Church Tax Conference for Small Churches

Originally Posted on June 16, 2021
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Webinar Transcript

– Good morning everybody. I hope that you’ve had a great weekend and I hope that it hadn’t been too generally hard to get back to work today. But I wanted to come to you today and talk about small church and tax reporting. And this will be recorded so if you need to go back and refer to it, you can at any time. Also my notes are online and you can find those notes and go through it if you’d like to go through it again or just need that. So, you can find that at alsbom.org/ccs and then when you go to that website click on Administrator Resources. So, that’s a great source for a number of different things. I do have a copy there of the minister estimate of taxes for 2021 that has just been updated to add the new thing about child tax credit and that it has been increased this year. So, hope that’ll help you to estimate your taxes. I will mention that estimate is a little bit on the high side because I simplified it a little bit to get it all on one page. It’s a little bit on the high side. I’ll also mention another problem with that is that it does not work well if your total family income, I’m talking about family income is over about 120,000 per year. Because then your family would go into another tax bracket and it wouldn’t make it as accurate. So anyway, that’s there for you. If you have questions about it give me a call and we will talk about it just for a minute when we get to that point. So alsbom.org/ccs is a good source and you can also find the salary study. I’ll mention that right now the salary study is the previous one and there was not a study done in 2020 because it was right at the height of the shutdown. So it was not done for the 2021, 2022 salary study. We’re going to report a cost of living adjustment to the numbers and put it out once again. And then in 2022, there will be an actual survey and that will be helpful at that time to all of us. But it will be summer of 2022 before that actual data will be out by the time GuideStone helps us to record the surveys and the state conventions helped to do that. And then Lifeway tabulates the surveys so it takes a while to get it all tabulated. But let’s talk about small church tax reporting right now. I am Lee Wright and serve as your host today, let’s have a word of prayer as we begin. Father, thank you for today. And thank you for each person involved today. Help us as we study today to do the right things and to do it in the right way that we may be honoring to you and Father help us to understand these complicated matters in a way that will be simpler in a way that will be helpful to us. And Father I pray for each participant today in Jesus name, Amen. All right, you’ve got my contact information 333-613-2241, my email address lwright@alsbom.org. Got some other resources for you, things having to do with the State Board of Missions. The office that I occupy is Church Compensation Services which is a part of LeaderCare. And so that will be some information you would need to know to get in touch with me. Got the 800 number, my cell phone number or the direct line that 334-613-2241. I’ll mention to you that I am semi-retired and have been for two years. So I work here in the office and largely from home. So when I’m not here this 613 number will be forwarded to my cell phone number and so wherever I am, you’ll be able to easily find me. And also the email address is an easy way to get to me. Church Compensation Services is that alsbom.org/ccs. There’s a number of things there. Another source is pinnaclealabama.org and there we have a lot of the recordings. Now many of the recordings that have to do with discipleship and church leadership and church health and things of that nature. But we do have some recordings there that have to do with taxes and contributions which that’s largely what we’re going to talk about today. We have some other recordings about other financial matters as well. Follow State Board of Missions on Facebook or whichever social media you like to do. And you’ll stay in touch with all the different things, the events that are coming up, of the training events that are coming up and you’ll stay informed of those things. I will mention that this summer during July and August I’ll be doing financial issues workshops and those workshops are a little bit less about taxes and a whole lot more about other things. Such as contributions and having good internal controls and things of that nature. So I hope that you’ll watch for those during July and August. And those will be live events. I’ll be all over the state to do those. So watch that at Facebook or State Board Admissions website and you can find those places that we will be. First one, I think it’s on July the 6th and it’s here in Prattville but you can look at the calendar under events and find it. Just give me a call if you have any trouble finding those dates. GuideStone is a wonderful source for us. It is our source for insurance and retirement and even property and casualty insurance in the last about 10 years or so. GuideStone has some wonderful resources. They are a great resource for retirement and they are us, it used to be the Annuity Board of the Southern Baptist Convention, and we still own it. It belongs to us, and there were some special benefits that your employees and ministers can get by participating in the church retirement plan through GuideStone. And so one of those benefits is a small disability benefit should one become disabled. Another benefit is one that excellent life insurance should something happen to that employee or minister. And then the third benefit is for ministers only but you don’t have to be ordained. You just have to be serving as a minister and you can receive up to $17.50 a month going into your account, your retirement account from the State Board of Missions. Another great source is GuideStone for written resources, and you’ll find many of those at guideStone.org/compensationplanning. And the compensation planning guide is one of the best tools that GuideStone has ever put out. I use it very often, and you can see that they’re online at guideStone.org/compensationplanning. Let me mention a few things and also let me mention that on your screen, you have Q and A that’s for your questions and then you also have a chat button. Now chat is just for anything that you might like to say or say how pretty the weather is. Where you are or something like that. And I’ll tell you, we sure have enjoyed this spring. It’s been nice and relatively cool for this time of year so it’s been beautiful. So chat, you can say anything you’d like, Q and A is where you’re going to put your questions and type those in. And I’ll stop periodically and we’ll deal with the question and we’ll be able to answer any questions that you might have today. So, first of all I wanna say that the IRS business mileage rate for 2021 is 56 cents per mile. That is how much you can reimburse your employee for the mileage that they do that’s business related. Now they’re going from home to church, that’s always commuting. But for their business miles going to a meeting, going to a convention, going to the hospital, making other visits at a home, things like that. They can record their mileage each trip that they do showing the date, place, purpose and number of miles. And they can turn that into the church and be reimbursed. And the business mileage rate for this year is 56 cents per mile. Now let me say today we’re emphasizing the smaller church. Some of those are our bi-vocational churches about a little over half of our churches in Alabama are bi-vocational. And so many times the pastor is driving quite a few miles to get to church. Now, unfortunately he can’t count that mileage. From home to church is always commuting even if it’s 30 miles, even if it’s 50 miles to get to church, that’s always commuting. But your business miles are those that you are doing something on behalf of the church. And I will say that your business miles can include from home to the hospital for example, from home to visit a prospect, for example. Things like that could be from home, but your trip from home to church, that one is always commuting and would not be counted as business miles. All right, this year well some of it started last year but this year it really goes into effect. There are three new IRS forms first one is a W-4. There’s a new form to work with a standard deduction, the child tax credit and the lack of regular deductions for most Americans. Most Americans do not have enough deductions to itemize. And so this form is really pretty simple especially simple for the employee. And we’re gonna talk about that in just a little bit. Now for your minister it’s a different story in that form that I’ve mentioned as we first started is a form that will be useful in completing for the W-4. Ministers, if they want withholding and ministers can ask for withholding or ask not to, for you to withhold. And if they ask for withholding, there’s a way to do it in which they could have their proper amount withheld and not have to send in quarterly reports. The other method is that minister could sit in his own quarterly report on a form, 1040-ES. ES, that stands for estimate. There’s a new 941 and it’s basically the same as it’s always been but there are some new lines on it for the Family Medical Leave Act of 2020. And that was where we were supposed to pay people who had to stay, they were forced to stay home due to COVID. They had COVID or a family member like a child had COVID or something of that nature. So there’s a new line on that. And you could actually get a credit if you paid an employee for staying at home due to COVID, directly due to