I continually speak to Pastors and Church Leaders throughout the USA and I am amazed at those whom feel as if they are somehow immune to the Internal Revenue Service and its codes, simply because they are a Church. Some are so naїve they almost flaunt their IRS lack of obedience. In addition to this being criminally dangerous, it is spiritually dangerous. In the context of paying taxes Jesus declared that we are to give Caesar that which belongs to Caesar (Mat. 22:21).
I wonder how many Churches struggle financially because they intentionally violate Mat. 22:21 and Romans 13:1-7? God will not bless a mess and when Church books are not in legal compliance with IRS guidelines it says to God that His Word only has clout when it is favorable to our desires.
According to the IRS tax gap report, underreporting of income is the biggest contributor to the tax gap. According to the report, there is $500,000.00 owed to the IRS and 90% of it is due to underreporting.
Churches are infamous for underreporting. This underreporting most often occurs when Churches fail to report payments made to their Pastors and staff. Pastors, Church Check-writers and Board Members think they are being creative when they give money and call it “love offering,” etc to justify not reporting it as income. Remember, anyone working on the inside of your church (Pastor, Treasurers, musicians, etc.) are employees and any funds provided to them must be reported. Anyone on the outside (independent contractors, vendors, etc.) receiving Church funds must receive a 1099 of some type.
Do not feel as if you are smart enough or saved enough to avoid the wrath of the IRS if you are out of compliance.
How Churches Contribute to the Tax Gap
- Improper Housing Allowance Payments
There are many facets that must be covered when dealing with Pastoral Housing Allowance. The Pastor cannot receive all Housing Allowance and not salary. As a matter of fact, the Housing Allowance should not exceed 50% of the Pastor’s ministerial income. Although Housing Allowance is not taxable, it is subject to Self-Employment Tax unless the Pastor has filed for and obtained self-employment tax exemption
- Improper Salary Documentation
Misreporting salary is subject to huge penalties from the IRS. The Church and Pastor better not have a salary agreement with any open-ended items. Also, the Church Leaders need to be aware of the fact that Pastor’s Salary must be set by an independent firm and not by those who have a vote. Remember all monies given to the Pastor, regardless of what the money is called (i.e. salary, love offering, etc.), with the exception of bona fide Housing Allowance, must be reported in his W-2.
- Be Careful with “Love Offerings”
If “Love Offerings” are not setup the right way, they are taxable and must be reported as income. Those who are receiving them the “old” way are going to get caught and the punishment (civil and criminal) may be severe.
Chitwood and Chitwood has been helping Pastors and Churches get the most tax free benefits available, but with our 77 years of experience, we know how to do it the right way. If you would like resources on how to properly set up a “Love Offering” program properly, contact firstname.lastname@example.org for more information.
The Last Word
The Internal Revenue Service is well aware of the lack of compliance among Churches in the USA. It is only a matter of time before you are caught and severe penalties assessed. Even if there were no IRS regulations mandating this, God’s Word does. If any organization in America is abiding by the law and doing things in excellence, it should be the Church. God always rewards good stewards and removes from bad stewards (Mat. 25).
Why take a chance? Retain the Premier Church and Clergy professionals in the world, Chitwood and Chitwood, and let us make sure you are in compliance with God’s Laws and those of the IRS. NO ONE DOES IT BETTER!