5 Ways to Protect Your Church

How to implement thorough policies and procedures.

No matter which side of the gun control debate you fall on, as someone in ministry at a church, news of gun violence hits close to home. The devastating news of gun violence rank among some of the greatest fears of contemporary church leaders.

So what can your church do in the wake of such a tragedy?

With churchgoers around the country wondering if it’s truly safe to attend services, now is the time to create a security plan at your church—one that addresses active shooters. The best way to do this is by listening and learning.

We can listen to the people in our churches about how they have been impacted by the news of gun violence at church and what kind of actions your church could take to help them feel safe. Some of the thoughts and ideas they have may be worth implementing in your church security plan.

Another important way to learn is to look through your own security plans with your leadership team. Listen to the people on your team, learn from each other, and see if there are any changes you need to make. If you discover there are elements missing from your security plan, then you’ll need to have your team work together to resolve them.

To help your discussion get started, here are five key elements to consider for a security plan:

  1. Consider armed security on campus. It may seem like a peaceful approach to not allow armed security, but the Department of Homeland Security and the FBI report that in over 95 percent of active shooter incidents, an active shooter doesn’t stop shooting until someone who is armed shows up. In this circumstance, what would your church do? Among the different ways of approaching armed security, attorney Richard Hammar recommends churches use uniformed off-duty police officers.
  2. Build a proper security team. It’s important to have the right people on your security team: people who have proper training in law enforcement or the military. You’ll also need to conduct proper background checks and training that is specific to your church security plan.
  3. Develop a church communication plan for a crisis. How much does your church congregation need to know about your security team? They don’t need to know everything, but after national news like this, it is important to let your church members know that you have a plan to keep them safe. It is equally important for them to know what they should to do in case of an emergency on your church campus.
  4. Plan for different types of critical events. You should have a plan for an active shooter on your church campus and another plan for an active shooter who may be nearby. Many church security plans only cover an active shooter on the church campus, but it’s just as important to have a plan for a nearby active shooter so you can keep the shooter from coming to your campus and keep your church members from inadvertently running into the shooter’s path.
  5. Don’t overlook domestic violence. The most common active shooter scenarios on church campuses involve a spillover of domestic violence. Thus the most effective active shooter programs for churches will have a specific plan when it comes to domestic violence cases.
  6. Proper security, training, and communication are all key elements to creating both an active shooter program and a successful church security plan. For more articles and resources to help your church, check out our Creating a Church Security Plan page.

Advantage Member Exclusive

Six Goals Churches Should Set in 2020

Prioritize these key tasks to strengthen your ministry in the year ahead.


Editor’s Note: This article is part of the Advantage Membership. Learn more on how to become an Advantage Member or upgrade your membership.

In the December 2019 Advantage Members article, we offered six developments for church leaders to watch in 2020, based on responses we received from members of our Senior Editorial Advisory Board.

This month, we asked the question: If you could advise a church to set one specific goal to accomplish with respect to its legal, tax, finance, or risk management matters in 2020, what would it be and why? Here’s the six goals churches should set in the year ahead, again based on the expertise offered from our Senior Editorial Advisors.

Address the Threat of Child Sexual Abuse

Richard R. Hammar, attorney, CPA, and senior editor, Church Law & Tax

“There is no greater risk faced by churches today than the risk of child sexual abuse on church property or during church activities. I base this conclusion on the following two considerations. First, according to my comprehensive research into church litigation, child sexual abuse has been the number one basis of church litigation and liability for 23 out of the last 25 years. There is no risk that occurs more frequently than this.

Second, churches will find it increasingly difficult to obtain adequate levels of insurance, if any insurance at all, to cover this risk. This means we must be vigilant to protect the most vulnerable among us. It also means that the greatest legal risk faced by churches today, in terms of frequency, may be uninsured.

Even if there is coverage, it often is limited. This poses the greatest existential threat to churches in America today. It’s imperative for church leaders to adopt effective policies to mitigate this risk, and to have those policies drafted or reviewed by an attorney familiar with this issue.”

Next Steps: Review Richard Hammar’s 13-step plan for minimizing the risks of child molestation in churches and implement Hammar’s comprehensive screening, selection, and supervision resource, Reducing the Risk , as an ongoing training tool.

Conduct a Risk Assessment

Vonna Laue, CPA

“Churches should complete a thorough risk assessment if they have not yet done so and update any assessments previously completed. This comprehensive look at church operations identifies existing risks and determines if there is adequate mitigation in place to protect the congregation.

Surprises are seldom pleasant when they are related to finances or risks. Being proactive will allow leadership to plan for, rather than respond to, situations and may allow you to avoid some negative situations entirely.”

Next Steps: Read more about how church staffs and boards can collaborate to build a culture of risk management.

Understand Political Advocacy Laws in an Election Year

Midgett S. Parker, Jr., Attorney

“Be vigilant in knowing the history and current status of the prohibitions regarding politicking for or against candidates and elected officials by religious institutions. Bring in trusted advisors who are knowledgeable on these topics and provide training for your church leaders and staff. Stay out of politics. Encourage the flock to vote. But do not endorse or demonize anyone seeking elected office. Focus on bringing folks to Christ.”

Next Steps: Learn the tax and legal guidelines every church and pastor should know regarding political activities.

Get Smart about Data Security

Michael E. Batts, CPA

“Get the basics of data security right. Don’t let the seemingly complex nature of this topic hinder you from covering the basics, which are not complex. Good policies. Good practices. Good education. Good insurance.”

Next Steps: Learn how to protect your church from cyber threats, how to integrate best practices for avoiding data breaches, and how to select cyberliability insurance to help reduce the financial risks associated with data breaches. Also, go deeper on policies, procedures, and technology that can help with data protection.

Review Employment Practices

Erika Cole, Attorney

“Review your employment practices. From hiring and firing to negligent retention, churches as employers have many areas of legal consideration. Such a review should also include any needed updates to the church’s employment manual. Moreover, due to the new overtime law that took effect on January 1, 2020, many employees who work more than 40 hours per week are eligible for overtime pay under the Fair Labor Standards Act (FLSA).

Most churches assume that the FLSA does not apply to them, but that is likely not that case, and the penalties for not following the FLSA rules are stiff. Rather than assuming the law does not apply, a church should consult competent legal or tax counsel and do so now that the new overtime law has taken effect. Reviewing the church’s employment practices now might save a church a lot of heartache in the future.”

Next Steps: Find out how the new overtime law works. Get help with employee handbooks. Learn the basics of wage-and-hour laws.

Conduct a Compliance Review

Elaine L. Sommerville, CPA

“Do a compliance review. Different from a financial audit, a compliance review will evaluate a church’s compliance with federal tax law as well as many areas of federal employment law. A review can pinpoint critical areas of weakness in a church’s operations as well as provide meaningful guidance for structuring church operations in these critical areas.The gold standard of the compliance review involves both an attorney and a CPA, but even one performed by the CPA alone can provide valuable information to the church.”

Next Steps: Obtain help with federal tax law compliance in Richard Hammar’s annual Church & Clergy Tax Guide.

Matthew Branaugh is editor of content and business development for Christianity Today’s Church Law & Tax.

Advantage Member Exclusive

Six Developments to Watch in 2020

What church leaders should monitor throughout the upcoming year.


Editor’s Note: This article is part of the Advantage Membership. Learn more on how to become an Advantage Member or upgrade your membership.

In this December 2019 Church Law & Tax Advantage Members article, we offer six developments for church leaders to watch in 2020 based on guidance we received from members of our Senior Editorial Advisory Board. In the January 2020 Church Law & Tax Advantage Members article, we offer six goals churches should set in the year ahead, again based on the expertise offered from Senior Editorial Advisors.

What is one development related to church administration/management that you are watching closely in 2020, and why?

