If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly.
Monthly deposits are due by the 15th day of the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church or organization need not deposit the taxes.
Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.
Semiweekly requirements
If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semiweekly. This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.
Also note that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.
Churches hiring their first nonminister employee between April 1 and June 30 may exempt themselves from the employer’s share of Social Security and Medicare taxes by filing Form 8274 by this date (nonminister employees are thereafter treated as self-employed for Social Security purposes). The exemption is only available to churches that are opposed based on religious principles to paying the employer’s share of Social Security and Medicare taxes.
July 31, 2023: File Form 941
Churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) must file an employer’s quarterly federal tax return (Form 941) for the second quarter of 2023 by this date. Enclose a check in the total amount of all withheld taxes (withheld income taxes, withheld Social Security and Medicare taxes paid by the employee, and the employer’s share of Social Security and Medicare taxes) if less than $2,500 on June 30, 2023.
Note: If a date listed for filing a return or making a tax payment falls on a Saturday, Sunday, or legal holiday (either national or statewide in a state where the return is required to be filed), the return or tax payment is due on the following business day.
Note: You must use electronic funds transfer to make all federal employment tax deposits. This is generally done using the Electronic Federal Tax Payment System, a free service provided by the US Department of Treasury. If you don’t wish to use EFTPS, you can arrange for your tax professional, financial institution, or payroll service to make deposits on your behalf. Failure to make a timely deposit may subject you to a 10-percent penalty.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Part 1 of 4: Prepping for a Church Meeting
Preparation is key in holding an effective church meeting.
Editor’s Note: Prepping for a church meeting is as important as the meeting itself. Continuing her look at effective business meetings through the hypothetical lens of Liz Jones, an experienced business administrator at First Church, Sarah E. Merkle walks us through the three-step process of planning, defining, and ordering a meeting agenda.
An effective church meeting can go a long way toward healthy and effective decision-making. Planning the meeting, therefore, is key.
Planning a church meeting: The problem
Liz Jones needs an effective business meeting plan.
Last year, First Church’s annual business meeting didn’t go so well. This year, Pastor Steve Hayes has asked Jones to fix that.
Jones, an experienced business administrator, knows preparation will be key. The congregationally led church is 16 years old and recently surpassed 500 members.
As the church grows, the need for meetings to go well only grows, too.
A few things went wrong at last year’s annual meeting:
It ran too long.
Discussion over pricey upgrades to the church’s audio/visual equipment went in circles.
A key decision related to making a minor tweak to one of the church’s bylaws got delayed because proper notice wasn’t given ahead of time to members.
The next annual business meeting—planned for Sunday, January 8, 2023, at 12:30 p.m.— is still several months away, but Jones knows she needs to work fast to plan and organize it well.
A general search online yielded some ideas. Then she came across a Church Law & Tax article series by Sarah E. Merkle, an attorney with impressive credentials and experience helping churches, nonprofits, businesses, and organizations run meetings.
The article covering meeting preparation especially caught her eye. On a whim, she sent Merkle an email explaining her circumstances. A short while later, Merkle emailed back.
Creating an effective church meeting plan
Merkle couldn’t provide specific advice to Jones because legal ethics don’t allow it when an attorney-client relationship doesn’t exist.
But Merkle generally described steps Jones can take to put a better plan together.
Step 1: Get your to-do list in order
Put the church’s articles of incorporation, bylaws, and policy manuals all within arm’s reach, and read through them to note any dates by which things must happen. Whether nominating new board members or approving an annual budget or adopting a pastor’s housing allowance, these dates create deadlines—and to-do lists that should get completed by the appropriate meeting before the corresponding deadline.
For the annual business meeting, recurring dates include submitting board nominations whenever one or more members finish their terms, and getting congregational approval for the next year’s fiscal budget. This year, only the latter needs to happen.
Step 2: Define the agenda.
Merkle explained that initial formalities need to be addressed, such as approving the minutes of the last business meeting, plus adopting the agenda for this one.
From there, First Church needs its next fiscal budget approved. It also typically uses the annual business meeting to share updates from the church’s ministries, facilities, and financial health committees. This year, it also faces several other important decisions—it’s about to call a new associate pastor. It is also contemplating repaving its parking lot.
In the past, First Church has typically saved the biggest—and often most controversial—decisions for the end of its annual business meetings.