COVID. There’s some other credits there they’re a little different. And for 20 I’ll mention, since I was talking about COVID. For 2021, the Family Medical Leave Act which told businesses to pay people who had to stay home. That aspect of it is no longer in effect, but you may, if someone got sick with COVID in 2021 they had to stay home from work and you paid them during that time. You can still get the credit even though this year, 2021 the paying of that employee is optional. It’s not required like it was required in 2020. And then the third form is the 1099 NEC, Non-Employee Compensation. And so for your situations where people perform work for the church or you have an interim pastor or you have a supply preacher or an evangelist. You would not give them a 1099 Miscellaneous anymore, you would use the 1099 NEC that would also include somebody who perform work for your church like say a plumber or a painter, or somebody like that who did some work for your church. You would give them a 1099 NEC or if you pay the person who cuts the grass, for example. And they’re not an employee of yours you don’t have any set hours. They just come whenever they want to. And all you care about is just getting the job done by Sunday, that’s all you care about. Then that one would be a 1099 NEC as well. We’ll talk about these a little bit more as we go. So the new W-4 form can be found at irs.gov. And for most people there’s really only three considerations, your filing status, such as married filing jointly or filing separately, or head of household or single. The standard deduction, which for a married couple this year standard deduction is $25,100 for a married couple, for a single it’s half of that amount. And that’s the new standard deduction. Then it takes the W-4 and using it as it’s supposed to be done, takes that into consideration. And then your child tax credits. Children under age 18 this year, in the past it’s always been under 17, but it’s children under age 18 can receive a child tax credit. So we’ll talk about that in a moment. It’s simple for the employee. In fact, they can if they want to, just complete step one which is that filing status, and of course your name and address and social security number and the personal information. And step five the signature they can just do that. The rest of it’s optional, if they want to do that. So the five steps are step one, personal information and filing a status. Step two, if you have multiple jobs in the family. Now this could be that the breadwinner has two jobs or the people are married in the household and both husband and wife have a job and they’re filing jointly. That would be an example of multiple jobs situation. And what would happen if we’re both are working in a family and we both are considering the standard deduction for a married couple $25,100, then we would have way, way, way too little money withheld from our paycheck. And so if you check this box under number two it’s going to claim half of the standard deduction for each spouse or each job. And this is the easy answer. Now, if you want to go into more detail or if one in the household makes a lot of money and the other one makes a little there’s some other instructions there. But the easy answer is just if both of you work, check that box and getting this wrong could cause severe underpayment of tax. Step three is the child tax credit. And oh, I did not change that slide. It’s each child under 18 for 2021. And so children that are under 18 can get a $3,000 child tax credit, which is up from $2,000 last year and children under age six, so five and under, they can get a $3,600 child tax credit. I will mention that, that increased child tax credit is for 2021. And that in 2022 it will be changed. It might be changed back closer to the $2,000. And from now on it will have an inflation adjustment to it. So we’ll see what happens for 2022. But, for this year it’s $3,000 and 3,600 for children under age six. Then you can add additional withholding and ministers would want to do that. We’ll talk about that one in a moment and then sign and date it. Now for 2021, if you’ll go to that website alsbom.org/ccs, click on Administrator Resources, you will find that estimate. And it’s one page it’s pretty simple, as simple as I can make it. As I said, it’s not totally accurate. It estimates slightly high. And then if you have a family income over $120,000 it’s not going to work quite right. But if you do have the family income over 120 you could call me and I could tell you how to adjust it to make it fairly close. So, that estimate is there under Administrator Resources and it will help you to walk through and see how much. Now ministers have a unique status. Ministers are employees for federal purposes. I’m talking about pastor, associate pastor, youth minister, things like that they are employees. And when I said youth minister, I would say basically in shorthand an ordained youth minister. The IRS says you don’t have to be ordained to have this status but if you’re not ordained you must be able to do essentially everything that the pastor can do. And so those things would include leading worship, leading the ordinances, considered to be a religious leader by your church congregation and leading the organization. So ministers are a little different. They have a dual tax status, they’re employees for federal purposes and self-employed for social security purposes. So your church cannot withhold social security on you, the minister as that church does for other people like a church secretary or custodian. And so this form will help you. And so if you want the church to withhold you can estimate a higher estimate than just your federal income tax. You can estimate what would be for federal income tax and social security tax and add those two together and divide it by the number of paychecks that you receive. And they would withhold it as federal income tax. They would not hold a dime out for social security taxes but just for federal. And then it will all work out next April when you do your tax forms in 2022. All right, so look for that form. I think it will help most ministers to estimate their taxes and get that done. Now, let’s talk about the bi-vocational pastor. I said earlier over half of our pastors are bi-vocational. And so these are the questions that I usually receive from bi-vocational pastors, more than half of all. And even if you’re a full-time pastor. Let’s say that you’re a full-time pastor but your income is relatively low. These questions would apply to you too. So, the number one question that I receive is, can all of my income be in housing allowance, talking about bi-vocational pastor. And the answer’s actually is yes, if that’s appropriate for your situation. There is a misnomer out there and that misnomer is that it can only be half of your income, but that’s just not true. Second, is there a limit to housing? There’s not a percentage limit it can be up to a 100% if that’s appropriate in your situation. Is there a dollar limit? There’s actually not a dollar limit either if that’s appropriate in your situation and you use the money for your housing allowance and it does not exceed the fair market rental value furnished plus utilities of your home. So, then this next question is really my question. But should you have 100% in housing allowance? And I usually recommend to bi-vocational pastors that they don’t do that but they have some as taxable income so that they may participate in the church retirement plan. For example, the average bi-vocational pastor in Alabama makes about $19,000 a year plus about $1,500 in benefits each year. Now that’s just an average bi-vocational churches run from seven in attendance to almost 200 in attendance and still have a bi-vocational pastor sometimes. Even though anything approaching 100, those churches in attendance, those churches often have a full-time pastor. So there’s a wide range of bi-vocational pastors and their income ranges on a wide-scale also. But, let’s just take that as an example let’s just use $20,000. Should I have all of that as housing? Maybe you might say, well I can justify $20,000 in housing allowance. And so I can justify all that. I can justify it to the IRS, but I would say just as a suggestion to you that even if that’s the case that you could justify it, that you have maybe $18,000 as housing allowance and the other 2,000 as taxable income. So that you can put 10% of of your $20,000 would be $2,000 into retirement. Now, we do recommend a minimum of 10% into retirement. And hopefully that your church is doing some of that or all of that 10%, but then beyond that you eventually want to get that up to 15% going into retirement. So if you have some as taxable you can participate in the church retirement plan. If you have 100% all as housing allowance that’s not taxable for federal purposes. So you actually would not be able to put money into the church retirement plan. The way GuideStone says it is they simply say you must get a W-2 from a Southern Baptist Church in order to participate in the church retirement plan. Okay, next question. If 100% is housing, do I need a W-2? And the answer to that one is no. Actually it could be a statement on church letterhead for 2021, you receive $20,000 100% of which is housing allowance. And so that’s the way that you could do that if 100% is housing allowance. Now, if you have some taxable income do I receive a W-2 or a 1099? And the answer on that one is it must be a W-2. A pastor serving a church, an associate pastor serving a church, a youth pastor serving a church. They should always receive either that memo because 100% was housing allowance or they should receive a W-2. A pastor serving a church should never receive a 1099 from that church. Now it’s pretty bold of me to say never and