Richard Hammar , attorney, CPA, and senior editor, Church Law & Tax: Student Aid and Religious Institutions

“I am monitoring a few cases pending before the United States Supreme Court. In one case, Espinoza v. Montana Department of Revenue, the Court will decide if a state can shut down a student aid program because parents can select a religious school. Obviously, this case is directly relevant to any church or denomination that operates a private school. Prior decisions by the Court suggest that student-aid programs that provide funds to low-income parents for tuition at a school of their choice, including a religious school, are constitutionally permissible. We shall see. Any ruling affirming the student-aid program will be a huge boost to religious education.”

What’s next. Oral arguments for the case take place before the Supreme Court on January 22, 2020. A decision is expected by June.

Vonna Laue , CPA: Employee Classifications

“California passed Assembly Bill 5 (AB5, the so-called “Uber law”), which will take effect in January. While this may not directly impact churches, it highlights an ongoing concern. There has been significant attention on classifying employees and independent contractors and yet many churches have not addressed the issue. California’s legislation will likely cause additional work and penalties in the future. The federal government focused on this issue previously and it now appears states are beginning to join the cause. Churches nationwide need to be aware of the regulations and make sure they are compliant as a matter of good stewardship and good citizenship.”

Watch for a “ripple effect.” JD Supra, a legal news website, reports 20 states previously adopted employment classification tests similar to the one California just passed. “The passage of AB5 could certainly hasten the . . . trend and expand it not only to other states but to other claim types,” the site notes. “Because California’s economy is larger than any other US state, legal and political developments there tend to have a ripple effect both across other states and at the federal level.”

More guidance. This Church Law & Tax article provides more details regarding how to classify a worker as either an employee or an independent contractor.

Midgett Parker , attorney: The Church and the 2020 Election

“The one development that I hope we will not see would be our faith institutions getting involved in political campaigning for those running for elected positions. As far as retaining tax-exempt status, there is a clear separation between church and state that will be closely watched this election cycle. There are some who are waiting to see if the faith community will support or oppose individuals running for political office. There are elements within our American society waiting for lines to be crossed by our institutions of faith in order to promote an agenda to strip faith institutions of their preferred tax-exempt status.”

What is politically permissible? For a comprehensive view on the tax and legal guidelines churches and clergy need to know for the upcoming 2020 election—including what is and is not permissible as far as tax-exempt organizations are concerned—check out Politics and the Church, a 28-page, downloadable resource from Church Law & Tax.

Michael E. Batts , CPA: Virtual Churches

“The Internal Revenue Service’s position with respect to churches that do not have physical gatherings has been that they do not qualify as churches under federal tax law. The IRS applies an ‘associational’ test. Given the reality that church congregations do meet virtually, and the fact that ‘virtual’ church gatherings are an increasingly significant part of the church arena, I expect the authoritative guidance in this area to evolve.”

Go deeper. Read the IRS’s current definition of churches, as well as this 2014 letter the agency issued when it rejected a web-based church’s application for recognition as a tax-exempt entity. Continue monitoring ChurchLawAndTax.com and the free weekly Church Finance Update e-newsletter for future updates.

Erika Cole , attorney: Gay Rights and Employment

“While the Obergefell v. Hodges decision in 2015 legalized same-sex marriage in our country, the legal issues surrounding the balancing act between LGBTQ rights and the religious community are far from over. By June of 2020, we expect to have rulings from the US Supreme Court in Bostock v. Clayton County, Georgia, Altitude Express v. Zarda, and Equal Employment Opportunity Commission v. Harris Funeral Homes cases—all three cases involve a gay or transgender employee who claims discrimination. Neither of the three involve a church as a party. Nevertheless, these cases will likely shed additional light on how LGBTQ matters and religious beliefs may be viewed by the courts in the employment arena, especially if LGBTQ rights are expanded in a manner that would impact religious employers.”

For a closer look. The November 2019 Church Law & Tax Advantage Members article takes a closer look at these three cases and their potential implications for churches and religious organizations with respect to employment decisions involving their nonministerial employees.

Elaine Sommerville , CPA: The Parking Lot Tax

“The one headline we are watching is if Congress will repeal the inclusion of expenses associated with transportation fringe benefits as unrelated business income (what many have called the “parking lot tax”). We know the repeal of the law has broad nonpartisan support, but Congress has yet to gain the coordination between the two parties to repeal the burdensome tax. While the tax has minimum effect on the majority of churches, it creates a compliance consideration that must be considered by churches. It also creates a tax burden for many nonprofits, such as hospitals, universities, and others.”

Update. The provision that disallowed deductions for transportation fringe benefits provided to employees was repealed in late 2019. Churches that had paid the tax were able to file an amended Form 990-T for a refund. See ‘“ParkingLot Tax’ Officially Repealed” for more details, including the provision’s backstory.

Matthew Branaugh is editor of content and business development for Christianity Today’s Church Law & Tax.

Are We Keeping It Confidential?

Nine question checklist to ensure financial and personal confidentiality.

Confidentiality is always a high priority among church staff and members. Use this checklist to guage how your church is doing at securing confidential information.

Download a PDF version of this checklist.

Creating a Culture of Confidentiality

Verbal sharing is sometimes overlooked in discussions about church-office confidentiality. On the phone or in person, office employees field questions about personal appointments or express concerns about church members.

Put it in writing.

One church administrator at a large Baptist church on the West Coast said that all office workers must sign a statement of confidentiality before being hired. Employees that breach this rule are dismissed. Several churches include a confidentiality clause in their employee handbooks.

Clear the area.

Information can be leaked unintentionally. If a secretary gets a phone call from a distraught person, the secretary may have to ask questions before directing the call. The secretary should make sure others are not present who might hear this confidential conversation. If potential eavesdroppers are nearby, the caller should be put on hold until the area can be cleared.

Put a lid on the log.

Many offices log in phone calls or keep copies of messages. This information could be harmful if shared with others. It might be wise to limit access to the church office, particularly after office hours.

Stress confidentiality.

People who work in the church office should be regularly re­minded of their role in maintaining confidentiality. What each person should ask prior to divulging information is, “Does this person have a qualified need to know it?” If not, the information should be kept quiet.

To learn more about confidentiality, check out attorney Richard R. Hammar’s commentary on the topic in Pastor, Church & Law: Your ultimate reference guide to understanding the legal issues and responsibilities of the church in America. Full access to this guide is available to with a Church Law & Tax membership.

IRS Releases Proposed Revision for Form W-4 for 2020

New form should make accurate withholding easier for church employees.

The Internal Revenue Service (IRS) has issued a draft of a new Form W-4, Employee’s Withholding Allowance Certificate (IR-2019-98), that is designed to make accurate withholding easier for employees starting next year.

The revised form implements changes made following the 2017 Tax Cuts and Jobs Act, which made major revisions affecting taxpayer withholding. The redesigned Form W-4 no longer uses the concept of withholding allowances, which was previously tied to the amount of the personal exemption. Due to changes in the law, personal exemptions are currently not a central feature of the tax code.

The IRS and US Department of the Treasury collected extensive feedback over the past year while working closely with the payroll and tax community to develop a redesign that best serves taxpayers.

“The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors,” said IRS Commissioner Chuck Rettig in a prepared statement.

The IRS expects to release a near-final draft of the 2020 Form W-4 soon to give employers and payroll processors the tools they need to update systems before the final version of the form is released in November.

Note that this draft Form W-4 is not for current use. It is a draft of the form to be used starting in 2020. Employees who have submitted a Form W-4 in any year before 2020 will not be required to submit a new form merely because of the redesign. Employers can continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.

Tip. Churches should encourage their employees to do a “Paycheck Checkup” on the IRS website as soon as possible to see if they are withholding the right amount of tax from their paychecks, particularly if they had too much or too little tax withheld when they filed their most recent income tax returns. People with major life changes, such as a marriage or a new child, should also check their withholding.

