruits offering electronically impact my heart the same way? After all, if I give without love, “it profits me nothing” (1 Cor. 13:13). Does electronic giving depersonalize tithing the same way an email letter depersonalizes a hand-written one? Am I bringing my tithe and offering to the church as an act of worship and obedience or is this just Old Testament rigmarole (I love that word, regardless of whether I am using it correctly)? Crown Ministries teaches that giving should be premeditated, that to know the full joy and reap the blessing of giving, it must not be done carelessly. Does e-tithing lead to careless giving more so than writing a manual check? When the offering plate goes by and I physically place something in it, do I more consciously remember that I am giving back to the Lord Himself? An electronic debit on my bank statement doesn’t seem to move my spirit in the same way. Is there a conscious (or subconscious) surrender of possessions when I participate in the Sunday offering or snail mail a check in to my church? Or am I missing the point altogether?

In wrestling with this whole thing, I am coming to understand that giving (whether it’s time or money) boils down to a heart issue. Am I giving, electronically or otherwise, with a heart of love? Am I positioned to reap the benefits and blessings that the Lord wants to bestow on me as the giver? Am I being stretched beyond my tithe? Is the tithe the starting point of my giving and not the limit? These are the questions that impact my selfish heart and more closely align it with Christ. Perhaps for me, a manual check would be better, but for others, giving electronically accomplishes the same mission in self and Christ-awareness: my heart follows my treasure (Matt. 6:21).

So, any thoughts out there? Should I buck the modernized e-tithe system and return to a pen and checkbook like my grandmother? Does it matter or am I splitting hairs? Is ‘obedience’ obedience regardless of how I arrive there, emotionless or not? Feedback, anyone?

Should churches file forms 1023 and 990?

Every non-religious, non-profit organization must file Form 1023 with the IRS. It is the application to be a non-profit. Non-religious non-profits must also do an annual tax return, Form 990.

The church is not required by law to be a legal entity. It does not have to file Form 1023 or Form 990. Under IRS Section 501(c)(3) churches are automatically tax-exempt as long as they meet both the organizational and operational tests found in Section 501(c)(3).

(Keep in mind that churches must be “organized and operated exclusively for religious purposes” and this “purpose” must be stated in the church’s Articles of Incorporation.)

Despite the fact that churches are automatically tax-exempt, the only recognition from the IRS of non-profit standing comes from the Determination Letter (also known as the 501(c)(3) Exemption Ruling Letter or simply your tax letter). And this letter can only be obtained by filing Form 1023.

Many churches are filing Form 1023 because the Determination Letter is needed to receive various benefits including:

  • A non-profit, bulk-mailing discount from the post office.

  • Some tax exemptions from state governments.

  • The ability to set up 403(b) retirement plans.

 
By far the biggest benefit of filing Form 1023 is legal protection. It separates the pastor and elders from the entity of the church and requires the church to have a constitution, bylaws, minutes, etc.

Churches that have completed Form 1023 are NOT required to complete Form 990. We recommend that you do not submit Form 990. Form 990 becomes easily accessible public information, and we believe the financial operations of the church and officer salaries should remain private.

Form 1023 does request officer compensation amounts, and this information is made public. However, Form 1023 is not nearly as accessible as Form 990.

If you are ever challenged to file Form 990, then refer to IRC 6033(a)(3)(A)(i) and Reg. 1.6033-2(g)(1)(i), which expressly exempt churches from filing Form 990 and continue to apply even if the church files Form 1023.

Raising Salary Support

When a church is getting started, income is low and expenses are high, so it is common that staff members must be responsible for raising their salaries.

This can get complicated because it is illegal for churches to raise donations that are earmarked for a specific person.

The best way to raise salary support is for each pastor to set a goal for fundraising. The church should then set a salary based on a percentage of what the pastor is projecting to raise. In other words, the pastor is a W-2 employee with a salary set at 80% (for example) of his fundraising goal.

If the pastor reaches his fundraising goal three months in a row, the church can give him a bonus. If he does not reach his goal three months in a row, the fundraising goal and the salary percentage can be re-evaluated.

The church must commit to paying the salary whether the funds are raised or not. If the salary needs to be adjusted, it must be a decision made by the church board.

The donations received from the pastor’s fundraising should be marked as “fundraising” and should not have the pastor’s name on them.