somebody might come up with an answer, but I cannot think of an answer on that one. Well, actually I do think of an answer. I once met a pastor who served four churches and he met at one church first and third Sunday, two churches, one after the other. And then he met with two churches, second and fourth Sundays one after the other. And I believe that was such a loose arrangement that with each church that probably he could receive a 1099 but in all my years of meeting with churches and pastors that’s the only example I’ve ever, ever seen. So I’ll say that a pastor serving a church unless you serve four churches should not receive a 1099 but should receive a W-2. Now, sometimes a pastor will say I would like for my full $20,000 to be housing allowance that’s what he requests, that’s what the church approves. And then the church gives him a $500 bonus at Christmas time. Well now, you have to have a W-2. So, in my example here $500 would be on the W-2. And if you wanted to you could put $20,000 housing allowance in box 14 of the W-2. Box 14 is not required it’s just simply an information box. A lot of the church software does it. A lot of accountants recommend that you do that. And so if it’s done by your software or your accountant recommends it, that’s okay. Just for simplicity sake, we have recommended through the years that you don’t do that. And instead give a memo statement to that minister saying you received $20,000 this past year which was housing allowance. So, this is the way it’s reported for bi-vocational pastor. And there’s a lot of misinformation out there. The big deal is that you can only have half of your income as housing allowance. That’s all you’re allowed to do. And that’s just really not true. The other thing is, bi-vocational ministers are often afraid to have 100% as housing allowance. They’re afraid it will be an audit, you know red flag, but if it’s appropriate near situation and you can justify it and it does not exceed your fair market rental value furnished plus utilities, then you could do that. I think we’ve got a question, so let’s see what this is. If you have a pastor that is taking no salary but 100% is housing allowance. He wants additional tax taken out of his salary, does he get a W-2? Yes, he would have to get a W-2. But, in this case, Sandra he would not be able to claim 100% as housing allowance. If he claims 100% as housing allowance and that’s what the church does, there’s no money from which to withhold. And so, that pastor let’s say that he wants to withhold $3,000 from his paycheck in my example, the $20,000. Then he would only be able to have 17,000 as housing allowance and he would have to have money from which to withhold taxes. And in that case he would need a W-2. And in that unusual case I think you should show the housing allowance in box 14 because it makes the W-2 make sense. That he started with $20,000, asked for 17 as housing allowance. And then he had three as taxable and three was withheld as federal income tax. But he would have to receive a W-2 but he would not be able to claim 100% as housing allowance. He’d only be able to claim that part that he was not doing some withholding and he’d have to have enough taxable income to cover that. And, Sandra that’s really a great question. I appreciate that question that’s a very good one. All right, I’ll close that, very good question. If you have 100% as housing allowance it means really you can’t do anything else with the money. You can’t put it into retirement, you can’t put it into tax withholding. You can’t put it somewhere else. And so you do have to reduce that housing allowance to an amount that fits with the other things that you’re doing. Good question. All right, now what forms are needed. And this is where many of you come in. What forms do we need depending on the pastor, so if the pastor is the only employee and has only housing then there’s no additional IRS forms are required. You can do that memo statement from church letterhead, which says 100% of this $20,000 was housing allowance. Now remember that if the church gives it he’s asked for $25,000, a 1,000 allowance and the church gives him a $500 bonus. Now you must do a W-2. So if the pastor’s the only employee and has salary and housing, then you’ve got to do a W-2 on the pastor. And then you do have to do two other forms, a W-3 which is a summary of all of your W-2’s. Now, to summarize one W-2 is not very hard. And your W-3 summarizes your W-2’s. And then there’s an Alabama form called an A-3 and you would use that to summarize all of your W2’s and in this case only one W-2. So, that’s what you would do if the pastor was the only employee has salary and housing, you would do his W-2 plus a W-3 and an A-3. Now, if there are any other employees such as a secretary, such as you pay your nursery worker, such as you pay the pianist, such as you pay a person who leads the music or something like that. Then if there are any other employees then you got to do a 941 each quarter. That’s a quarterly report going into the IRS of what money went out in salary and things like that. And then how much was withheld from people’s paychecks and you report that. And also you’ve got to make your deposit. If you’re withholding for the entire quarter is less than $2,500 you can just deposit it all at once using a 941V, which is a voucher if it’s less than that. Now, if it exceeds $2,500 you’re going to have to do monthly tax deposits. And those monthly tax deposits will have to be electronic. If your amount withheld each quarter is less than 2,500, and you would like to do the electronic deposit. You certainly may, it is easy and once you get it set up, it’s very easy to do. If there are other employees such as the secretary or nursery worker or custodian, or a pianist they’re paid then you would need a W-2 for each one. And then you would then need end of the year forms W-3 and A-3. Now also, I don’t think I mentioned this. There’s a 941 for each quarter and there’s a corresponding Alabama form called an A-1. A-1 is what it’s called. Now the A-1 is extremely simple it’s not hard to do, you’re just reporting the income and how much was withheld as Alabama taxes in that instance. Now, here if there’s any other employees do not give them a 1099. Some churches want to give let’s say that we’ve got a nursery worker that makes $2,000 a year. Or we’ve got a person who plays the piano that makes $75 a week, or we’ve got a church secretary that’s part-time and makes $7,000 in a year. A lot of churches want to give those people a 1099 just because it’s easy to give them a 1099. They don’t have to do withholding and that sort of thing, but that is wrong. If they meet the definition of being an employee you must make them an employee. And then for those non-ministers you’ve got to withhold. And even the nursery worker that just works two hours a week, and you pay them, a small amount. You must do withholding at the very, very least, you’re going to have to withhold social security taxes. It’s called FICA, F-I-C-A. And there’s an amount for social security and an amount for Medicare taxes. Let’s see, I think we may have another question. No, I think we got it, all right. Okay, let’s move on. All right, so first of all, when we’re going to pay somebody if we’re gonna pay anybody, does it matter who they are? We’ve got to first determine is this an employee or a contract worker, an employee or a contract worker? So first, we’ve got to look at the degree of control the employer has over the details of the work. So do you control when they come in? How long they stay when they get off? What duties they’re going to have? Like for example, one of your duties is to answer the phones, that sort of thing. If you control the details of the work then that’s going to be an employee, which party invests in the facilities used for the work. For example, the church pianist let’s say that you pay the church pianist. Whose piano is it, well it belongs to the church. Whose music is it, belongs to the church. And so who invented the facilities, so that church pianist is going to be an employee. The opportunity the worker has for profit or loss. So let’s take another example. Let’s say the person who cuts your grass. So, let’s say that they have their own grass cutting business. And in that business, they’ve got 75 customers and they’ve got a truck and equipment and they hired somebody to help them. And they do all kinds of things. Well that situation, that grass cutter company they have an opportunity for profit or loss. If they spend too much on equipment and trucks and things and don’t bring in enough, they could have actually a loss. But, when you just simply pay somebody you’re paying X number of dollars per hour for the hours that you work they don’t have any opportunity for profit or loss. So, when they have opportunity for profit or loss that would indicate a contract worker. Whether the employee has the right to discharge to fire the worker. So, if I have a company cutting the grass and I’ve got 75 clients and you fire me I still have my job. I’ve got one less client, but I still have my job. But if you work for us as church secretary and you get terminated, then I don’t have a job anymore. Okay, number five, whether the work is part of the employer’s regular business. So, for example grass cutting really isn’t our business of what we do as a church is something that has to be done but it’s not part of our regular business. And then permanency of the relationship would indicate if it is permanent, that would indicate, employ. And then seven, the parties relationship that they think that they’re creating. And those would be determining. Now you might not have seven indicators go all one way, you might not have that. You might have four that go one way and three that go the