IRS Q&A

The IRS has provided several questions and answers to assist employers and employees in understanding the new form. Here are five from the site that are the most relevant to churches:

Does this mean our software will need two systems—one for forms submitted before 2020 and another for forms submitted after 2019?

Not necessarily. The same set of withholding tables will be used for both sets of forms. You can apply these tables separately to systems for new and old forms. Or, rather than having two separate systems, you may prefer to use a single system based on the redesigned form. To do this, you could enter zero or leave blank information for old forms for the data fields that capture the information on the redesigned form but was not provided to you under the old design. Additional guidance will be provided on the payroll calculations needed based on the data fields on the new and old forms.

How do I treat employees hired after 2019 who do not submit a Form W-4?

New employees who fail to submit a Form W-4 after 2019 will be treated as a single filer with no other adjustments. This means that a single filer’s standard deduction with no other entries will be taken into account in determining withholding. The IRS and the Treasury Department anticipate issuing guidance consistent with this approach.

Are employees hired after 2019 required to use the redesigned form?

Yes. Beginning in 2020, all new employees must use the redesigned form. Similarly, any employees hired prior to 2020 who wish to adjust their withholding must use the redesigned form.

What about employees hired prior to 2020 who want to adjust withholding from their pay dated January 1, 2020, or later?

Employees must use the redesigned form.

May I ask all of my employees hired before 2020 to submit new Forms W-4 using the redesigned version of the form?

Yes. You may ask, but as part of the request you should explain that:

• they are not required to submit [a] new Form W-4, and

• if they do not submit a new Form W-4, withholding will continue [to be] based on a valid form previously submitted.

For those employees who furnished forms before 2020 and who do not furnish a new one after 2019, you must continue to withhold based on the forms previously submitted. You are not permitted to treat employees as failing to furnish Forms W-4 if they don’t furnish a new Form W-4. Note that special rules apply to Forms W-4 claiming exemption from withholding.

For more answers to questions about taxes, see my annual Church & Clergy Tax Guide.

Related Topics: |

The 10 Commandments of Church Management

The 10 commandments of church management cover everything from intellectual property to unrelated business income.

The 10 Commandments of church management offer a basic framework for ensuring your church does not veer too far off the path of sound financial, tax and governance matters.

I. Thou shalt not allow the church’s intellectual property to be used for personal purposes.

Rule: Under the work for hire doctrine, any property developed within the scope of the job duties of an employee is the property of the employer.

Practice Tip: An intellectual property policy should be carefully crafted and adopted. It should address all areas of concern, such as curriculum, sermons, and music.

II. Thou shalt not have a substantial amount of revenue derived from unrelated business income.

Rule: An organization may have some unrelated business income, but too much can endanger the exempt status of the church.

Unrelated business income is generated from activities that are r egularly carried on; not substantially related to exempt purposes, and trade or business.

Practice Tip: The rules are complicated and there is an exception to every exception. Each activity must be separately analyzed. The commercial manner in which an activity is conducted can create unrelated business income even if the activity seems to be related.

III. Thou shalt carefully design outreach programs to provide for the benefit of a charitable class.

Rule: The church’s programs cannot create unacceptable private benefit to individuals and organizations. Therefore, all programs have to be able to pass a test that any benefit to an individual is permissible private benefit and will not endanger the exempt purposes of the church. Such programs include the benevolence program and scholarship programs.

Practice Tip: The church should construct policies and guidelines to be followed for these programs that comply with the applicable rules.

IV. Thou shalt not allow any transactions with another party to be conducted at more than or less than fair market value.

Rule: Any transaction may benefit the church, but the transaction may not provide a greater benefit to the other party (with the exception of another nonprofit organization). Transactions with disqualified persons may be subject to intermediate sanctions of 25 percent to 200 percent under IRC Section 4958.

Practice Tip: Fair market value should always be established for a transaction. Where a control party is involved, this should be determined and documented in writing. For example, competitive bids should be obtained for transactions involving outside services, purchases, or sales.

V. Thou shalt not endorse any candidate for any public office, nor dedicate a substantial amount of your assets to legislative activities.

Rule: No support or opposition may be given to a political candidate and only limited support can be dedicated to legislative activities.

VI. Thou shalt fully document every aspect of a control party’s (disqualified person’s) compensation package within the requirements of IRC Section 4958.

Rule: A disqualified person is someone who carries influence in the church, either currently or within the past five years. Examples include the senior pastor and other senior leaders (whether credentialed ministers or not); board members; committee members who oversee key areas of the church; and, family members of any of those individuals.

The compensation paid to a disqualified person must meet the following criteria:

• It must be decided by the independent persons.

• It must be based on outside, comparable data.

• It must be documented in writing along with the basis for the amount of compensation determined.

Practice Tip: Each year, analyze every benefit provided to a disqualified person and re-document these in writing prior to the start of the next year. This includes cash compensation, noncash compensation, and fringe benefits. (To go deeper on compensation-setting, and the topic of disqualified persons, see Chapter 2 of CPA Elaine Sommerville’s Church Compensation, Second Edition.)

VII. Thou shalt document all expenditures as to the exempt purpose of the expenditure and maintain documentation as required by law for those special expenses involving meals, entertainment, and travel.

Rule: Every expenditure of a church must be documented as to the exempt purpose of the expense. For meals, entertainment, and travel, the “who, what, when, where, and why” must be documented.

Practice Tip: The following should be adopted and maintained by the church:

• An accountable plan for all business expenses.

• A credit card acceptance policy that requires employees to submit receipts for all charges.

• A formal policy should be adopted to require immediate repayment of any expense that is determined to be a personal expense.

VIII. Thou shalt conduct all designated fundraising programs with the greatest of care and caution and don’t mess up the contribution receipts.

Rule: Designated contributions must be used as designated unless the restriction is released by the donor or by the appropriate state office or court.

Practice Tips:

• Attempt to build in a provision that allows excess funds to be redirected to another ministry of the church or to the general fund.

• Make sure everyone is familiar with the rules regarding events that include a contribution where benefits may be exchanged.

IX. Thou shalt adhere to all payroll/labor rules—even the ones you don’t like.

Rule: Churches are subject to many of the same payroll tax rules as other organizations, with the complication of special rules for ministers. Additionally, the majority of labor law rules apply to churches and religious ministries.

Practice Tip: Pay special attention to the following areas:

• Classification of ministers.

• Classification of employees vs. independent contractors.

• Deposit rules for payroll taxes and filing requirements for Forms 941, 944, W-2, and 1099-Misc.

• Taxation of fringe benefits.

• Designation of housing allowance.

X. Thou shalt endeavor to determine good governance procedures and adhere to them consistently.

Rule: Good governance equals good organization. Follow the basics:

• Knowledge of what the organization’s exempt purposes are.

• Good governing documents.

• Well-documented actions of the governing body(ies).

• Good policies.

• Good people.

• Keep the corporate status up to date and in good standing.

Practice Tip: Review governing documents, policies, and procedures and make sure that they are actually being followed.

Adapted from “The Ten Commandments of Religious Organizations,” by Frank and Elaine Sommerville. Used with permission.

Additional resource:

Church Compensation – Second Edition with 2023 Updates: From Strategic Plan to Compliance.

IRS Official: Expect More Church Audits Regarding ACA Compliance

Many churches won’t be investigated, but here’s why your church should still verify it is compliant.


Editor’s Note: This article was updated on July 17, 2019, to correct information regarding churches with between 2 employees and 50 full-time equivalent employees and what is—or isn’t—required under the Affordable Care Act.

The Internal Revenue Service (IRS) is initiating hundreds of church exams to test compliance with the Affordable Care Act (ACA), a key IRS official overseeing exempt organizations announced late last month.

The update was delivered by Margaret Von Lienen, the Director of Exempt Organizations for the IRS, to the TEGE Exempt Organizations Advisory Council (Council), a national group fostering communication between the IRS and practitioners. I attended the update meeting as a member of the Council.