Property Insurance

When reviewing property insurance, be sure to discuss these five categories:

  1. Contents

  2. Computer Software and Equipment

  3. Inland Marine

  4. Improvements and Betterments

  5. Building Coverage


Contents


Coverage – Insures office furniture, machinery and computer equipment.

Cost – $20,000 in contents is approximately $250 annually.


Computer Software and Equipment

Coverage – Additional content coverage that specifies computers / software against additional perils not covered by a typical contents policy. Examples include damage from electric surges and loss of data. You will need to itemize your computer equipment and software. By that, we mean you will need to list your equipment and software and the cost on an EDP (electronic data processing) form. This is known as an “additional rider”.


Cost – $1.50-$2.00 / $100 value annually.


Inland Marine

Coverage – Insures mobile property such as a laptop computer, video / sound equipment. You may be required to itemize these mobile properties as well.

Cost – $1.50-$2.00/ $100 value annually.


Improvements & Betterments

Coverage – Check your lease agreement to see whether or not you have improvements (walls, re-carpeting, re-painting) and betterments to insure.

Cost – usually included in the Contents policy at that going rate.


Building

Covers commercial buildings and personal property against a wide variety of perils or causes of loss, such as a fire. Obviously, you will not need Building Insurance until you own the facility.

Cost – Usually a rate multiplied by the replacement cost (this means no deduction for depreciation will be accounted for when the insurer pays your claim). Cost varies widely from $.30 – $1.10 per $100 value annually. Rural and coastal areas are more expensive than urban areas; frame is more expensive than brick, etc.

Print Philosophy on Discretionary Spending

Establishing a discretionary budget for your staff can be very beneficial.

As a result of an effective discretionary policy, you can provide:

  • Clear understanding for each staff member or employee as to what they can spend as discretionary funds

  • Promotion of personal and spiritual development

  • Encouragement to the staff by letting them know the organization is committed to their growth and development

  • Flexibility as to how each staff member chooses to spend the funds

When developing a policy, clearly identify the types of costs that fall into discretionary spending and make sure the allotted amounts are consistent for each level of positions within your organization.  Incorporate these amounts into the budget and make sure actual costs are within budget throughout the year.

Liability Insurance

When discussing liability insurance, be sure to review these five categories:

  1. General Liability

  2. Employment Practices Liability

  3. Ministers / Lay Counselors Errors & Omissions

  4. Sexual Misconduct

  5. Directors’ & Officers’ Liability

General Liability

Coverage – Insures your church and its operations against third party bodily injury and/or property damage. Please notify your Insurance Agent before going on Mission trips to make sure you are adequately covered with General Liability.

Cost – Determined by square footage of area occupied. 2,000 square feet will cost about $200 annually.

Employment Practices Liability

Coverage – Protection from lawsuits resulting from wrongful discharge, sexual misconduct, discrimination, etc.

Cost – $35-$75 per employee annually.

Ministers / Lay Counselors Errors & Omissions (also known as Clergy Professional Liability)

Coverage – Protects Ministers and Lay Counselors against claims and lawsuits arising from counseling services. Usual coverage is up to $1,000,000 in occurrence and in aggregate (total of all occurrences) annually.

Cost – Rates vary $50-$250 annually (based on # of clergy or professionals and type of care offered). Note – If you are outsourcing consulting to one particular person or entity, then we recommend you ask that person or entity to place you under their insurance coverage. Most underwriters have two requirements: 1) at least one staff member needs to have a seminary degree and 2) the church needs to submit a formal typed plan on childcare precautions.

Sexual Misconduct

Coverage – Protects church employees and volunteers against claims and lawsuits arising from sexual misconduct allegations. You should have this Insurance once the church has youth programming.

Cost – $500-$1,000 annually (based on # of volunteers and childcare/daycare programming).

Directors’ & Officers’ Liability

Coverage – Protects Board Members and Officers against alleged third party lawsuits for mismanagement. Typical coverage amount = $1,000,000 per occurrence.

Cost – $50-$250 annually.

How To Do a Capital Project

Entering into a capital project can be a challenging process.  However, there are a few guidelines that will help make the process much smoother.

  • Define the project in scope.

  • Determine the cost which will result in a project budget.

  • Decide how to fund the budget.

    • Funds can be raised prior to starting the project.