other way. And if that’s the case it’s a balance test and you would go with the four. But if you are in doubt about this you go through these seven tests and you’re still not sure if that person is an employee or a contract worker. The IRS says to make them an employee, you’re always safe to make them an employee. And so, that’s what you would do. So when we’re gonna pay somebody, anybody we first got to determine if they’re an employee or a contract. So, typically in a church, your pastor, other ministers, they’re always employees. If you have an interim minister that person could be a contract unless that person has other duties. Like if they’re only coming to preach and that’s it, they could be a contract worker but if they come and they visit the hospitals and they meet with the deacons and they meet with other groups in the church then they should be an employee. Your church secretary would be an employee of the church, your church pianist, if you pay that person, that would be an employee. Now typically the ones that could go either way would be the person cutting the grass if you pay them. Then that would oftentimes is a contract worker. And then how you get the church clean. And if you pay it, if it’s not volunteer you pay somebody to clean the church. That one would depend on the circumstances. That one could easily go either way. So, if you just tell somebody we want it done by Sunday we don’t care how you do it, when you do it, in what order you do it we just want it done by Sunday. Then that’s typically going to be a contract worker. But if you say, you’re gonna come in Monday morning at nine, and we want you to work on cleaning the sanctuary first and then we’ll move on to the buildings or rooms that we want done for Wednesday night. And you’ll get off at five and you’ll have this amount of time for lunch and that sort of thing. Those would be an employee. So that’s our first thing to determine. So oftentimes we classify a person as a contract worker who really should be an employee. And if in doubt, you should make them an employee. If you just look at those seven tests and you’re not sure then make them an employee, that’s always the safe bet. And then a person who does two jobs in the church sometimes will be classified both ways, employee and a contract worker. But, you really should not do that unless there’s a clear reason to do so. So here’s an example, Mary the church pianist also operates Mary’s lawn service. And so the lawn service could be given a 1099. In that case there’s a clear reason to do the two different ways. If you determine that this person is an employee you need four forms. Four forms are needed, plus E-Verify. So, first is a W-4 and A-4 that’s for federal withholding and Alabama withholding. You can find those forms at irs.gov and revenue.alabama.gov. And those would be the first basic forms you would have them fill out. Now, I’ve heard many pastors say you don’t need a W-4 on me. Well, that’s not true really. The W-4 is how you obtain their information address and their social security number and things like that. But then also, if they don’t want you to withhold they could just simply write at the top, do not withhold. Now, nobody else can do that, but the minister could simply write do not withhold. If they want withholding done, you may withhold federal income tax and state income tax only. Alright, then there’s the immigration form the I-9. You find that at uscis.gov/I-9, and that is to determine that the person can legally work in the United States. They are an American citizen or they have a green card or things of that nature that they legally can work in the US. There is a religious worker visa and some of you could possibly have that. I know in our association we had a person to do Hispanic ministry in our association and that person had a R-1 religious visa. And that person was legally allowed to work in the US but there are some stipulations and that person could only work for in my example the association could not work for somebody else. But the 1-9 determines that this person can legally work in the US. The next form is E-Verify. And this one is not really a form it’s just done online. And you go to usc.gov/everify and then Alabama has done a similar job because Alabama makes the E-Verify mandatory. The federal government does not make the E-Verify mandatory, but Alabama does. And so they’re trying to make it simpler for small employers at verify.Alabama.gov. Notice that it says verify not E-Verify, verify.Alabama.gov. And notice also the web address it does not have www. And if you put in a www, it doesn’t work right. And then finally, the last form that you need to do on a new employee would be an NH1. And this is the Alabama new hire form. And it’s dir.alabama.gov/nh for New Hire. So, those are the five forms that you need to do on each new employee. Now if you’ve never done this before, do the first three because those are not set anywhere they’re just held in your files. And it’s important for you to have those available that they are in your files. The last two, only do those only, if it’s a brand new employee and you would do those last two forms. Common mistakes, failing to do the forms at all. And so if that’s the case then do the first three. Failing to complete the forms on a minister. A minister serving your church like pastor or associate pastor. They are an employee in every way except their social security taxes and then failure to do E-Verify is a common mistake. And it is required by Alabama in immigration law. All right, so we determined we’re going to pay somebody we determined that this person is an employee. We’ve determined that we need to have the five forms and we’ve obtained those. So, now we need to determine the taxable income and how much needs to be withheld. And there are some common mistakes that are done in this arena. And I like the quote that I have from Frank Somerville who is one of the nation’s leading tax and church experts and he’s a CPA and an attorney. And he said, “everything is taxable unless the Internal Revenue Code says that it is not.” And that’s a good way for us to think because we want to make things not taxable. Where our desire is to have least tax burden on our employees as possible, but let’s keep it at that. The least that’s possible, let’s don’t stretch it. Let’s do it as the IRS states. So I do have a “Financial Issues Book” on page 18 a chart and you can obtain the “Financial Issues Book” it’s online at alsbom.org/ccs and you would get it under that Administrator Resources. So, many people, many churches are doing business expenses incorrectly. And if you don’t do them correctly, they are taxable. Many are doing medical reimbursement incorrectly, you need to do that correctly. And there’s a few other benefits that are often done incorrectly. So be sure that you’re doing it right. And then many pastors are under what we call a package approach and the church, when they’re first called to that church the church would say, here’s X number of dollars. You divide it up any way you want to. So, if you want health insurance, you take that out of it. If you want to send money to your retirement, you do that. If you want life insurance or disability insurance or things like that, you take it out of your paycheck. Well that is not a good way to do it at all. And it certainly in the last five years it just does not work anymore. One of the things that the IRS has clarified is that if the employee makes the decisions and can undo those decisions, then it was really taxable all along. A benefit is suddenly provided by the employer. And it’s those benefits that the IRS defines. So, if you have any questions about that give me a call and we can talk through your situation and kind of come to a conclusion about your situation. So, some of the common mistakes, failure to include Bonus and Love offerings. It must be included when it comes from the church, it must be included on the W-2. Don’t do a separate 1099 for that. And that’s one of the most common questions that I receive on the phone. Is, is there any way to make this not taxable? And when it comes from the church it needs to be taxed, failure to include gift cards from the church is taxable. So if your church gives gift cards to your employees you’ve got to add those to the W-2. Now, for your ministers that’s not terribly complicated for your non-ministers that gets to be really complicated because you’ve got to deal with the tax and the FICA on that, which on a gift card, that’s difficult to do. Another thing that churches often do wrong is trading as tax-free the wrong kind of health coverage. In our booklet that I mentioned just a moment ago you can find some definitions of the right kind of health insurance. What the Congress did back in 2010 and 2014 is they said that group health insurance provided by the employer continues to be a tax-free benefit. And basically everything else is not. But since that time, they have redefined some things. When a pastor is the only employee that works 30 hours a week or more, that gives a lot more liberty to do some things in the health reimbursement. And also since that time, once in 2017 and once in 2020 Congress gave two other ways to provide a health reimbursement without it being taxable. Now, for both of those there’s some special rules and you’ve got to know those rules. So, that’s another thing that I get calls about quite often. And we can talk through that but you can see the basics in that chart in the “Financial Issues” book. And according to our calls about 90 to 95% of those reimbursements are done incorrectly. For life insurance, your life insurance that you provide as a church as a benefit should be group term life insurance. And the easy way to do that is GuideStone term life insurance that is a