That’s what happened last year when the church wrestled with the audio/visual proposal. It was costly, members wanted to debate it, and, given that the meeting was already running long, frustrations mounted as a vote was pushed through.
Merkle cautioned Jones about prioritizing the agenda a certain way only because it’s “how the church has always done it.”
With the list of agenda items defined, Merkle said she asks these questions to further understand the potential flow for the agenda:
Who should speak or present on behalf of any of the agenda items? The chair of the associate pastor search committee, for instance, should plan to talk about the candidate and explain the process used for the search, including the qualifications sought and the other people interviewed.
All presenters should be identified and contacted early to get them started with their respective presentations.
What resources do these individuals need to succeed with their remarks? This might include PowerPoint and other audio/visual support—and it may require staff time to assist the presenter, especially if he or she is a volunteer.
What information about an issue can be given to members ahead of time to help them learn and understand what the issue is about? For the associate pastor role, that might include a biography of the candidate. For the parking lot project, it might include an explanation about why it’s needed, the potential costs, and the ministry impact it can deliver.
What notice is required under the church’s governance to ensure an issue can be voted on? Last year’s bylaw change didn’t provide proper notice—and this year, the church’s governance requires notice before members can vote to call any pastor.
Step 3: Ordering the agenda
The last major step is to order the agenda.
“There’s no right or wrong answer here,” Merkle wrote. “It’s more important to ask certain questions to decide how to do it. What are you ultimately wanting to accomplish at this meeting? Prioritize the agenda based on what needs to be decided for the healthy functioning of the church over the next 30 to 45 days.”
One evaluation is to anticipate controversies.
“Is everyone coming to the meeting because they are already angry about the issue? If so, then it needs to be earlier in the agenda,” Merkle wrote. “Is everyone coming calm, but an issue on the agenda may anger them? If so, then don’t schedule anything afterward that is heavy or serious—keep it straightforward.”
Another evaluation is the pros and cons of each item happening at specific times on the agenda.
With the associate pastor role, there are positives to placing it early on the agenda. Most people likely will attend because of this specific decision, and they’ll have more energy early in the meeting. One negative, though, is that updates about ministry and financial health may shape how people decide—and those reports would likely come later.
Relatedly, there are pros and cons to placing the item later in the agenda, too. The pro is that all information should be in hand. The con is that people are tired.
For Jones, the order is starting to take shape. Leading the agenda with the ministries, financial health, and facilities reports should start things on a positive note. The facilities report will then include the parking lot project.
From there, the agenda will shift into the associate pastor discussion and decision, since the meeting is still relatively young and the new role’s impact on the church’s mission and operations will be better understood.
Plus, adding the position directly influences the church’s healthy functioning within the next 45 days.
Lastly, the agenda will address approval of the next annual budget.
Jones now can begin working on contacting the individuals she needs to speak on the various topics, and the timetables needed to notify the congregation about the associate pastor vote.
“I’m really glad you reached out,” Merkle wrote. “The thought put into an annual business meeting can turn it into something invigorating. The time you’re using now to prepare can make a massive difference in how people feel—helping them see the big picture and celebrate the church’s direction.”
Holding an effective church meeting includes knowing who should be keeping minutes and how they should be kept.
Sarah E. Merkle is a professional parliamentarian and presiding officer. One of five lawyers worldwide to have earned the credentials Certified Professional Parliamentarian-Teacher (CPP-T) and Professional Registered Parliamentarian (PRP), she helps boards, associations, corporations, and public bodies navigate rules applicable to governance and business meetings.
Image: Getty/Kameleon007
Correcting Improper FICA Withholdings
What to expect when correcting improper FICA withholdings for a pastor.
Q: Our church has been withholding FICA for its pastors, in some instances for years—or even decades. We recently learned this is a mistake. How do we fix this?
Wages paid to ministers are not included in the definition of wages for the purposes of withholding FICA/Medicare tax. This includes the related employer matching of these taxes by the church.
Instead, ministers must pay into the Social Security/Medicare systems through self-employment tax calculated on Schedule SE with their personal tax returns (unless they obtain an exemption).
Improper FICA withholdings is not uncommon. Churches often incorrectly withhold and match the FICA/Medicare taxes on ministers. If the IRS determines this treatment has occurred, it takes the position that the church has determined the employee is not a minister for payroll tax purposes. This may affect the taxation of other benefits. That’s because it’s impossible to claim to be a minister for one portion of the rules but not for another.
