Mastering Seventeen End-of-Year Financial Tasks

Mastering seventeen end-of-year financial tasks before January 1, 2024, to help churches and ministers thrive with the upcoming tax season.

Here’s to finishing 2023 strong and getting off to a great start in 2024!

A key end-of-year financial task for a church board or congregation should be designating a housing allowance for 2024 for ministers who own or rent their home (and for ministers who live in a parsonage and who pay some of their housing expenses from their own funds). 

Find sample housing allowance and parsonage allowance resolutions in chapter 6 of Richard Hammar’s annual Church & Clergy Tax Guide.

“Because housing allowances can only be provided prospectively (that is, after they have been approved by the board or the board’s designee), obtain approval from the board prior to January 1,” advises Rob Faulk, a CPA and partner with CapinCrouse.

All employees should review their W-4 form and submit a new form if circumstances have changed. This will ensure accurate tax withholding.

“Many employees are surprised when they complete their tax return and find they owe money,” says Elaine Sommerville, a CPA and senior editorial advisor for Church Law & Tax. “Employees may be caught short on taxes paid if both spouses are working.”

She explained that the tax withholding tables “don’t appropriately take a dual-earner household into consideration. It is advisable for employees who owed money with their 2022 Form 1040 to complete a new Form W-4 at this time.”

And don’t leave out ministers, says Frank Sommerville, a CPA, tax attorney, and senior editorial advisor for Church Law & Tax. Unfortunately, “many ministers just go to the treasurer and say, ‘Withhold such-and-such from a paycheck,’” he said. “But the pastor should also fill out a W-4 or provide other written documentation for withholding income tax.” (For more information on this aspect of the topic, see #9 below.)

Advise donors in the church bulletin or newsletter, on the church website, or in a letter or email from the church, not to file their federal income tax return before they receive their contribution summary from the church.

Donors may not be able to deduct individual contributions of $250 or more if they file a tax return before receiving a qualified contribution receipt from their church.

Double-check the software the church uses to prepare charitable contributions receipts to confirm that the vital “no goods or services other than intangible religious benefits were provided” statement is included when the receipts are prepared.

“Making sure donors have those contribution acknowledgements prior to filing is definitely important,” added Kaylyn Varnum, a partner and assistant national director for tax services for the accounting firm Batts Morrison Wales & Lee, and an advisor-at-large for Church Law & Tax.

While deductions may be available to fewer donors, it’s still important to notify all donors, Frank Sommerville stressed, because churches simply don’t know who might qualify for a deduction.

The general rule is that a contribution is effective when delivered. A check deposited in the church offering in January of 2024 cannot be deducted in 2023, even if it is backdated to 2023. One exception—checks mailed and postmarked in 2023 are deductible in 2023, even if they are not received until 2024.

IRS Publication 526 offers these guidelines for three other types of giving (adapted):

Consider these two categories of gifts:

Avoid monetary gifts (including gifts cards) to volunteers of any amount, says Frank Sommerville.

“Once you give people money, they are no longer volunteers,” he says. “They are employees. Once you compensate them, then you’re getting into all kinds of issues. Does employment law apply? Does workers’ comp apply? Once you give them anything of value, they no longer qualify as a volunteer under many, many statutes.”

Near the end of the year, churches should be wary of a noncash donation of significant value, such as an antique car or a gift of real estate. Some gifts might be hard to sell. With land, there could be unresolvable zoning issues or issues with toxic soil. With a building, there could be structural issues or a problem with lead or asbestos.

“You don’t want to be rushed into making a decision,” says Frank Sommerville. “If a gift comes in near the end of the year, you don’t have the time to do your due diligence.” He stressed that the gift could end up costing you a lot more than it is worth.

An exception: publicly traded stock. “Stock is pretty easy to address appropriately as a year-end gift,” he says.

“Now is the time to decide if employees are properly classified for wage and hour purposes,” Elaine Sommerville says. “Review job descriptions to determine if employees qualify for the ministerial exception. Then review job descriptions for non-qualifying employees and decide if they’re exempt or non-exempt.”

Past year determinations may be affected by the current minimum weekly salary requirement of $684 for exempt employees. While this change was effective January 1, 2020, many churches still are not aware of its implications.

It is possible that exempt employees are nonexempt due to the higher minimum weekly salary requirement. Those that are have to be reclassified.

For further guidance, see Elaine Sommerville’s article “The Right Way to Handle Wage Classifications.”

Separate from applying the DOL’s ministerial exception discussed above, a church must also determine who is a minister for IRS and Social Security purposes.

Many churches incorrectly report ministers as employees for paying into the Social Security system by withholding Social Security and Medicare taxes from their wages. This is incorrect, since the tax code classifies ministers as self-employed for purposes of paying into the Social Security/Medicare system with respect to services they perform in the exercise of ministry. As a result, they pay the self-employment tax with their individual income tax returns and not through withholding and employer matching of Social Security and Medicare taxes.

Now is also a good time to provide information to ministers regarding their unique tax classifications to make them aware of the unusual filing requirements.

Since ministers’ wages are exempt from Social Security, Medicare, and federal income tax withholding (with respect to services performed in the exercise of their ministry), they use the quarterly estimated tax procedure to prepay their federal taxes.