group term life insurance. Other things might not be the right type. And if they’re not the right type that would be taxable money. Payment of individual insurance should be a group plan, that’s the easy answer. And paying for individual plans is often taxable but there are some exceptions. Number one, group plans remain a tax-free benefit. GuideStone remains a tax-free benefit. It is group even if now GuideStone has what they call a group plan. And then they have personal plan and personal plan would be one individual employee getting that insurance but actually all of their plans are group. And you and I could think of it, it’s really a church plan which is a different sort of animal, but you and I can think of it as GuideStone is the group provider for Southern Baptist churches. And we can think about it that way. So GuideStone is a group plan. There’s also an exception for groups fewer than two employees. So, if your pastor is the only employee working 30 hours he has individual plan through say across and your church pays it or reimburses it then that is not taxable. The IRS recognizes that an employer cannot buy real group health insurance for just one person. And then as I mentioned earlier there are two new health reimbursement provisions. These health reimbursement provisions, one of them is called a Qualified Small Employer HRA. It’s not a group health plan but it’s where your employees have individual coverage and the arrangement is funded solely by the employer and no salary deduction is allowed. And then the arrangement provides that after the employee provides proof of coverage then you can reimburse that employee. And it does not exceed 5,200 or 10,600 for family. It’s got to have same terms for all eligible employees. So, this one you would need to do this if the pastor was the only employee. You would need to do this if you had several employees, but they all were own individual coverage rather than group coverage. And then you write up a written plan that’s properly done and you may reimburse. Now, a lot of churches want to reimburse for health insurance they’re saying, “hey, we can’t afford health insurance but we’ll reimburse part of it.” And some of those churches are not doing that correctly. If you’ve got more than just the one employee you’ve got to have a written plan and do it right and treat everybody alike. And it can’t be from salary reduction. There’s another new one called Individual Coverage HRA. It’s got more flexibility you can actually cover different classes of people such as salaried and hourly and full-time, and part-time. You may cover them differently if you wish, but again you’ve gotta have a proper plan that needs to be written. These can be done where they’re tax-free, I will say that some ministers and some church employees have a Christian sharing ministry plan for their health coverage. And so like Samaritan or one of those. And if you do that can be a good way to go but it is taxable money when the church pays for that. Even if you do what are these HRA’s? So, if you’re in that balance you’ve got several employees. You want to reimburse them an amount for their health coverage and you want to get that done in a tax-free way, then look into these. You would have to have a properly written document to do these. Now, let’s take an example and let’s stop right here for just a second and see. Alright, Sandra says I’ve never done an E-Verify for state on any of my employees. And I don’t go back and do that for each employee. Yes Sandra that is correct. You do not do that for the employees. You would only do that on brand new employees. And, if I get a new employee then I’ll do it in the new employment form. Yes, the NH 1 if you have a brand new employee you would do those last two forms as well as the first three. But these would only be done for brand new employee. You would not go back and do your former, well not former employees, but also not your current employees who’ve been with you for awhile, good question. All right, so, we’re gonna take an example in this church there are two employees and Mary Smith serves as the ministry assistant she’s part time. And then they have a pastor and we’re going to look at the forms through these two employees. So her salary is $12,000 a year, she’s part-time. And in addition, the church contributes $1,000 to her church retirement plan, and also through salary reduction agreement she wants to contribute $1,000 to her church retirement plan in addition to what the church did. And then the church provides $25,000 in group term life insurance through GuideStone which that’s an easy way to do it. And at less than $50,000 value, that is not taxable. So we’re gonna look at her situation. So her W-2 just looks like anybody else’s W2, anybody else working for basically any other industry. So she started with $12,000 and she put $1,000 of her own money out of her paycheck into her church retirement plan. So up here in box 1 shows 11,000 rather than 12. And then down here in box 12 shows $1,000. So the 1,000 plus the 11 is 12. And that’s where you show the retirement amount that she did out of her own paycheck. Now the other retirement amount that comes from the church it does not show up here. It does not show up on the W-2 but the amount she took out of her paycheck does show up. Now, retirement does not help you on your social security taxes and Medicare taxes. And so we show the full $12,000 and then the Medicare is multiplied out times 0.129. Let me see, social securities is 6.2%. And Medicare’s 1.45%. And that equals your 7.65%. And that’s what these are. These are the amounts that came out of her paycheck for those two. She chose to do some extra federal withholding. And so had managed to the amount of $600. If a person made $12,000 and did not indicate anything else or that they wanted any extra withholding then federal income tax would not withhold anything because of the standard deduction. But she chose to withhold some more so it’s there in box 2 that’s federal withholding box 4, social security tax withheld and box 6 as Medicare tax withheld. Then down here under Alabama state wages also the $11,000 it works exactly the same as federal. You would show $11,000 down here. All right, so there’s some lines that I’ve left out like Alabama and the ID numbers and the federal ID number and that sort of thing. But this shows you what a W-2 should look like. All right, that one is just real normal just like anybody else working for any other employer. Some of the most common mistakes are failure to include bonus or love offering in boxes, one, three, five and 16. It’s just income just like any other income don’t put the bonus or love offering in box 14. It goes in one, three, five and 16. Don’t put bonus or love offering on a 1099 for an employee it goes on the W-2. And then one of the most common mistakes is failure to handle their retirement contributions correctly. The employer and that’s what I’ve got the ER for, employer contributions are not on the W-2 but the employee contributions are. They’re not in box 1 but they are in box 3 and 5 and that amount is in box 12 as well. So here’s the pastor of the church. Pastor Jones is the ministry he has a salary of $25,000 of which he’s requested $15,000 in housing allowance. And the church approved that $15,000 in housing allowance. And he send a $2,000 salary reduction agreement plan for the church retirement plan. The church provides insurance as a benefit and $1,000 contribution into his retirement plan. So, the church also provides $50,000 in term life insurance through GuideStone. It does not exceed 50 so there’s no taxable amount. And the IRS only allows group term life insurance which the easy answer is GuideStone. So, he started with 25,000. He asked for 15,000 as housing allowance. So, I’m gonna show you that down here, box 14 I put housing allowance $15,000. I put that in red because it’s not required. And we recommend that you don’t do it. However, if your software automatically does that or your accountant wants you to do it, then it’s okay to do we just recommended not to because it’s not required and keep it simple. So $25,000 minus $15,000 that left $10,000 of taxable income. Then he asked for $2,000 brought over here in box 12 to go to his church retirement plan. And you’ll notice code letter E and the $2,000. So that leaves for taxable income $8,000, which is up here in box 1. And it’s also down here in box 16. And so, that’s what his W-2 looks like. Now, notice that this W-2 looks quite a bit different. He chose not to have federal income tax withheld. So there’s nothing there. He could withhold federal income tax and then it would be showing up in box 2. But notice that on an ordained minister boxes 3, 4, 5 and 6 are always blank on an ordained minister serving a church. Ordained minister serving a church’s always blank. Those 3, 4, 5 and 6. If you put an amount in box 3 and 5, the church would get a bill from the IRS so don’t do that. You would also be penalized for doing the W-2 incorrectly. So here’s what his W-2 should look like. Does anybody have any questions about his W-2 in particular, anybody, okay. Everybody all right to go on. If you have any questions about W-2 just give me a call and we’ll talk through your situation. Some of the common mistakes about a minister are number one failure to include bonus or love offering in box 1 and 16. Don’t put the bonus or love offering in box 14, it goes in box 1 and 16. Don’t put it on a separate 1099. And then, it goes in box 1 and 16. And then for an ordained minister box 3, 4, 5 and 6 are always blank for an ordained minister serving a church. Some other common mistakes improperly handling the housing allowance on the W-2 you don’t have to put it on the W-2 you could put it in a memo form. But if you’re going to