    • Pledges can be taken and funds received over time.

    • Debt can be used if the church or organization determines this is appropriate and the desired source of funding.

  • Once funds are secured, track the actual costs and stay within the budget to avoid overruns.


We highly recommend working with an outside organization who specialized in capital projects and generosity.

How Things Work at Dime

What is outsourced accounting?

Generally outsourced accounting includes the services below. (Dime provides some industry-specific services in addition to these general accounting services.)

  • Enter all bills into the accounting system and record them to the appropriate expense account. 

    • Regular monthly bills (telephone, copier lease, rent, etc.).

    • Credit Card company bills (including itemized transactions).

    • Personal expense reimbursements.

    • Capital expenditures and maintenance of depreciation schedules.

    • Payroll transactions. (Record payroll journal entries if not completed by Dime.)

  • Issue and distribute all checks.

  • Record deposits.

  • Reconcile all monthly bank statements including all deposits, checks, wire transfers, etc.

  • Process payroll transactions.

  • Provide a monthly “Executive Package” including month-end financial statements.

What is the workflow?

  • Accounting Access

    Dime is located in the Atlanta area, and the accounting system will be hosted out of this office. Many of our clients are located outside of Atlanta. We will provide you a login to our server, via Microsoft Terminal Services, so you can view all your reports and what not. This gives you the ability to access your financial data at your convenience from any internet connection.

  • Submitting Bills

    You may either scan your bills and email them to Dime or upload them to our PM system. We ask that you submit bills once a week on the day of your choice. When we receive the bills, we will send you a confirmation email stating that your bills have been received and will be processed shortly. It is very important that you ensure you receive a confirmation email from us. If you do not receive that email within 48 hours, then we have not received your invoices. Please contact your account manager immediately.

  • Filing

    It is your responsibility to maintain all files for audit purposes. We give you some of the files you need and the processes associated with them. Here are some examples. 

    • Bills to be paid

      We provide this file and the process associated with “What to do when a bill comes in.”

    • Vendor file system

      We recommend creating a file for each letter of the alphabet. Once the bills have been sent to us, please file each bill alphabetically by name.

    • Manual checks file

      This is for any manual checks that you write.

    • Deposits

      We provide this file for you. It will contain any deposits you make.

  • Cash Requirements Report

    If necessary this report will be emailed to you before each check run and is a heads up on 1) your current cash balance before the batch of bills are paid, 2) the amount of your pending bills, and 3) your cash balance after your pending bills batch is paid. This report is very useful in recognizing your cash position. It may be necessary to hold checks based upon cash balance, vendor management, etc. This is the time to confirm all vendors to be paid and perhaps delay payment of one or more bills. This is also the best time to confirm that all bills have been entered and are scheduled to be paid on time.

  • Manual Checks

    On occasion you will need to write a check yourself using hand-written check stock. This is typically done when a vendor needs “cash on delivery” or when you need something to be paid when purchased. Please make a copy of this check and fax or email this copy to us in a separate batch from your weekly bills. Make sure to file this copy in the “manual checks” file discussed above.

  • Deposits

    It is recommended that you make all deposits yourself. Please make a copy of the deposit slip and each check. Be sure to let us know what revenue account to book the deposit to. You can write the account number on the deposit ticket. Fax or email this report to us on a weekly basis separate from your bills.

  • Payroll Transactions

    If you don’t use Dime for payroll, please fax or email the payroll reports from your current payroll provider. It is highly recommended that you use Dime as your payroll processor. This alleviates any possible confusion in the month-end process.

  • Month End

    We will provide a copy of the general ledger showing each transaction (checks, deposits, and adjustments) for the month. You will need to review this report and alert us to any changes (using the “Journal Entry Form”) within 10 days of receiving the report. If we do not hear back within 10 days, we will assume all transactions are approved and will move forward with closing the books. Once the books are closed, we will provide you with your Balance Sheet and Income Statement. If there are other reports you would like included in the monthly “Executive Package,” we will do our best to meet your needs.

What happens with previously recorded transactions?

9 times out of 10, we have a way of converting all your history data over into our accounting system. In fact, we have someone dedicated to just this! The other 1 time out of 10, we convert over summary data. Regardless, we have to have good data to start from, so it’s in everyone’s best interest for us to have the best implementation plan we can.