Von Lienen stressed the IRS would comply with the church audit rules. She said examination notices are currently going out and she expects them to continue through the rest of this year.

Though the total number of audits promised—in the hundreds—still will only affect a small percentage of churches overall, news of this specific enforcement effort should prompt all church leaders to double check whether their churches are compliant.

No one should panic. But everyone should verify all is well under their watch.

Representing a church that received an ACA penalty

I well understand the issues Von Lienen raised in her remarks. My firm represented a church last year that received an ACA penalty notice for more than $100,000 related to violations of IRC Sec. 4980H(a), the provision related to the employer shared responsibility rules. The church sponsored a group health plan, but one of its employees opted out of the church’s group health insurance. After opting out, the employee later signed up for coverage through an insurance exchange and received a related credit—one resulting in a substantial reduction in the cost for health insurance (as opposed to his cost for participating in the church’s group health insurance).

For employers covered by the ACA’s mandatory coverage provision, the only way for an employee to opt out of employer coverage is to go to another group plan, such as a spouse’s plan. The church allowed him to opt out of its group health insurance but failed to inform him that he was not eligible to sign up on the insurance exchange for any individual health plan. The church also did not require the employee to represent that the church was participating in another group health insurance plan.

An employer may be penalized $2,500 per employee (based on 2019 figures) for each employee over 30 employees if an employee buys individual health insurance through the exchange. While my firm successfully secured a waiver of the penalties in this specific church’s case, the penalty assessment demonstrates how easily any church can be assessed ACA penalties.

The ACA is extremely complex and contains no exceptions applicable to churches. The penalties can be severe, up to $100 per day per employee. Even minor infractions can trigger significant penalties. While many provisions only apply to churches with 50 or more full-time equivalent employees (FTEs), even smaller churches may run afoul of provisions applicable to health benefit plans with as few as 2 participants.

The specifics on the ACA audits

Von Lienen stated that any ACA-related exams would be conducted according to the church audit rules under IRC Sec. 7611. These rules require the IRS to have written evidence of noncompliance to trigger an initial notice of examination. Additionally, the examinations must be approved by a high-ranking Treasury official and provide notice of examination conference. The IRS is matching ACA mandatory filings with W-2s or other filings to create the mandated written evidence needed to support these examinations of churches.

The two places most likely to be scrutinized (because they have proven most problematic for churches in terms of compliance with the ACA):

  • Opt-out process: The process in which churches allow employees to opt out of the group health insurance the church provides. While there are allowances for this process, there are rules to be followed to allow the opt-out to comply with the ACA.
  • Use of individual health insurance: Before the ACA, churches would provide reimbursements to allow employees to buy their own health insurance or go under a spouse’s plan. While the ACA prohibits this, many churches have continued that practice, even though it is no longer allowed, especially for those employees eligible for Medicare (which might be much less expensive than group health insurance).

A complete discussion on ACA compliance is beyond the scope of this article. However, a brief review of the highlights follows:

  • If the church has 50 or more FTEs, the vast majority of the ACA applies to it;
  • If the church has between 2 employees and 50 FTEs, the church still must comply with certain portions of the ACA;
  • Churches with between 2 employees and 50 FTEs are not required to offer group health insurance to its employees; and
  • If the church offers access to group health insurance, and has 2 or more employees, the church must comply with group health benefit rules in the ACA.

Every church should audit itself for ACA compliance. Each church should at least take the following two defensive steps:

  • Perform a self-audit or hire someone independently to conduct a compliance audit to verify compliance; and
  • If the church discovers noncompliance, then the church should immediately correct the problem areas.

If the church is contacted by the IRS, then it should engage a licensed tax professional who is experienced representing churches in exams conducted by the IRS. This tax professional can:

  • Work with the IRS during the pre-examination conferences. The church has the right to request a conference with the IRS, before the exam begins, to narrow the scope of the exam to relevant issues;
  • Assist the church in working through that defined issue (or issues) with the IRS and perhaps keep the IRS focused on the narrow issues relating to the ACA; and
  • Assist the church in determining the steps to correct the issues, if noncompliance is determined. For instance, paperwork sometimes gets mishandled, inadvertently triggering an examination. The professional can assist with straightening out that paperwork.

Until we begin seeing the IRS examination letters promised by Von Lienen, we will not know specific details. But this newsworthy announcement creates a reminder for churches to review their ACA compliance. Virtually all employers with more than one employee must comply with some portion of the ACA. There are no exceptions or exemptions for churches. If churches are unsure of their compliance, there is a good chance they are not compliant.


Frank Sommerville
is an attorney, CPA, and shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P.C. He has been an editorial advisor for Church Law & Tax since 2009.

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Few Church Leaders Discuss Abuse Crisis Says Pew Research

Most startling is how little church-goers in Protestant faith traditions indicated leaders actively raised the topic.

The News

In a news release issued July 10, Pew Research Center said it conducted a survey this spring asking US adults (those who say they attend religious services a few times a year or more) whether “the clergy or other religious leaders at their place of worship have spoken out about sexual harassment, assault or abuse.” The survey results: “[A]bout three-in-ten say their clergy have spoken out about sexual abuse (29%), while two-thirds say they have not heard their clergy say anything about this topic (68%).”

Pew Research Center also notes:

  • “There are similar patterns among religious groups, with the exception of Catholics. Catholics are more likely than other U.S. Christians to hear clergy talking about sex abuse in general (41% among Catholics vs. 27% among Protestants). And Catholics who attend Mass at least a few times a year are more likely to say they hear their clergy talk only about supporting victims (24%), compared with a smaller share among Protestants (11%).”
  • “Among those who attend religious services at least a few times a year, one-in-ten say their clergy have spoken out both in support of victims of sexual abuse and to caution against false accusations. In terms of regular attenders who are only hearing one type of message from their clergy, more hear only about supporting victims (14%) than only about false accusations (2%).”

The Church Law & Tax Take

These results are surprising. Based on the Pew Research Center study, less than one-third of church leaders have publicly discussed concerns recently regarding sexual abuse, sexual harassment, and other forms of sexual misconduct. Perhaps most startling is the fewer number of respondents from Protestant faith traditions who indicated leaders actively raised the topic.

All of this comes despite ample headlines over the past 18 months revealing numerous incidents and cover-ups involving houses of worship. The Catholic Church has faced this controversy for decades. But Protestant denominations have quietly faced their own crisis (and attorney Richard Hammar, Church Law & Tax’s co-founder and senior editor, has long noted the abuse threat in churches and religious communities). The continuing #MeToo and #ChurchToo movements promise to keep these matters in the spotlight for years to come.

Churches ignore these developments at their own peril. The old cliché says “what gets measured gets done.” Similarly, one can argue that “what gets discussed gets addressed.” The ability to shape a culture or environment, particularly within a congregation, depends largely on what the church’s leadership prioritizes. If leaders avoid discussing the threat of abuse and misconduct in their congregations, they very well may allow ongoing cases occurring in their midst to continue, not to mention leave their churches more vulnerable to future cases.

How can leaders respond? Consider conversations at upcoming staff and board meetings. Raise awareness and discussions about how to begin talking about this threat within the congregation. Awareness and education can go a long way toward identifying harmful activity, bringing it to light, and discouraging future attempts.

The following articles can help with these conversation-starters and education:

Matthew Branaugh is an attorney, and the content editor for Christianity Today's Church Law & Tax.

How New IRS Reform Affects Taxpayers

Increased penalties, new improvements will affect all tax-filers, including pastors and staff members.

Earlier this year, Congress enacted, with substantial bipartisan support, the 100-page Taxpayer First Act of 2019 to modernize and improve the Internal Revenue Service (IRS). The eleven provisions most relevant to churches and their employees are summarized below. Church leaders should make sure their employees are informed of these provisions.