For an example of how the incorrect withholding of a minister’s payroll taxes can prove so consequential, look no further than the housing allowance that qualifying ministers are eligible to receive.
The housing allowance is one of the most valuable tax benefits available to ministers. If a church treats a minister incorrectly and withholds and matches the minister’s FICA/Medicare taxes, then the IRS views him or her as an employee, not a minister. The IRS then would tax the housing allowance paid by the church for the minister, representing a sizable financial loss for the minister.
Correcting Improper FICA Withholdings
Churches that have improperly withheld/matched a minister’s FICA/Medicare taxes should amend the payroll reports for the three tax years open under the statute of limitations.
This requires amending quarterly Forms 941 and annual Forms W-2. Taxes paid will be refunded to the church. And, because it mistakenly overpaid its taxes, the church will not face any penalties.
The minister will need to report the compensation as self-employment income for the past three years. This is done by amending the related Forms 1040.
The minister also needs to pay the related self-employment tax owed. Interest will be calculated on the tax owed when he or she amends the Forms 1040.
These amendments can be complicated, so a church may require professional assistance in filing the related amended reports and returns.
Editor’s Note:Minding meeting minutes is both an oft-misunderstood and under-appreciated part of a church business meeting. Continuing her look at effective business meetings through the hypothetical lens of Liz Jones, an experienced business administrator at First Church, Sarah E. Merkle shows the important roles that meeting minutes play.
Long before First Church’s annual business meeting arrived, Liz Jones mapped out a plan for getting the meeting’s minutes taken, too.
Before proceeding, though, she first needed to clear up some misconceptions about who should take minutes. Some assumed it would be the church secretary. Others assumed it should be Jones as the church business administrator.
Neither assumption was correct.
Instead, the responsibility of taking minutes falls to the church board’s secretary.
Jones reached out to Tom Erickson, the board secretary, and scheduled a meeting ahead of time to go over his duties.
“I’m nervous about this task, to be honest,” Erickson confided to Jones when they met. “I have a hard time capturing everything said in a conversation—there’s so much to keep track of.”
“Don’t worry,” Jones responded. “I’ll help you understand exactly what we need. And remember, I’m attending the meeting, too. There should always be someone backing you up at a meeting, and I can do that for this meeting.”
“You’re not recording the meeting, and you’re not transcribing the meeting,” she explained. “You’re recording what was done, not what was said.”
Erickson nodded but looked slightly confused.
“But to record what was done, don’t we need to know who said what—who supported what, who opposed what, that kind of thing?” he asked.
“No—that’s a common mistake many church leaders make,” Jones answered. “So much of what happens just needs to be a brief, general description. For instance, when Cindy Martinez gets up to give the facilities report, it doesn’t have to be detailed. It should just say, ‘The facilities chair gave a report on behalf of the facilities committee, including details on proposed projects for the parking lot, children’s ministry wing, and HVAC system.’ That’s it.”
Jones paused as Erickson jotted down some notes.
“Is there ever a time when specific details need to be included, though?” Erickson asked.
“Yes,” Jones responded. “Mainly when votes are taken. You need to record the outcomes. If specific counts are made, you need to capture the votes for and the votes against.”
Holding an effective church meeting includes understanding the four basic types of votes, and knowing which one is best.
“So, this is really about just making sure ultimate decisions and directions are recorded for future reference—not a play-by-play,” he said.
“Exactly,” Jones responded. “And when the next business meeting comes, they’re already prepared and ready to be presented for approval as a way to formally document those decisions and directions.”
A closer look at the minutes
Erickson heeded Jones’s advice. Because he wasn’t focused on recording every word said, he found the task much more manageable—and capturing highlights and high-level details came more easily than he expected.
This especially proved true during the extensive discussion about the proposed facilities projects. Erickson knew he would have gotten flustered trying to note each perspective shared about support or opposition—and objectively representing the remarks would be next to impossible anyway.
After First Church’s annual business meeting, he cleaned up the notes he typed during the meeting. To his credit, he needed Jones’s backup notes for only one thing—the official vote count (243 to 13) in favor of the candidate for the new associate pastor role.
Erickson’s draft minutes looked like this:
First Church
Annual Business Meeting
January 8, 2023
12:30 p.m.
Board Chair Terry Christensen called the annual business meeting of First Church to order at 12:35 p.m.. A quorum was present.
Agenda
By unanimous consent, the agenda was adopted as presented.