Dime has a partnership with ADP for payroll processing. If you are currently using a different payroll provider, we will handle the conversion to ADP.

What forms will I use?

We provide many standard and customized forms for you to use when communicating with Dime. These are included in our PM system. If there is a form you need that we did not provide, please ask, and we’ll put one together for you. We want to do our best to over-communicate with you and give you all the tools that you need to operate.

  • Expense Reimbursement Form

    This is for expenses that the employee paid for out of pocket. Employees will submit their expense reimbursement form for approval to their supervisor on a monthly, weekly, or bi‐weekly basis. This form must be approved by a supervisor, then faxed or emailed to Dime. It is important that you collect receipts for all expenses and that you file these receipts and expense reports in the vendor file system. It is not important that Dime receives copies of the receipts. Just the expense reimbursement form is sufficient.

  • Check Request Form

    This is for payments that need to be made when no bill is available. This might be for 1099 contractors, volunteer reimbursements, payments for conferences or other events, etc. It is important that appropriate approval processes are implemented and that the check request form is included in the weekly email or fax of bills.

  • Cover Sheet

    Every time you send us something by fax or email, it’s best to use this form.

  • Other Forms

    Dime will provide other customized forms such as payroll change forms, direct deposit authorization forms, housing allowance calculator, weekly checklist of tasks, etc.

How much debt can my church afford?

Churches generally use debt to fund capital projects or building expansions that enable them to grow and expand ministries. Assuming that your church has a surplus operating budget [spending less than taking in each month] and have a good financial history, our recommended guideline is to borrow no more than 3 times your annual general fund income and to not exceed a debt service ratio to income of 30%. In addition, we would want to see a healthy working capital reserve fund (3 months operating expenses) set aside and a substantial cash down payment on the project, in the range of 25 to 30%. Of course, the financial lender will have final say in how much money can be borrowed for a project looking into things such as current budgets, past financial statements and loan to value on the project.

How does health insurance work

Traditional health insurance requires you to pay a premium to insure against future health-related expenses and to soften the blow of the big medical bills. This operates much like car insurance, where you pay a premium to protect yourself in the event of an accident. Usually with car insurance you have a deductible, an amount of money to pay out-of-pocket before your insurance company will begin to pay for damages.

Health insurance works in much the same way. There are various kinds of health insurance, but they generally work through a claims system. Your doctor provides treatment, and your insurance company receives notice of your claim. The company determines if your insurance policy covers this treatment, and the bill is settled. If any balance remains after the insurance company has paid their portion, then you must pay the remaining bill. This is what all that “Deductible” and “Coinsurance” stuff is all about.

If you go to the doctor, most of the time you pay a fee, regardless of your coverage under health insurance. Some health insurance plans come with a deductible. Others come with a per-use payment called a co-pay. Some come with coinsurance. Most plans come with all of the above: a co-pay, a deductible, and coinsurance. This amount can vary by plan.

A copay is a fee you pay, regardless of the bill or the service you’re having done. This is typically just a flat fee, depending on the type of procedure or the type of doctor you’re seeing. A deductible is the portion of the bill that you’re responsible to pay, up to a certain dollar amount. Once your deductible is met, coinsurance kicks in. You might see that coinsurance is 80% / 20%. This means that after you meet your deductible, your insurance company will step in and pay 80% of every bill. You will be responsible for the remaining 20% of the bill. Then, you can be thankful for the “Maximum Out of Pocket”: after you’ve met the deductible, you’ll pay 20% of every medical bill until you reach the maximum out of pocket. Then you’ll be finished paying medical expenses for the year.

All of these elements are designed to spread the risk among multiple people so no single person or family becomes responsible for 100% of the bill. This is the true definition of insurance: spreading the payments amongst multiple people.

How does a housing allowance work and who is eligible?

Any ordained minister (as defined by their denomination or elder board) is considered a “Duel Status employee”. This basically means that they are considered self-employed AND fully employed by the church. That said, an ordained minister is allowed to consider some of their income as a “housing allowance”. Historically, some churches offered a parsonage, but those are now fairly few and far between. For the purposes of this discussion, we’re going to assume that this is a standard ordained minister.

Most churches do not dictate the amount that a pastor can consider as housing allowance. Generally, churches provide the pastor with a total salary (total income or gross compensation) and then allow the pastor to determine how much of that total income is to be considered “housing allowance”. We actually have a worksheet that the pastor can use to determine the appropriate amount to consider “housing allowance”.