1. Filing Form 1099-MISC electronically

The tax code does not presently require the IRS to make available an internet platform for the preparation or filing of information returns, such as the Form 1099 series. The Act embodies the philosophy that it is desirable to provide a simple and secure manner for small employers to file tax information returns electronically, and that an online platform for submitting information returns to the IRS, similar to SSA Business Services Online, could improve compliance of small employers while reducing their administrative burden.

Accordingly, the Act allows small employers to prepare and file information returns such as IRS Form 1099–MISC online while preparing the payee statements and creating necessary business records. The Act requires the Secretary of the Treasury (or his or her delegate) to make available, by January 1, 2023, an internet website or other electronic medium (the ‘‘website’’), with a user interface and functionality similar to the Business Services Online.

2. Increase failure-to-file penalty

A taxpayer who fails to file a tax return on or before its due date is subject to a penalty equal to 5 percent of the net amount of tax due for each month that the return is not filed, up to a maximum of 25 percent of the net amount. If the failure to file a return is fraudulent, the taxpayer is subject to a penalty equal to 15 percent of the net amount of tax due for each month the return is not filed, up to a maximum of 75 percent of the net amount. The penalty does not apply if it is shown that the failure to file was due to reasonable cause and not willful neglect. If a return is filed more than 60 days after its due date, and unless it is shown that such failure is due to reasonable cause, then the failure-to-file penalty may not be less than the lesser of $205 or 100 percent of the amount required to be shown as tax on the return. These penalties for failing to file tax returns have not been increased in several years. Congress concluded that an increase was in order and would encourage the filing of timely and accurate returns.

The Act provides that if a return is filed more than 60 days after its due date, then the failure-to-file penalty may not be less than the lesser of $330 (adjusted for inflation) or 100 percent of the amount required to be shown as tax on the return.

3. Payment of taxes with credit and debit cards

Under current law, the IRS cannot accept credit and debit card payments for taxes directly due to a restriction on the payment of fees charged by the card issuer. As a result, the IRS must use a third-party processor to accept credit and debit card payments. This Act allows the IRS to directly accept credit and debit card payments for taxes, provided that the fee is paid by the taxpayer. The IRS is directed to seek to minimize these fees when entering into contracts to process credit and debit cards.

4. Establishment of Internal Revenue Service Independent Office of Appeals

The Act codifies the requirement of an independent administrative appeals function at the IRS. The Act seeks to generally ensure that all taxpayers are able to access the administrative review process, allowing for their cases to be heard by an independent decision maker. The Act also ensures that staff working in the Independent Office of Appeals generally do not receive advice from the Office of Chief Counsel employees working on the case prior to its referral for administrative review. Further, the Act provides taxpayers access to “the case against them.” This provision would require the IRS to provide certain individual and business taxpayers with their case files, if requested, prior to the start of any dispute resolution process.

5. Comprehensive customer service strategy

The IRS is required to develop and submit to Congress a comprehensive customer service strategy. The strategy must address how the IRS intends to provide assistance to taxpayers, in part by ensuring adequate customer service training for its own employees and taking into account best practices from the private sector. The strategy must also establish metrics and benchmarks for measuring the IRS’s success in implementing this strategy.

6. IRS Free File program

The IRS currently works with electronic tax preparation services to provide free tax preparation software and electronically fillable forms. This program is known as the IRS Free File program. Generally, there is no fee for taxpayers using the Free File program provided they meet certain income thresholds. The Act codifies the existing Free File program and requires the IRS to continue to work with private tax software providers to maintain, improve, and expand the program. The Act also requires Free File program members to continue to provide basic fillable forms to all taxpayers.

7. Low-income exception for payments otherwise required in connection with a submission of an offer-in-compromise

The IRS is authorized to enter into an offer-in-compromise (OIC) agreement with a taxpayer to settle a tax debt at a lower amount than what the taxpayer generally owes. Generally, when proposing an OIC to the IRS, the taxpayer must pay an application fee and provide an initial nonrefundable lump sum payment. The IRS has the authority to waive these payments. Typically, the IRS does not require taxpayers certified as low-income (defined as those with incomes below 250 percent of the federal poverty level) to include the application fee and initial payment. The Act codifies the existing low-income exception with respect to any user fee or upfront partial payment imposed with respect to any OIC.

8. IRS seizure requirements with respect to structuring transactions

The Bank Secrecy Act (BSA) mandates reporting and record-keeping requirements, including the reporting of currency transactions exceeding $10,000, to assist federal law enforcement and regulatory agencies in the detection, monitoring, and tracing of certain monetary transactions. To circumvent these reporting requirements, individuals may structure cash transactions to fall below the $10,000 reporting threshold (also known as “structuring”). Structuring can be used to conceal illegal cash-generating activities, such as selling of narcotics, or income earned legally in order to evade the payment of taxes. Structuring (or attempts to structure) for the purpose of evading the reporting and record-keeping requirements is subject to both civil and criminal penalties. The Act requires the IRS to show probable cause that funds believed to have been structured to avoid BSA reporting requirements are derived from an illegal source or are connected to another criminal activity. This provision also provides important procedural protections for individuals, including a post-seizure hearing within 30 days of the seizure.

9. Misdirected tax refund deposits

This Act directs the IRS to establish procedures for taxpayers to report instances where they did not receive an anticipated electronic fund transfer or a refund was erroneously delivered to the wrong taxpayer, and also to ensure the IRS will recover the erroneous refunds and deliver them to the correct taxpayer.

10. Notification of suspected identity theft

Identity theft and refund fraud victims often may be unaware that their identity has been used fraudulently or, when they are aware, may not be fully informed of the outcome of their case. The Act requires the IRS to notify a taxpayer if there has been any suspected unauthorized use of a taxpayer’s identity or that of the taxpayer’s dependents; if an investigation has been initiated and its status; whether the investigation substantiated any unauthorized use of the taxpayer’s identity; and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving such victims the ability to pursue civil action against the perpetrators.

11. Prohibition on rehiring any employee of the IRS who was involuntarily separated from service for misconduct

In 2014, Congress found that the IRS had rehired hundreds of employees who had been involuntarily separated for serious offenses such as fraud, failure to file a return, falsification of documents, and unauthorized access to taxpayer information. The Act prohibits the IRS from rehiring any employee of the IRS who has been involuntarily separated for misconduct.

Richard R. Hammar is senior editor of ChurchLawAndTax.com.

Annual Nondiscriminatory Policy Reporting Deadline Looms for Church-Run Schools

Filing Form 5578 is one of the most commonly ignored federal requirements of church-run schools and preschools.

Last Reviewed: April 15, 2024

Filing the certificate of racial nondiscrimination (IRS Form 5578) is one of the most commonly ignored federal reporting requirements of private schools and preschools, including ones operated, supervised, or controlled by churches and other religious organizations.

But it is due every year.

What is a private school?

A private school is defined as an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly conducted. The term includes primary, secondary, preparatory, or high schools, as well as colleges and universities, whether operated as a separate legal entity or an activity of a church.

Key point.
The term school also includes preschools, and this is what makes the reporting requirement relevant for many churches. As many as 25 percent of all churches operate a preschool program.

Private schools must meet certain requirements

The IRS requires that a private school have:

  • a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that is has a racially nondiscriminatory policy toward students.
  • a statement of its racially nondiscriminatory policy toward students in all its brochures and catalogs dealing with student admissions, programs, and scholarships.

The IRS also requires that a school make its racially nondiscriminatory policy known to all segments of the general community served by the school either online, in the local newspaper, or via broadcast media (see below).

    What is an acceptable public notice?

    The IRS has offered this template:

    Notice Of Nondiscriminatory Policy As To Students

    The (name) school admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.