put it on the W-2 put it in box 14 and don’t include it in box 1, because if you do include it in box 1 that minister cannot fix it. The only way that it can be fixed is for the church to reissue the W-2 as a W-2c which is W2 corrected. Another common mistake is failure to handle the retirement contributions correctly. The employer, again contributions are not on the W-2 but the employee contributions are in box 12. Now let me say here that this is for the traditional way that contributions are made, which is traditional, it saves on taxes. Now, if you have a minister who wants to do Roth contributions then that’s handled tax wise differently. If that’s the case, then the contributions do not reduce the tax and they do not reduce the line one of the W-2. I will say that if you have a minister who wants to do Roth contributions you or that minister might wanna give me a call. There’s some things they need to think about because a minister can do retirement contributions in the traditional like save on money taxes on the tax money right now. And then when they fully retire in their retirement years they don’t have to pay taxes on part of it that is used for housing allowances. So it can be a very good way to do it. All right, seven, a lot of churches don’t do business expenses correctly. Some churches just here’s, $500 a month for your business expenses. Well, if you’re gonna do it that way then it’s just taxable money. It’s got to be an accountable plan where the minister shows the date, place, purpose, and number of miles and where they’re shown receipts for say books purchased or going to a conference or receipt for that conference, things like that. And they get reimbursed from that. That’s the proper way to do it. Other ways would be taxable. And then it cannot be from salary reduction. It’s got to be church money from church funds rather than from the employee’s funds. Number eight improperly handling health reimbursements. And we talked about that earlier unless you do it correctly. All right, if you have any employees like this church. This church has two employees, pastor and Mary Smith. And the pastor, his taxable income is $8,000 per year, and so that would make $2,000 per quarter. And Mary makes $12,000 per year taxable which would make $3,000 per quarter. However, she has $1,000 per year taken out of her paycheck for retirement contributions and that reduces her taxable income. So in the first line there’s two employees. Second line, the amount of money made this quarter has been $4,750. And the IRS, you can have some things that are different, most things need to reconcile. Like for example, your line five will need to reconcile 941s that will need to reconcile with your W-3. That the W-3 would be half the amount that is shown in line five because it’s only half because it’s the money that came out of their paycheck. Whereas line five down here is the full amount. And then pastor did not do any withholding, but Mary did and she withheld $150 a quarter which totaled $600 for the year as we said earlier. So we’ll show a quarters worth as $150 a year. And then down here in line five she made $3,000 this quarter, and he did not have any wages subject to social security or Medicare. Remember that he is self-employed for his social security taxes. So we have her $3,000 times 0.124 and her $30,000 times 0.029. And so those are the two amounts, and then we put those in these boxes and then we add them together in box 5 D. So notice that Mary’s contribution to her retirement plan did not reduce our wages, subject just social security and Medicare. So we put the full $3,000 here and here and up here in box 2, it did not have the full $3,000 there. So, basically now I’ve not gone over every line of the 941 but I’ve gone over the basics of it. And then what’s different about a church that is different from other business that you might encounter. So that’s what the 941 looks like. 941 common mistakes, the minister should be included in the employee count. Ministers wages are included in line 2 but not housing. So, notice that we put $2,000 of his money in that line two which did not include the housing. The minister’s federal withholding would be included in line 3, but he didn’t request it. So there is not in this example. And then the minister’s wages are not included in lines 5. All right, for the pastor is it on the W-2 and we’ve got over his W-2 quite extensively. So, I think in the interest of time I’ll just leave this. You have these slides and so you can look them up at alsbom.org/ccs and then click on Administrator Resources. There are some additional steps. There’s an Alabama A-1 which is quarterly. It corresponds to the 941 and it’s real easy to do. It’s just how much money was made this quarter and how much was withheld as Alabama income tax. Oftentimes in a small church some of your employees don’t make enough to withhold Alabama income tax. And oftentimes they may not have enough money made in order to withhold federal income tax. But for your regular employees, not ministers you’re going to have to do the social security taxes, FICA. Alabama A-3 is the annual form summary of your W-2s. And then the W-3 is that summary of the W-2s. And then the 944 it’s like the 941 but it’s an annual form rather than a quarterly but that’s rare. And then for those people that you pay who are not employees then there would be a 1099 that you’d send to that person and a 1096, those would go to the government as well. All right, this is the new 1099-NEC. And what the NEC stands for is non-employee compensation is what it stands for. So you fill out there your church name and address and payer’s tax ID number and then the recipient’s name and address and tax ID number. And then you put the non-employee compensation here in box 1 what they’ve done is they’ve just taken the 1099 Miscellaneous and pulled out this one thing non-employee compensation. The old 1099 was confusing I don’t know whether to put it under other income or non-employee compensation or whatever. But if you have somebody who performs work for you but they’re not your employee, they’re a contract worker. This is where you would record their wages that they made at the time that they work for you. And like we said, they could be an interim pastor, it could be a plumber, it could be a heating and air guy. It could be possibly the person who works at your church to cut the grass depending on how you set that up. This is the new 1099 NEC. So, common mistakes here. Oftentimes classifying a person as a contract worker when they shouldn’t be and we talked about person who does two jobs at the church. And then notice that you’re going to be using 1099 NEC you’re not going to be using the 1099 Miscellaneous. And there for a church to use a 1099 Miscellaneous is it’s gonna be one in a million cases, there’s only one instance I can think of that a church would do it, right now. So, just get in the habit of using your 1099 NEC. And before you do the 1099 NEC you need to use the W-9 that you can get that online at irs.gov, but you have them fill out the W-9 it’s a simple form gives you their information. It gives you their tax ID number or their social security number. And that will really protect you because you know a lot of times we go ahead and pay the person. And then at tax time, we’re like, oh my goodness I didn’t get their social security number. So you call them up and say, “I need your social security number.” And they say, “oh, okay, I’ll get it to you.” And then, three weeks later they still haven’t gotten it to you. Or you tell them, “hey, I need for you to fill out a W-9.” And they say, “okay, I’ll do it” but then they don’t. But get that W-9 done first before you pay them. And the problem with it is if you don’t have a social security number but you paid them and you paid them $600 or more you still must provide a 1099. And your church will be penalized for providing a 1099 without a social security number. And you were supposed to have done backup withholding of 28%, because you did not have a social security number and where is that money coming from? Well, that’s in effect it’s gonna be another penalty on the church. So get those W-9’s done. It’ll save you a lot of trouble. It’ll save you a lot of heartache as well. And so, we’re gonna go back to any questions, any new questions. At this point we’re gonna take about a two, three minute stretch break. If you need to go and stretch and use the restroom or something like that go right ahead. I’m gonna take a quick break and then we’ll come back. And after this quick break we’re going to talk about contributions. Right now we’re gonna talk about charitable contributions. And to me, this is a source that’s most important. And we so often mess up at this. And I get a lot of my questions based on these. So contribution rules, there are six requirements for charitable contributions. And the first thing is a gift of cash or property. And the second claimed as a deduction in the year in which the contribution was given. And third, the contribution is unconditional without personal benefit to the donor. Now on these, I want to mention that I’m just gonna kind of quickly go through these and then we’re going to kind of give more detail to this right here. All right, contributions made to or for the use of a qualified charity. Five, the contribution is within allowable legal limits and number six, the contribution is properly substantiated and that’s an important one for us. So, first of all it is a gift of cash or property. And so cash checks, bank transactions, those are cash gifts. Excuse me it is claimed in the year that it was given. So cash is cash checks, bank transactions property is any non-cash. And so you would record separately from cash gifts. Do not give gifts of property of value. That’s