2022 Annual Business Meeting Minutes
By unanimous consent, the minutes of the January 9, 2022 annual business meeting were approved as distributed.
Ministry Update
Outreach Coordinator Joy Allman provided an update on the progress of various ministries of the church, noting that the children’s ministry was experiencing significant growth and that the church leadership was exploring a new missions opportunity in Ecuador.
Finance Committee
Alex Armstrong, chair of the Finance Committee, provided an overview of the financial reports distributed to the membership, noting that member giving has been steady and that the building and property loan from 2016 remains the church’s only outstanding debt.
Facilities Committee
Cindy Martinez, chair of the Facilities Committee, provided an update on the state of the Church’s facilities. On behalf of the Committee, Ms. Martinez moved that the Facilities Committee obtain bids to begin the following capital projects during the next fiscal year: repave the parking lot, and replace the HVAC system; and, that the Facilities Committee be authorized to proceed with these projects, provided they do not exceed a combined total cost of $200,000. The motion was adopted as amended.
Associate Pastor Search Committee
Russ Moore, chair of the Associate Pastor Search Committee, provided an overview of the associate pastor search, including the Committee’s process for identifying and vetting candidates. On behalf of the Committee, Mr. Moore moved that First Church call Karl Miller to be associate pastor of First Church. The motion was adopted, with 243 in favor and 13 opposed.
2023–2024 Budget
On behalf of the Finance Committee, Alex Armstrong moved that the 2023–2024 budget be adopted as distributed. The motion was adopted.
Adjourn
By unanimous consent, the meeting adjourned at 2:00 p.m.
Sarah E. Merkle is a professional parliamentarian and presiding officer. One of five lawyers worldwide to have earned the credentials Certified Professional Parliamentarian-Teacher (CPP-T) and Professional Registered Parliamentarian (PRP), she helps boards, associations, corporations, and public bodies navigate rules applicable to governance and business meetings.
Part 3 of 4: Making Every Vote Count
Holding an effective church meeting includes understanding the four basic types of votes, and knowing which one is best.
Editor’s Note:Making every vote count in a church business meeting takes many forms. Continuing her look at effective business meetings through the hypothetical lens of Liz Jones, an experienced business administrator at First Church, Sarah E. Merkle illustrates the various types of votes that can be taken at a business meeting, and the methods for calculating their outcomes.
Before First Church’s annual business meeting, Liz Jones met with Terry Christensen, the church board’s chairwoman, to go over the four types of votes that can be conducted. The two looked closely at each option, weighing their benefits and drawbacks and assessing when they might prove most useful.
The homework pays off as the annual business meeting unfolds.
Vote Type 1: General or unanimous consent vote
“This type of vote is great for noncontroversial matters,” Jones told Christensen during their prep. “It also speeds up the meeting.”
The two agreed she’d use them for the first items on the agenda: adopting the agenda for this meeting and approving the last business meeting’s minutes. She followed that plan in the meeting’s first moments.
“First, we will approve the agenda for this meeting. Are there any objections to today’s agenda as presented?” she asks. Then, as Jones coached her, she pauses and counts to three. “Hearing no objection, the agenda is approved.”
Christensen clears her throat, then leans into the podium microphone again. “Next is approving the minutes from the last business meeting. Are there any corrections to the minutes as distributed?”
Three more seconds pass with silence. “Hearing no objection, the minutes are approved,” she says.
Jones told Christensen the likelihood of objections to either of these agenda items was very small. Had one arisen, though, she would have simply resorted to a voice vote.
Vote Type 2: Voice vote
Like Jones predicted, members discussed the proposed motion from the facilities committee with zeal.
A proposed amendment to that motion—in which bids would be sought for projects involving the church’s parking lot and HVAC system, but not for repainting the children’s ministry wing—went through lengthy discussion.
After nearly 20 minutes, Christensen senses it’s time to move things along. To do so requires a motion to close debate, followed by a second to that motion, then followed by approval by a two-thirds majority. With 300 members present, Christensen opts to use a voice vote.
“All of those in favor of closing the debate on the amended motion as presented, say ‘Aye.’”
The ‘aye’s’ boom across the room.
“All opposed, say ‘No.’”
Only a smattering of ‘no’s’ arises across the sanctuary. Christensen feels confident that two-thirds voted in favor.
Now it’s time to see if enough support exists to approve the motion as amended with the children’s ministry project removed.
This time, only a majority is needed. Christensen again opts for a voice vote.