    Exceptions to the public notice requirement

    The publicity requirement is not required if one or more exceptions apply. These include the following:

    • During the preceding three years, the enrollment consists of students at least 75 percent of whom are members of the sponsoring church or religious denomination, and the school publicizes its nondiscriminatory policy in religious periodicals distributed in the community.
    • The school draws its students from local communities and follows a racially nondiscriminatory policy toward students and demonstrates that it follows a racially nondiscriminatory policy by showing that it currently enrolls students of racial minority groups in meaningful numbers.
    • The school can demonstrate that all scholarships or other comparable benefits are offered on a racially nondiscriminatory basis.

    Online notice options

    Private schools can post their racially nondiscriminatory policy online, per IRS Revenue Procedure 2019022 (2019).

    To do that, a school must display a notice of its racially nondiscriminatory policy on its primary publicly accessible Internet homepage at all times during its taxable year (excluding temporary outages due to website maintenance or technical problems) in a manner reasonably expected to be noticed by visitors to the homepage.

    Per the IRS, a publicly accessible Internet homepage is one that does not require a visitor to input information, such as an email address or a username and password, to access the homepage.

    Factors to be considered in determining whether a notice is reasonably expected to be noticed by visitors to the homepage include the size, color, and graphic treatment of the notice in relation to other parts of the homepage, whether the notice is unavoidable, whether other parts of the homepage distract attention from the notice, and whether the notice is visible without a visitor having to do anything other than simple scrolling on the homepage.

    A link on the homepage to another page where the notice appears, or a notice that appears in a carousel or only by selecting a dropdown or by hover (mouseover) is not acceptable. If a school does not have its own website, but it has webpages contained in a website, the school must display a notice of its racially nondiscriminatory policy on its primary landing page within the website.

    Other notice options

    A school may publish its racially nondiscriminatory policy at least once a year in a newspaper of general circulation, or via broadcast media.

    Filing the certificate of racial nondiscrimination

    The certificate of racial nondiscrimination is due by the fifteenth day of the fifth month following the end of the organization’s fiscal year.

    However, for organizations that operate on a calendar-year basis, the Form 5578 deadline is May 15, 2024. Schools must also maintain supporting records documenting compliance with the policy in order to retain their tax-exempt status.

    Form 5578 is easy to complete. A church official simply identifies the church and the school and certifies that the school has “satisfied the applicable requirements of sections 4.01 through 4.05 of Revenue Procedure 75-50.”

    Key point. Independent religious schools that are not affiliated with a church or denomination and that file Form 990 do not file Form 5578. Instead, they make their annual certification of racial nondiscrimination directly on Form 990 (Schedule E).

    Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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    Q&A: Are Discounts to Church Events Taxable Income?

    Understanding what IRS Publication 15-B and IRC Section 132(a)(2) does and doesn’t say.

    We want to offer all staff who work 32 hours a week or more discounts to church retreats and functions. Does the “employee discounts” exclusion outlined in IRS Publication 15-B apply or must discounts be treated as taxable income to the employees? The publication says: “This exclusion applies to a price reduction you give your employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services.”

    I would also like to point out that Publication 15-B says, “You can generally exclude the value of an employee discount you provide an employee from the employee’s wages, up to” certain limits—including “a discount on services, 20% of the price you charge nonemployee customers for the service.”
    There are some caveats to this discount, and this one may apply to your executive leadership: “You can’t exclude from the wages of a highly compensated employee any part of the value of a discount that isn’t available on the same terms to” other employees.
    If you are giving a discount of 20 percent or less to any employee, it is nontaxable. If the discount is more than 20 percent, then the term “substantial services,” as you quoted above, will need clarification from a tax expert.
    For some additional insights, I reached out to nonprofit CPA Mike Batts, a nationally noted expert, an editorial advisor of Church Law & Tax, and author of Church Finance: The Church Leader’s Guide to Financial Operations. He concludes his remarks by dealing specifically with the terms “line of business” and “substantial services,” which relates specifically to whether an employee needs to work in the department conducting the discounted activity in order to be eligible for the discount.
    Here, then, is what Mike had to say:

    The nontaxable fringe benefit rule that your reader is referring to is the “qualified employee discount” exclusion found in Internal Revenue Code Section 132(a)(2). Under this rule, an employer can generally exclude from an employee’s wages the value of an employee discount of up to 20 percent of the price charged to nonemployee customers for the same service. An employee discount provided to “highly compensated” employees is nontaxable only if the discount program does not discriminate in favor of highly compensated employees. In other words, the discount given to highly compensated employees should not be more favorable than that given to other employees. For this purpose, the term “highly compensated employee” generally refers to individuals whose total compensation exceeds $125,000. This is the amount applicable to 2019 and it is indexed annually for inflation. Note that for this purpose, the compensation used in determining whether an individual is highly compensated is the compensation of the prior year. The definition of “compensation” varies depending on the circumstances, but it generally does not include a validly designated clergy housing allowance within allowable limits. As far as the “substantial services” question, unfortunately, neither the Internal Revenue Code nor the related Regulations provide a definition or “bright-line” test for what constitutes “substantial services.” However, the Regulations do indicate that an employee who performs substantial services that directly benefit more than one line of business of an employer is treated as performing substantial services in all such lines of business. In our experience, we believe it is likely that all of the ministry activities of a traditional church taken together would comprise a single line of business for purposes of this fringe benefit rule. In practicality, churches rarely consider their employees to work in separate lines of business as that concept would be applied to this issue.

    Visit ChurchLawAndTaxStore.com and check out these resources for additional insights:
    David Fletcher has more than 35 years of experience as a pastoral leader in churches. In 2003, he founded XPastor, a resource website for executive pastors, and XP-Seminar, an annual church leadership conference.

    Preventing Abuse in Youth Ministries

    Churches need to develop solid boundaries and a good reporting structure.

    When I started doing research for the Church Law & Tax resource, Youth Ministry in a #MeToo Culture, my stomach was in knots. I began my process by Googling “youth pastor in jail sexual abuse,” expecting to find a few news stories. Within two days, I had over 30 individual cases, and I’d barely scratched the surface of the abuse allegations that took place. My heart broke for these students, for these pastors, and for these church bodies.

    Youth ministry is important to me; it was a safe space for me in junior high and high school, and as a post-college young adult, I was a youth leader. I see youth ministry as a vital space for transformation, safety, and teaching teenagers how to live in Christian community and develop stronger relationships with God. It’s also a place for having innocent fun.

    But when abuse creeps in, that innocence is destroyed. Telling families, let alone students, that the man or woman who led their ministry for years turned out to be a sexual abuser, a predator, or a liar, is crushing.

    As Millennials seem to be walking away from their faith in droves, I have to ask myself if constant allegations of two-faced pastors sleeping with students or congregation members has anything to do with it. How can a teenager trust God when everything they were taught about him was taught by a man who is now no longer allowed on the church premises? How can the world trust the church when the top reason churches go to court each year involves an abuse allegation?

    It’s uncomfortable to think about. If you’re reading this as a youth pastor, I know your desire is to protect your students. But you’re fallible. And so are your leaders. The only way you’ll be able to ensure your ministry is a safe place is through boundaries, and a strong, no-shame reporting structure. You won’t go to jail for telling your supervisor that you’re struggling with feeling attracted to one of your students.

    That honesty will open up doors to help prevent anything from happening. It may preserve your career, and it might save your ministry from heartbreak. But the most dangerous thing you can do in the situation of student attraction is to not recognize it for what it is: the greatest threat to your future life you may ever experience.

    Where there is no accountability, there is no safety. Even with all the accountability rules and procedures, no one can assure that you or one of your volunteer leaders will not victimize one of your youth. However, following rules and procedures such as the ones discussed in Youth Ministry in a #MeToo Culture will greatly reduce the odds of sexual abuse taking place in your ministry.

    This article is adapted from Youth Ministry in a #MeToo Culture .

    When Churches Neglect Payroll Taxes

    Experts say this is an all-too-common problem—and one church leaders cannot ignore.