As an example, the church may determine that Pastor Ken’s total income is $75,000. After Pastor Ken fills out his housing allowance worksheet, he may determine that his annual qualified housing expenses equal $30,000. The church’s payroll department should be notified that Pastor Ken would like to allocate his total income to be regular wages, salary of $45,000 and housing allowance of $30,000.

The tax side then gets a little complicated.

The regular wages (usually labeled as “clergy wages” by payroll companies) of $45,000 in our example, is subject to income taxes (federal, state, local) and Self-employment tax (Self Employed social security and Medicare tax) while the housing allowance portion $30,000 is exempt from income taxes. However, the housing allowance is considered Self-Employment income and is subject to the Self-employment tax (SECA or Self-employment Contributions Act) currently set at 15.3%. SECA tax is the Social / Medicare tax that applies to self-employed individuals. As mentioned above, pastors are considered duel status – both an employee and self-employed and therefore pay into social security through the SECA tax. One thing to mention is that for non-ministerial staff, the church will pay ½ of the Social Security / Medicare (FICA) tax while the employee pays the other ½. However, for ordained ministers, the church is not allowed to pay that employee ½ and therefore the pastor is responsible for the full 15.3%.

The federal income tax is a pay as you go system. The taxes can be paid via payroll withholding or quarterly estimated payments or a combination of both. The bottom line is that both types of taxes discussed above – income tax and self-employment tax – need to be considered and paid throughout the year in order to avoid an underpayment penalty or interest due at the time of completing the tax return or filing for an extension. However, the payroll withholding process based upon an employee exemptions W-4 form only applies to the federal income tax system and will not incorporate a withholding amount related to the self-employment tax. Therefore, we think it is a good idea for pastors to have an additional amount (above the standard income tax table withholding rate) withheld from their paycheck to cover the self-employment tax that they’re likely going to have to pay when they complete their tax return. If not, it’s imperative that the pastor make quarterly estimated tax payments, otherwise, they will be subject to penalties and interest by the IRS.

Using our example, here is how the taxes are paid ::

Regular “clergy” Wages – $45,000

Federal Income Tax – Withheld from paycheck per pay period

State Income Tax – Withheld from paycheck per pay period

Local / etc. (where applicable) – Withheld from paycheck per pay period

Self-Employment Tax (SECA) – Quarterly estimated payments

Housing Allowance – $30,000

Federal Income Tax – Only paid on the unused portion, quarterly estimated payments

State Income Tax – Only paid on the unused portion, quarterly estimated payments

Local / etc. (where applicable) – Only paid on the unused portion, quarterly estimated payments.

Social Security / Medicare – Not Applicable

Self-Employment Tax (SECA) – quarterly estimated payments

Because this gets very complicated, we always recommend that pastors use a CPA to complete their tax return and determine the appropriate amount of periodic withholding or estimated payments to be made during the year. Of course, we can always help with this… we do lots of tax returns for pastors!

How do we track designated restricted funds?

Gifts given to designated funds and their subsequent disbursements are tracked on the Balance Sheet as Current Liabilities.  Gifts received are credited to the donor as tax deductible and are recorded to the Fund as an increase to the liability.  Payments made out of the fund are recorded as a decrease to the liability.  A current balance on the fund can be determined at any time by viewing the balance shown on the Balance Sheet.

Sometimes there are circumstances where the organization would prefer seeing the disbursement activity on the Profit & Loss Statement as a record of spending so they can compare it to their budget.  An example of this would be for a Building Fund and the expenses associated with construction or remodeling.  In this scenario, an adjustment would then be made at month-end to offset the building project expenses on the Profit & Loss and reduce the Building Fund on the Balance Sheet.

In the absence of a Benevolence Policy or Mission Fund Policy, gifts marked for these ministry areas are treated as “preferenced” and are recorded as an offset to the expense lines for those ministries, reducing the total spending from General Fund/Operating monies.

Likewise, gifts given to the “Children’s Ministry” are recorded as an offset to the expenses for the Children’s Ministry.

Registration fees for camps and special events are recorded as an offset to expenses on a separate line “Proceeds from Events” within the applicable ministry expense grouping.