the donor’s responsibility to get that done. Time and labor are not tax deductible. And then the use of something is not tax deductible. Next, it is deductible in the year given that means that it’s physically given by the 31st or it’s postmarked, December 31st. It is unconditionally delivered. And so if it’s dated 12/31, but it’s postmarked 12/31 but you’ve got a sticky note that says please don’t deposit this until January 5th. Then it is the next year’s contributions. That would be a 2022 contribution. Number three and four, it is unconditional. So if you’re going to have designated offerings then you’ve got to have that approved by the church, that designated offering. And they give to that designated offering because the church allowed them to. You cannot designate to an individual and you cannot designate to a church staff member unless the church establishes a love offering and controls the love offering completely. The church decides who gets what and the maximum. So for example, let’s say that in the fall we have staff appreciation and we do staff appreciation. The people can give to that but the people would not be able to say, “hey I don’t want my money to go to the whole staff. I want my money to go to the youth minister.” They can’t do that they’ve got to go along with what the church does. And then the church sets the policy and sets the conditions. Now that also means that, hey, during June here we are in June and you would not be able to say, “hey, I wanna give $500 to the youth minister.” Because we’re not doing staff appreciation right now. And that’s not the way we do it anyway, we divided among all the staff who worked here. Next, contributions that are not deductible, contributions designated to a specific individual. And you can’t do that. Contributions to a non-qualified organization are not tax deductible, but one that really hits for us is the value of time or services. Those are not tax deductible. Next we must properly substantiate it. And so your statements must be done, your statement from the church must be before the return is filed by the tax payer. So the way that the IRS calls that as I say it’s contemporaneous it’s before they filed their taxes. And it is not a legal requirement that you’ve got to send out statements by January 31st. But it is recommended, it’s a recommendation but not a legal requirement. On your statement it should show the name of the organization, the date with each contribution itemized. Now that’s our recommendation just to keep things simple. The IRS actually says that for those donations that are less than $250 you could add them together. But, if you have any contribution that’s $250 or more, it must be itemized. It must be itemized with the date. And so we just recommend that for all the contributions whether it’s $10 or $10,000 or $250 that you just put all of them itemized with the date and the amount. To us, that’s just a much simpler way, it’s clearer. If you have any questions about what a person gave it’s easier to go back to that date. And perhaps you’re using offering envelopes and it would show on your offering envelopes what they gave on that particular day if you are using envelopes. If they give non-cash property, they give something of that nature. You would have a description of it but not the value. And a statement that no goods or services were provided to the organization in return for the contribution. As long as that’s the case so you’ve got to do that. If there is anything given in exchange then the organization would state that. So, thank you for your donation of $100 in exchange, you received a cake at the gate bag fundraiser with an approximate value of $20. So you would give a good faith estimate of what that’s worth. This is a important thing that we must note. If it’s less than 250, the IRS will accept a canceled check, a receipt or letter from the church. If it’s $250 or more, the IRS will only accept the receipt for the church, your canceled checks won’t do you any good if you’re in an audit with the IRS. You must state no goods or services were provided to the donor in exchange for the contribution. Another alternate wording of that is only intangible religious benefits were provided to the donor in exchange for the contribution. So you’ve got to have that. If that wording is not on the statements then the IRS will deny the contributions if that person is audited. Some examples of written acknowledgement would be thank you for your cash contribution of $300. That First Baptist Church received on December 12th no goods or services were given in exchange for your contribution. There’s no certain kinds of IRS forms, letters, and postcards those are fine. And even an email can be used but a lot of churches don’t do email in this case because people change their emails often and that becomes a little bit complicated. So non-cash would include items from Walmart for example, jewelry, publicly traded stock, cars, real property, somebody’s real estate that they’ve given. And in all these cases, the church does not determine the value that’s the donor’s responsibility. And you did not include on the contribution statement unless you have a section for non-cash contributions on your church software. So, typically when people give a used computer or a used car or something like that, we would give a statement to them not put it on their contribution statement. Which is generally those contribution statements are generally for the cash contributions. When they get something in return, then that typically makes it not a charitable donation. I, for example, go into a camp or a retreat because we receive a value in exchange. But mission trips are a tax deductible event as long as there’s no significant element of pleasure or vacation. Mission trips are not for us or about us but about us fulfilling the work of the church. Some of the fundraisers that we do, do have goods and services in exchange. For example, you have the youth carwash and somebody gives $10 and they want that on their contribution statement. Well, it’s not a contribution because they did receive a car wash in exchange and that’s about what it’s worth. So if somebody gave $100 you could say on a letter, thank you for your donation of $100. Give it on June 1st in exchange for your contribution you received a carwash with a value of approximately $10. The Youth Spaghetti Dinner, the Bake Sale, the Golf Tournament those are other examples of non-cash goods and services that would give in exchange. So if it is quid pro quo and that’s what we’re talking about. Quid pro quo means this for that. They receive something for what they gave and there’s no receipt needed unless the donation is more than $75. And then if it is more than $75 you would tell them how much they gave and what they received in exchange. In the booklet the “Financial Issues” booklet we have some donation checklist. Property gifts like used computer or merchandise from Walmart or jewelry or whatever they might give. Gifts of automobiles are a little different. And so typically on a gift of a automobile you must include an IRS form that goes along with that gift of an automobile it’s a 1098 C. But that’s explained to you on page 59 and you can find these at www.alsbom.org/ccs and then click on Administrator Resources. Gifts of publicly traded stock are handled a little bit differently, and there’s an explanation of how to do that. And by the way, if people give to your church publicly traded stock can be a good way to give. And so, for example if a person had a stock that they bought 20 years ago for $100 and it’s worth a $1,000 today. Then they would not want to sell it and give the money they would want to give the stock itself and then your church could sell that stock and get the money. And that’s a much better way to do it because they get the advantage of having a tax deductible contribution. But they also do not have capital gains tax because they gave the stock to the church rather than selling the stock and giving the money. Now, here are some contribution rules that we suggest to you about designated contributions. Designated contributions must be approved in advance of the contribution. That is something that is required. Number two, all those designated funds are under the control of the church. So, that is also required that any designated funds are controlled. Sometimes a person gives and wants to control that gift and this is not the way to do that. A person that says “I want this money to go to the youth minister,” for example. A person gives and they want the church painted purple, for example. They could give to the building fund or maybe you have a fund for building the grounds but then the church would decide how to use that money. Number three, have an exit strategy for some of the funds. And so leftover funds from a project revert back to the general fund if they’re not used this year. Or after the project is completed any leftover funds would revert back to the general fund and you don’t have to do that but that is a good way to have it where you don’t have money sitting on the books that is just leftover money. Some churches have dozens of funds and some of that money is just sitting there and they finished a project or did not ever do a project. And it’s just sitting there waiting on that project. And if you’ll use this number three suggestion, then you’ll be able to handle that in a different way. Number four, if a designation is not an approved fund the church will not accept the gift. So, every once in a while let’s say that somebody gives money. Here’s $2,000 for the new church van fund that implies that we’re gonna buy a brand new church van. And maybe your church is not in a position to buy a van or maybe you don’t want to buy a van right now because you’ve got other