    For about five years, a financial secretary for a 200-member church quit sending payroll tax money to the Internal Revenue Service.

    Instead, she pocketed the funds.

    When the IRS came knocking on the church’s door, it owed about $350,000, including penalties and interest, recalled Frank Sommerville, an attorney, CPA, and senior editorial advisor for Church Law & Tax.

    “This individual was the sole person in charge of payroll and getting those payroll taxes paid,” Sommerville said. “So the end result was, the church had to sell its property and dissolve to pay the payroll taxes.”

    In other cases, it may not be malfeasance that causes a church to neglect payroll taxes, but rather, financial problems within the congregation. Prioritizing the electric bill over the IRS, though, can have dire consequences, Sommerville warned.

    A different church had a file folder marked “IRS.” Each time an envelope came in the mail from the IRS, the church would drop it in that folder, said Vonna Laue, a CPA and senior editorial advisor for Church Law & Tax.

    A new church treasurer asked about the envelope and was told, “Oh, we’re tax-exempt. We don’t have to worry about anything from the IRS.”

    Wrong.

    “They had never opened the letters to realize they were notices of failure to file payroll taxes, so penalties and interest accrued really quickly,” Laue said. “Unfortunately, that’s not uncommon, whether they do it willfully or out of ignorance. It can really add up and get expensive in a hurry.”

    A common issue for churches

    Failure to file payroll taxes on time is a fairly common issue, several experts told Church Law & Tax.

    “This is a big problem for smaller churches because they lack sufficient internal controls over the payment of payroll taxes,” Sommerville said. “The church needs to establish numerous checkpoints to assure that the payroll taxes have been paid.”

    William Townes, vice president for finance for the Southern Baptist Convention’s executive committee, agreed, adding, “The church treasurer in many smaller churches is usually a volunteer position. Because of this, the volunteer treasurer may simply be unaware or uninformed of tax-filing requirements, which apply to all organizations, and the many consequences of not filing payroll taxes on a timely basis.”

    The failure to “withhold and properly remit payroll taxes can include substantial late payment penalties,” Townes warned, “and willful failure to comply can also include felony charges, substantial fines, and possible imprisonment for the person responsible.”

    Michael Batts, a CPA and senior editorial advisor for Church Law & Tax, points to two main risk scenarios.

    “One is where the payroll processing is done internally by church staff, using the church’s payroll software,” Batts explained, “and the risk is that the person(s) responsible for payroll do not actually remit the payroll taxes to the government.”

    The second scenario involves an outside payroll firm. “The church uses an outside payroll processing company to process payroll,” Batts said, “and the church remits the payroll taxes to the processing company, but the processing company doesn’t remit them to the government.”

    Both scenarios can carry serious consequences.

    “Either scenario is very bad,” Batts said, “and except in very limited circumstances—such as using a certified professional employer organization (CPEO)—the IRS will consider the church to be the employer and will look to the employer for payment, regardless of whether the employer previously remitted the payroll tax funds to a third-party processor.” (For additional information on CPEOs, go to IRS.gov and search “CPEOs.”)

    Solving the problem

    “An effective way to dramatically reduce this risk is to use a highly reputable and financially sound payroll processing company where the church is required to remit the payroll taxes,” Batts said.

    There might be reasons, however, that a church would choose to handle payroll internally. A church might, for instance, have trouble justifying the cost and effort of using a third-party provider.

    If that’s the case, a church needs to make sure it has someone on staff who is trained to handle the task and has proper oversight. And there are churches where this is the case, Townes said.

    “Similar to many small businesses, many churches and other religious nonprofit organizations are operated by dedicated and competent individuals who correctly administer payroll deposits in accordance with federal rules and regulations,” he said.

    But getting correct information about compliance is key. “It requires taking advantage of all available resources and making yourself familiar with the steps to correctly comply,” Townes explained. “This can be done through a host of IRS electronic resources and publications or through the ministries of many denominational organizations that offer publicly available resources for their churches.”

    Still, some tax professionals are concerned that a church may unknowingly rely on unqualified internal staff or volunteers to handle payment of payroll taxes.

    “Churches certainly can do it themselves, and I have seen some do that, but you really have to understand the competence of the individual involved,” Laue said. “If you’ve got someone who is a volunteer or a staff person for whom this is their job, and they’ve worked payroll for a number of years and understand all the intricacies of it, the person probably can do it and stay on top of it.”

    On the other hand, she added, “If it’s someone whose job is to help the youth department and be the receptionist and write the accounts payable checks and, ‘Oh, by the way, you’re responsible for payroll, too,’ that’s probably a disaster waiting to happen.”

    If an internal person is handling payroll taxes, then the church board or a business administrator—a committee or individual with financial oversight—needs to be reviewing the quarterly reports to confirm that the taxes were paid, Laue stressed.

    Churches that do decide they have the ability to process payroll internally “should implement a ‘dual-control’ process to ensure that at least two approved individuals guarantee taxes are paid properly and on time,” Townes said. “If the church determines that they do not have the consistent expertise to administer payroll properly, they should seek a reputable and qualified third party to administer their organizational payroll.”

    “It all goes down to the individual church,” Sommerville added. “More and more, I see my churches using a payroll service.”

    Sommerville, though, offers this caveat: the service must be qualified and competent.

    As Batts pointed out, some payroll services have been known to not submit the tax payment. “Even when it hires a payroll service, the church is not absolved from liability,” Sommerville stressed. “It has to monitor and supervise the service in order to avoid the adverse consequences.”

    A great first step for any church is to have a payroll assessment performed by a knowledgeable CPA or an enrolled agent credentialed by the Internal Revenue Service, Townes urged. “This can help the church verify that everything is being done decently and in order. Or alternatively, it can help identify any issues that need to be corrected.”

    Vetting an outside service

    If a church does determine it needs to hire an outside company, it needs to do basic fact-checking, Sommerville said: How long has the company been in business? What are its specific areas of expertise? What liability does it assume if something goes wrong? Who are its current clients and references? Does it work with churches specifically or a variety of clients?

    Churches can also help protect their sensitive data by working with payroll providers who have service organization controls (SOC) audits and reports.

    Some providers have what are known as “Type 2 SOC1” reports, which are independent auditors’ reports on the effectiveness of the internal controls maintained by the company surrounding financial reporting and key operations, Batts said.

    “Having a Type 2 SOC1 report is the strongest objectively observable standard for internal control for a payroll processing company,” he added. “In my opinion, a Type 2 SOC1 report with a favorable opinion addressing key controls over financial reporting is a very strong and adequate indicator of a company’s internal control strength.”

    Churches, however, cannot simply depend on strong SOC reports. As stressed earlier, churches must have their own effective internal controls in place.

    “I am grossly simplifying the point here, but I will say that such reports contain assumptions about controls that users must have in place for the whole process to be sound,” Batts said. “Even if an outside company’s controls are strong, the church must have its own appropriate controls in place in order for the whole process to be sound.”

    For Laue, expertise specific to church payrolls is crucial because of special circumstances related to such areas as the ministerial housing allowance and minister tax positions. Payroll services that are not well-versed in such areas should be avoided, she advised.

    Also, she recommended talking to current customers, even those on a company’s “official” list of references.

    “They’re probably only going to give you satisfied customers,” she said. “But still, when you ask them questions, you can learn a lot.”

    Churches should also check with other congregations that use payroll vendors.

    Call around and talk to some area churches that currently use a payroll service, recommended Diane Freeman, director of accounting for First Evangelical Free Church of Fullerton, California. The 3,000-member congregation employs 150 people and relies on a payroll service.

    “You can do that on your own, rather than asking the company to provide references—because, of course, they’re only going to give you the good ones,” she said. “And it’s the people in the trenches who are actually going to have to work on it and use the program.”

