Have Faith … But Take Precautions Financial Best Practices for Religious Congregations
Because they aren’t required to file tax returns, many churches, synagogues, mosques and other religious congregations don’t hire independent accountants to perform regular audits. But regardless of size, religious organizations often are subject to other requirements, such as reporting unrelated business income tax (UBIT) and properly classifying employees. Without the oversight of tax authorities or outside auditors, religious leaders may not be aware of all requirements to which they’re subject. This could leave the organization vulnerable to fraud and its trustees and employees subject to liabilities.
To effectively prevent financial and other critical mistakes, make sure your religious congregation complies with IRS rules and federal and state laws. In particular, pay attention to:
Employee classification. Determine which workers in your organization are full-time employees and which are independent contractors. Depending on many factors, including their responsibilities, work location and form of compensation, individuals you consider independent contractors may need to be reclassified as employees. In most cases, employee wages are subject to Social Security and Medicare taxes.
Clergy wages. Most clergy should be treated as employees and receive W-2 forms. Typically, they’re exempt from Social Security taxes, Medicare taxes and federal withholding, but clergy are subject to self-employment tax on wages. A parsonage (or rental) allowance can reduce income tax, but not self-employment tax.
UBIT. If your organization regularly engages in any type of business activity that’s unrelated to its religious mission, be aware of certain tax and reporting rules. For example, do you rent your parking lot when it’s not in use during religious services or sell ad space in your newsletter? Such income could be subject to UBIT.
Lobbying. Your organization shouldn’t devote a substantial part of its activities in attempting to influence legislation. Otherwise you might risk your tax-exempt status and face potential penalties. Of course, terms like “substantial” and “attempting to influence” are open to interpretation. But, in general, avoid making specific endorsements “from the pulpit,” supporting candidates for office financially or sponsoring events that might be interpreted as partisan.
Trust and protect
Like all nonprofits, religious organizations need good internal controls. Faith groups are particularly vulnerable to fraud because they generally foster an environment of trust. Also, their leaders may be reluctant to punish the offenders. Just keep in mind that even the most devout and long-standing members of your congregation are capable of embezzlement when faced with extreme circumstances such as bankruptcy and substance abuse issues.
To ensure employees and volunteers can’t help themselves to collections, require that at least two people handle all contributions. They should count cash in a secure area and verify the contents of offering envelopes. Next, they should document their collection activity in a signed report. For greater security, encourage your members to make electronic payments on your website or sign up for automatic bank account deductions. Also protect fund disbursements by requiring that a nonaccounting employee or trustee receive and review bank statements and that all checks above a specified amount have dual signatures.
Case for audits
Although your congregation is subject to less IRS scrutiny than even your fellow nonprofit organizations, that doesn’t mean you can afford to ignore financial best practices. Consider conducting periodic audits — even if it’s not required.
Internal controls are just the start
Internal controls are critical to preventing fraud in religious organizations. But a comprehensive risk-reduction program contains other elements, as well. For example, always perform background and credit checks on employees and volunteers who will be entrusted with financial matters. You should also:
- Maintain insurance coverage that’s regularly reviewed as your organization grows and its needs change,
- Have an investment policy that describes procedures for handling donated stock and other securities,
- Undertake an inventory of securities, valuables and equipment at least once a year, and
- Create a personnel manual that outlines the rights and responsibilities of employees and documents expectations regarding work policies, ethical behavior, and technology use, including social media.