priorities that are much more important than buying a van right now. So you don’t want someone giving and trying to control the church by the way that person gives. Now, they might not be doing it intentionally but it’s the same effect. And so if we’re not going to do that project then steer them in another direction and say in this instance, say, “hey, we’re not going to buy a van. Would you be willing for that money to be used by the youth ministry? That is a fund that we’re trying to emphasize right now.” Or “would you be willing to use that money to go towards the mission trip” and things like that? All right, a designated offering may not be used for a specific person except for a mission trip. And when we talk about a mission trip, the only way you can specify a particular person would be if it’s yourself, an adult paying for their own mission trip or your child you’re paying for your child’s mission trip and those monies should be non-refundable. A person might suggest a need, but they must be willing to allow the appropriate committee such as benevolence committee to decide how best to use the money. So, if I was interested in giving to the Smith family I might suggest to the benevolence team “hey y’all might look into the Smith family has a need.” And then you would just simply give to benevolence. Number six, a mission trip is a tax deductible event as long as there’s no significant amount of personal pleasure or vacation. And gifts given by persons going, or even by family members are deductible. Number seven, gifts given towards a mission trip will benefit others going or revert to the general fund if the participant does not go. So if you’ve got somebody that they’ve gotta work and they can’t go they should be willing to let that money go to benefit others and not want their money back. And you should set it up that way in the very beginning that everybody agrees and we all know that we’re not getting our money back. Now, let’s talk a little bit about mission trip contributions. An adult paying for their own mission trip is tax deductible but it’s non-refundable. Number two, church members that are not going on the mission trip may donate to the mission trip fund but they cannot designate a particular person. So, they just stated to give to the mission trip fund. And then church leaders would decide how that money is dispersed, whether it’s just divided equally among all the people who go. Or whether there’s some needy persons going who need the help and we’re gonna give most of it to them, or however the church leaders decide to use that money. Now, number three this one is a little tricky an adult paying for their own teenager to go is not tax deductible, unless the funds are made in trust are a legally enforceable arrangement for the benefit of the church. So what you wanna do is at the very beginning of planning for that youth mission trip you want to get the parents together and say “your money that you pay towards the mission trip. You may designate it for your own teenager. However, it’s not going to be refundable.” And maybe they sign a tiny little slip of paper saying, I understand that my mission trip money is not refundable and that if my teenager can’t go it will benefit others who are going. Number eight, designated funds should be broad rather than narrow in focus. So we should have a building fund which would be anything that church decides to do next rather than a family life center fund. A music fund rather than a choir robe fund, things like that, so keep it more broad so that no matter what happens, we can use this money. Sometimes a church sets out to build a family life center and then they don’t get enough money and they decided not to do it or they decided to do something totally different. So you should not be that specific. Number nine staff love offerings are under complete control of the church. And number 10, you should talk about offerings that are designated to a particular budget line. Does the church allow that, does it increase the budget lot or is it just simply the first money spent and assuring that there are dollars available for that budget if of cashflow’s tight. Does it carry over until next year? So most churches do allow this practice but it can be possibly a dangerous practice. So talk about that and talk through those things. Now, another thing that I get questions about a lot is repurposing designated money. So, money has been given to the family life center fund and we decided, hey, we changed our mind. We’re going to move and we’re going to build a multipurpose building as our first building in the new location and we’re not going to build a family life center so we want to repurpose that money. Now that’s a dangerous thing to do. So, like I said earlier the best thing to do would be to have it set for building fund and building fund means whatever the church decides to build next. And so build or remodel or refurbish or whatever, that’s what that means. And we tell the church family that’s what that means. But let’s say that we do need to repurpose some money. It requires two steps, a vote of the church to disband that project and to move the money. And then second obtaining permission from the donors. Wow and that part is hard. It’s very difficult to get the donor’s permission to do that, just because you might not know who gave, you might not know who they are. You might not know where some of them are because they gave years ago. So that’s very difficult to do. And the bottom line is upfront, we need to make our designated funds very broad in order to do that. If you repurpose the funds without all the donor’s permission or the court’s permission, then in some states it’s called fraud and in other states it’s called theft. And so you really need to walk carefully in this. And if you are gonna repurpose some designated money you probably need the assistance of an attorney to walk through that. All right, now repurposing designated money that originated from the church is not a problem. So, let’s say that we decided, and maybe we voted on in a business meeting, the church is gonna contribute a $1,000 each month to the contingency fund from the general fund. And we’re gonna do that every month. And so those amounts, they weren’t designated by individuals so they can be changed or we could stop. We could say, “hey, we’ve got enough in the emergency fund. We’re going to stop that $1,000 contribution each month.” So those amounts could be changed or could be repurposed. All right, let me stop and see if there are any questions. Okay, the church members reimbursed for the purchase of merchandise that will be used by the church. The church member wants to endorse the check back over to the church is this a contribution? Sandra it is and a lot of people do that. And what they did is they were reimbursed for their merchandise but then they made a cash contribution to the church. And that would be acceptable. Personally, I’d like for them to write a check you reimburse them $50 and then they write you a check for $50 out of their own checking account. I like that a little bit better because to me it makes it a little bit better paper trail. However, this is what you’re talking about is done often and can be a tax deductible contribution that would be listed on their contribution statement. So, that’s a really good question. But I would suggest that you try to say it would be better for our paperwork if you wrote us a check, if they’re willing to do that. If they’re not willing to do that then signing over that check is okay, too. It’s a great question. All right, so those are the things that are important that we needed to talk about, about contributions. I have calls every week about contributions and I’m always glad to take those calls and deal with those questions that we have. I want to say thank y’all for being with us. We’ve dealt with the questions that we’ve had. Appreciate it, if there’s anything we can do, give us a call. I do wanna remind you about the financial issues workshops that are coming up in July and August. In those workshops we will be talking about some different topics. We will talk about contributions. We talk about contributions almost every time we meet because there’s some questions about designated contributions and in the summertime you got the questions about mission trips and things like that. But we will talk about internal controls. We’ll talk about who is an employee again, but we’ll also talk about the question about who is an exempt employee. Meaning they’re exempt from the Fair Labor Standards Act meaning they’re exempt from overtime. And those employees would be the ministers and who is not exempt from overtime and things like that. So we’ll talk through those things this summer we will do those meetings as live meetings. I hope that you can start to come and we can start to get back to more normal kinds of things. I am so thankful for this method of doing things online it’s been a lifesaver during COVID do, I look forward to being able to meet in person. To me I like that way better if it’s possible, I like that way better because we can see when people are grasping, what we’re talking about and when they’re struggling with it. After this meeting, if there’s anything I can do please give me a call and be glad to help at any time. I’m going to stop sharing and go back, there we go. And so if there’s anything that I can do for you just give me a call or send me an email and I’ll try to get to those emails and calls as quickly as possible. Usually that day, if I’m traveling or something possibly the next day but I’ll try to get to those very quickly. So if there’s anything we could do for you just let us know and we’ll be glad to do that. I’m going to hang up.

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