However, ministers who report their income taxes as employees can enter into a voluntary withholding arrangement with their employing church by submitting written authorization—such as a letter, email, or a W-4 form—to the appropriate church representative. Under such an arrangement, the employing church withholds income taxes as it would for any other employee, and also can withhold an additional amount of income taxes to cover the minister’s self-employment tax liability.

In addition, some churches have filed a Form 8274 with the IRS exempting themselves from the employer’s share of Social Security and Medicare taxes. As a result, lay employees of these churches are responsible for making quarterly estimated self-employment taxes to the IRS.

If the employee requests additional voluntary withholding, the church withholds an additional amount of federal income taxes to cover their estimated self-employment tax liability.

“For ministers who prefer to make estimated tax payments rather than allowing the church to withhold federal income tax, it is beneficial to enroll in the IRS Electronic Funds Transfer Payment System (EFTPS),” Elaine Sommerville suggests. “Making tax payments through the EFTPS system provides the minister with the ability to preschedule estimated tax payments and to receive immediate confirmations of the payments. The 2020 pandemic raised awareness of the benefits of the system as the IRS continues to struggle in the timely processing incoming mail.”

Review compensation and benefits for employees for the upcoming year. Doing so will “provide for the proper documentation of compensation packages and proper taxation of benefits provided to employees,” says Elaine Sommerville.

Certain plans require benefit elections by the beginning of the plan year. These include benefit elections for a church’s cafeteria plan or Section 125 plan, enrollment in insurance plans that begin on January 1, and the required health insurance opt-out election certificates required by large employers.

For any church that’s an applicable large employer—and currently in its annual benefit enrollment period—Rob Faulk from CapinCrouse offers this guidance: Ensure that any employee who chooses to opt out of the health benefit plan completes an opt-out election certificate [or waiver] and furnishes proof of enrollment in another qualified group health benefit plan from a source other than your church’s plan before coverage is terminated.

Preparations for filing the annual Forms 1099-NEC should include a review of payments to unincorporated independent contractors, including LLCs, and their related W-9 forms. (Credit card or PayPal payments are not reported on the Form 1099-NEC.)

“If a Form W-9 hasn’t been obtained for a contractor, determine if the church has the correct address and Social Security/employer identification number for the contractor,” Elaine Sommerville stressed. “And don’t forget to include payments to attorneys even if paid to a law firm that is incorporated.”

Did your church give a low-interest or interest-free loan to your pastor this year?

How about forgiving interest or principal on a loan to your pastor during the year?

Could employees’ children attend your summer camp without charge? Did you provide employees with free memberships to the local gym?

The value of such benefits needs to be reported on your employees’ W-2s “and included on your Form 941 with tax withholdings and payroll taxes paid as applicable,” Batson says.

“Whenever possible, taxes for fringe benefits should be withheld throughout the year and at the time the fringe benefit was received,” Batson says. “But in cases where that has not happened, the value of the fringe benefit should still be included on the W-2s at the end of the year.” 

Elaine Sommerville adds that “taxes associated with the fringe benefits may still be calculated and paid through additional withholding from employees’ final paychecks this year, if not calculated at the time the benefit was provided.”

“Fringe benefit plans should be reviewed to determine the plan documents are still in compliance with applicable law and the church is operating within the boundaries of the applicable benefit plan,” Elaine Sommerville says.

“A church that provides its minister a car should download IRS Publication 15-B and review the Fringe Benefit Valuation Rules to ensure the proper amount for personal use is included in the pastor’s W-2,” Batson says.

The IRS requires electronic filing for 10 or more 1099, W-2, and many other forms. 

There are many easy systems allowing for electronic filing of payroll reports. The Social Security Administration maintains a portal for filing Forms W-2 electronically for smaller employers.

The IRS has created the Information Returns Intake System (IRIS) as a free system for meeting electronic filing requirements. Filers must register to utilize the IRIS system.

Local office supply stores sell hard copy forms. While irs.gov/forms, offers many forms for download, Form 1096, Form 1099-MISC, and Form 1099-NEC still require original, red-colored forms when filing paper forms.

The IRS is still struggling to timely process any paper returns. Therefore, it is a good time to see about moving all payroll tax filings to a method of electronic filing for 2023 returns due in 2024. The new rules make it mandatory for virtually every filer. 

If your current budget year ends on December 31, finalize your 2023 budget before then, Faulk advises. Further, he says to perform a variance review of income statement (actual vs. budget). “This process may affect decisions about next year’s budget and may be particularly challenging due to the changes caused by the pandemic,” Faulk explains. “To help, CapinCrouse offers a free e-book, How to Budget Effectively in Changing Times.”

Sit down and list any additional items that could easily slip through the cracks, which are particular to your church, then take care of them before the end of the year. Faulk mentions the following items:

Now is a good time to order Church Compensation – 2nd Edition: From Strategic Plan to Compliance by Elaine Sommerville. It’s also a good time to preorder the 2024 edition of Richard Hammar’s Church & Clergy Tax Guide. Both can help answer the various tax, payroll, and compensation questions that will invariably arise next year.