    Payroll companies to consider

    Stan Reiff, a partner with CapinCrouse, and Sommerville told us about several organizations that work nationally with churches and their bookkeeping, payroll, taxes, and governmental reporting requirements. While by no means exhaustive, these suggestions should give churches options to explore if they are looking for a service provider.

    Reiff:

    AccuPay. AccuPay is a payroll/HR company that some of our clients use. It is based in the greater Indianapolis area.

    BELAY Solutions. We have a lot of churches nationally that use BELAY Solutions for their bookkeeping and payroll processing. This company offers great help especially to smaller and midsize churches. Very proactive with a real passion for its clients.

    ChurchShield. ChurchShield is another bookkeeping and payroll company that several of our church clients use that we hear good things about. They have clergy/church payroll/clergy housing/taxation-specific training, and service that makes this company stand out.

    Jitasa. Jitasa works with several of our nonprofit groups, which is its specialty. I believe it also serves churches and understands nonprofit accounting and clergy taxation issues. Based out of Idaho, this company works with a lot of federated clients.

    Sommerville:

    MinistryWorks. Brotherhood Mutual Insurance Company created a separate company that offers payroll-related services. Brotherhood developed this service because it felt like it was dealing with a lot of clients with problems in the payroll area.

    Payroll Partners. PSK, a well-known and church-centric CPA firm, created this separate company to provide churches and ministries with payroll services. With 22 years of experience and high client retention rates, this company is popular with many churches.

    ADP. This is probably one of the larger, more reputable ones out there. I recommend them for larger churches. If you have three employees, ADP probably isn’t cost-effective. But if you have 50 employees, it is very cost-effective.

    IRS Ramping Up Its Focus on Tax-Exempt Entities

    The news: “IRS auditors who focus on tax-exempt groups will be kept busy this year.

    The news: “IRS auditors who focus on tax-exempt groups will be kept busy this year. Among the issues they’ll be eyeing … Charities that run afoul of the private benefit and private inurement prohibitions. … Misclassification of workers. And groups that operate gaming activities such as bingo. More examiners will be brought on board. After an almost 10-year drought in hiring and loss of a significant portion of its workforce, IRS now has job openings for revenue agents in both its exempt organizations and employee plans programs.” –Kiplinger Letter

    The Church Law & Tax take: Several resources and articles are available to help address the topics the IRS plans to target. Chapters 4, 5, 6, and 7 of the Church & Clergy Tax Guide, as well as Chapters 2 and 3 of Church Compensation: From Strategic Plan to Compliance address private benefit and private inurement issues specifically for ministers and church leaders. Chapters 4 and 5 of Church Compensation also address worker classifications for churches. This unrelated business income article discusses bingo games and their effect on churches.

    The IRS Clarifies Tax Treatment of Business Meals

    The Internal Revenue Service issued a statement this past fall providing guidance with respect to

    The Internal Revenue Service issued a statement this past fall providing guidance with respect to the Tax Cuts and Jobs Act’s effects on business meals. When it comes to business meals, CapinCrouse said the IRS guidance “conclusively [states] meals are deductible. The rules for deducting meals have not changed unless the meal occurs in the context of entertainment, such as at a sporting event or a theater.”

    In the fall, the IRS also issued clarification on the taxability of moving expenses incurred prior to 2018, but paid in 2018. For details, see “What’s New” in the December 2018 edition of this newsletter.

    Related Topics: |

    Changes in IRS’s Voluntary Correction Program

    How to file VCP submissions and pay user fees changes.

    The Internal Revenue Service’s Voluntary Correction Program (VCP) allows sponsors of retirement plans to “disclose mistakes in plan documents or operations, pay a fee, and work with the IRS to fix the errors and preserve the plan’s tax-favored status,” said The Kiplinger Tax Letter. “The [IRS] has now announced new procedures for filing VCP submissions. It won’t accept paper filings after March 31. Applicants must instead use pay.gov to electronically file their VCP submissions and pay the applicable user fees.”

    However, the possible need to make corrections may simply not be on the radar of churches, said Ted Batson, attorney and CPA with CapinCrouse , adding that many church financial leaders are unaware of what it takes to be compliant. He said that this is complicated by the fact that compliance requirements vary among retirement plans and the rules can be difficult to understand. Even so, certain plans popular with churches (such as (403(b) and SIMPLE IRA) do require careful adherence to plan requirements. Churches should seek guidance from qualified retirement plan professionals, including their third-party plan administrator, Batson said.

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    IRS Clarifies Taxability of Moving Expenses Prior to 2018

    With the passage of the Tax Cuts and Jobs Act, pastors can no longer deduct

    With the passage of the Tax Cuts and Jobs Act, pastors can no longer deduct moving expenses. Still, many have wondered if the tax-free suspension applies to expenses earlier than 2018 but paid for or reimbursed in 2018. IRS Notice 2018-75, posted on IRS.gov in September, clarified that the tax-free suspension does not apply to reimbursements or payments made in 2018 for expenses incurred in a prior year, reported CapinCrouse.

    CapinCrouse offered three additional insights: (1) payments or reimbursements must be for work-related moving expenses that would have been deductible to the employee if the employee had paid them before January 1, 2018; (2) the employee must not have deducted the expenses in 2017; and (3) if an organization has already treated employee reimbursements or payments as taxable, it can follow the normal tax adjustment and refund process.

    Child Abuse Prevention and Reporting: Protecting Your Church in the #MeToo Era

    Webinar Recording: Create a plan for your church to help prevent child abuse and sexual harassment.

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    Q&A: How Should Items Donated for a Silent Auction Be Treated for Tax Purposes?

    Items donated to a silent auction are treated the same as other noncash contributions to the church.

    My church is planning a silent auction to raise money for a missions trip. What should we say to potential donors to help them understand any tax implications for their donations—whether it involves a donated item, a service, or, say, the use of a vacation cottage for a week?

    Items donated to a silent auction are treated the same as other noncash contributions to the church. Under current federal tax law, donors are responsible for determining the value of their noncash gifts and the proper amounts to deduct as a charitable contribution. Unfortunately, no charitable contribution deduction is allowed for donated services or for a gift of the right to use property (such as the use of a vacation cottage).
    Donors who contribute noncash items valued at more than $500 must generally file a Form 8283 with their tax return. Depending upon the type of item contributed and the amount claimed as a deduction by the donor, the donor may be required to obtain a church official’s signature on the Form 8283 confirming receipt of the donation.
    If, within three years of the date of the contribution, the church sells, exchanges, or otherwise disposes of a donated item for which it signed a Form 8283, the church is required to file a Form 8282 with the IRS within 125 days. A copy of the Form 8282 filed should be provided to the donor.
    Special rules apply to contributions of vehicles (cars, boats, or airplanes). See IRS Publication 4303 for more information on vehicle donations.
    The contribution acknowledgment issued by the church to the donor should include the date of the gift, a description of the property donated, and a statement that the donor received no goods or services in exchange for the gift (if true). If the donor received goods or services in exchange for the gift, the acknowledgment should indicate the value of items received by the donor and a statement noting that federal tax law permits the donor to deduct as a charitable contribution only the excess (if any) of the amount of the gift over the value of items received in exchange.
    The church is not required to, and should not attempt to, provide the value of a noncash gift on the donor’s acknowledgment. The church may acknowledge gifts of services or the use of property, but should indicate on the acknowledgment that such gifts are generally not tax-deductible, and the donor should consult his or her tax advisor regarding the tax implications of such a gift.
    Chapter 8 of the Church & Clergy Tax Guide provides further information regarding charitable contributions.
    Kaylyn Varnum is a partner and the assistant national director for tax services at Batts Morrison Wales & Lee (BMWL), an Orlando-based national CPA firm serving churches and nonprofits. Varnum’s primary responsibilities involve serving and advising tax-exempt organizations.

    Planning Your Pastor’s Retirement

    Webinar Recording: What you need to create and follow a successful retirement plan.

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