Hiring Forms

There are two sets of hiring forms:

  1. Hiring form W-9 for contractors.

  2. Hiring forms for regular employees.

Hiring Form W-9 for Contractors:

Form W-9 (request for taxpayer identification number and certificate) is the IRS form that needs to be completed by independent contractors. It is simple and essentially requests the contractor’s taxpayer identification number. Get this form.

For significant contractual jobs, we suggest that you sign an agreement with contractors describing the the work and the compensation arrangement.

Hiring Forms for Regular Employees:

Both part-time and full-time employees need to complete the following forms. These forms should be retained on file for each employee, as they are subject to government inspection at any time.

Form W-4 (employee’s withholding allowance certificate)—Each non-ordained employee must fill out a W-4, which authorizes the employer to withhold funds for federal and state taxes. Get this form.

Form I-9 (employment eligibility verification)—This form requests several forms of identification. Get this form.

State Employee’s Withholding Allowance Certificate—Nine states have no individual income tax on wages (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). For all other states, each employee needs to complete a state withholding form unique to that state. This form is similar to the federal W-4 above. Your payroll processor can assist you in obtaining and completing the form particular to your state.

We encourage employers to have each employee fill out an employee information sheet. This asks for emergency contact info, personal contact info, etc. This is good for keeping a clean database of all your employee’s contact info.

Deductibility of Donations

Regular Giving

Generally, anything dropped in the offering plate, mailed in, donated online, cash in an envelope, etc. is a tax deductible donation.

Restricted gifts vs. gifts with preference


The idea of a charitable contribution deduction is that the donor is relinquishing or giving funds / assets to a qualified charity who then has full discretion and control over those funds. A donor’s stipulation on how the funds are to be used may cause the gift to be non-deductible if it limits or removes the church discretion and control of the fund or if the funds are earmarked for a specific individual. Let’s look at some examples. A gift that is designated for a building fund or a specific church project is called a restricted gift and the church must use the funds according to the designation. This type of gift is tax deductible to the donor because the church still has full discretion and control of the funds even though it is restricted to a specific use. A gift designated to be paid to an individual is problematic as this type of restriction results is non-deductible by the donor. The church should not act as a “conduit” for funds to be transferred between individuals as those types of gifts are non-deductible by the donor (more on this subject under the Love Offering section below). The last example would be a gift with a donor preference that the funds be used for a program or specific ministry while acknowledging that the church has full discretion to use the funds as determined appropriate. This type of donor’s preference communicates a desire or suggestion for the use of the funds as opposed to a mandate for the use of the funds. This type of suggested use of the gift is fully tax deductible by the donor.

Salary Support

When a church is getting started, income is low and expenses are high, so staff members are commonly responsible to fundraise their salaries.  This can get complicated though, since it’s illegal for churches to raise donations that are earmarked for an individual.

We recommend this strategy as the best way to raise salary support:  each pastor should set a goal for fundraising, and then church should then set a salary based on a percentage of what the pastor is projecting to raise.

In other words, the pastor is a W-2 employee with a salary set at 80% (for example) of his fundraising goal.

If the pastor reaches his fundraising goal three months in a row, the church can give him a bonus. If he does not reach his goal three months in a row, then the fundraising goal and the salary percentage can be re-evaluated.

These donations should be marked as “Salary Support” and should not have the pastor’s name on them.

The church must commit to pay the salary whether the funds are raised or not. The church board must decide if and when the salary needs to be adjusted.

Love Offerings

Typically, when donor’s give love offerings, they have an intended specific recipient in mind. Because the gift is given with the intention of the gift benefiting a specific individual, the gift is not tax deductible.  Further, the gift is taxable income for the recipient. There are exceptions, however. In the case of a “love offering” for distribution among multiple staff members, if leadership is determining the specific recipients and the allocation of funds between the recipients, then donations to that love offering fund are tax deductible.  Payment of the love offering is taxable income and subject to IRS reporting.

Missions Trips

All monies donated to missions trips are considered tax deductible donations.  However, it is imperative that the church publish, in the fundraising documents, a statement saying that any monies not used for the trip will be released into unrestricted income for the church to use at their discretion.  Some churches say that any monies not used for this trip will be released to the missions budget.  Whichever way you choose, it’s important to know that if this statement is not included in the fundraising documents, then the donation is restricted and can only be used for that trip or it has to be refunded to the donor.