“All of those in favor of the motion as amended, say ‘Aye.’” Christensen says.
Another hearty round of ‘aye’s’ fills the sanctuary.
“All opposed, say ‘No.’”
A strong number of ‘no’s’ spread across the sanctuary, too.
It’s too close to call.
Vote Type 3: Raised hand or standing vote
During the prep, Jones told Christensen about the usefulness of a “raised hand or standing vote” option. “You use this when a voice vote is too close to call. You can also use it if you need the exact vote count noted in the meeting’s minutes,” Jones explained. “It’s a really effective way to keep things moving when the vote itself doesn’t need to be kept in secret.”
With the voice vote on the parking lot and HVAC projects too close, and no apparent need for secrecy involved with either decision, Christensen chooses a standing vote.
“The chair was uncertain, so we’ll conduct a standing vote,” she says into the microphone. “All of those in favor, please stand.”
A large contingent of individuals across the sanctuary rise.
“Please sit down,” she says. “Now, all of those opposed, please stand.”
Another sizable group rises. It’s still too close to call, even visually.
Christensen asks those standing to sit. She then asks those in favor to stand again.
Two tellers attending the meeting to count votes then proceed to count off those who are standing. Upon finishing, Christensen asks supporters to sit, then asks those opposed to stand. The two tellers then have those who are opposed count off.
The result: Those in favor measured 102, while those opposed measured 101—the closest margin possible.
“The motion as amended passes,” Christensen says.
Vote Type 4: Ballot vote
Going into the annual business meeting, Jones knew the calling of an associate pastor would need a ballot vote. Not only is it a significant decision, and one that members may not wish to openly vote about, but the church’s bylaws require at least two-thirds of those present and voting to approve a decision like this.
A ballot vote ensures an accurate and official count is taken and documented with the meeting’s minutes.
Anticipating this, Jones worked ahead of time with Russ Moore, chair of the Associate Pastor Search Committee, to review the church’s membership roll.
She made certain enough notice was provided to all members about the expected vote during the meeting. And she made certain enough ballots were created and available on the day of the meeting.
Jones also ensured the ballots were printed with the actual question and appropriate responses for members to select. It didn’t have to be fancy—it just simply read, “I am in favor of calling Karl Miller to be associate pastor of First Church,” followed by boxes with “YES” and “NO” next to them. No signature was required since the bylaws didn’t require one and the desire for secrecy weighed heavily.
Counting votes
The ballots for Miller’s candidacy were collected. Two tellers quickly went through them.
Among the 300 members present at the meeting, 256 cast votes.
Jones recalled Sarah E. Merkle’s article on voting and the formula needed for determining at least a two-thirds majority. Here, since there were 256 members present who voted, the tellers would take 256, multiply it by 2, then divide it by 3 to determine the number of votes needed for a two-thirds approval. Since the mathematical result to this formula—170.6—wasn’t a whole number, the tellers rounded up to the nearest whole number, which is 171.
Tip: The formula for determining a two-thirds majority is (N x 2)/3 where N is the number of people present who voted. When the result is not a whole number, the number is rounded up to the nearest whole number.
For Miller, the members overwhelmingly approve his call by a margin of 243 to 13.
Christensen breathes a sigh of relief, partly because of the need to get Miller started soon, and partly because the controversy with the facilities projects earlier in the meeting was much closer—and almost didn’t pass.
Part of the reason why was because the calculation for a majority vote works differently from the formula for calculating a two-thirds vote. With a majority, the number of members voting is multiplied times 0.5. If a whole number results, then a 1 gets added. If a fractional number results, then it gets rounded up to the nearest whole number.
Tip: The formula for determining a majority vote is N x 0.5, where N is the number of people voting. If a whole number results, add 1. If a fractional number results, round up to the nearest whole number.
In the facilities motion as amended, 203 people voted. Multiplied by 0.5, the result was 101.5, and rounded up to the next whole number, the figure was 102. That meant the motion barely passed.
But it passed nonetheless, and as the meeting headed toward the home stretch, Christensen and Jones believed no major obstacles remained in the way. The church’s budget information was presented well in advance, and support already existed for the variance built in for the facilities projects.
Christensen and Jones were right: A voice vote on the approval of the budget overwhelmingly passed.
The meeting finished. Pastor Hayes considered it a major success.
Holding an effective church meeting includes knowing who should be keeping minutes and how they should be kept.
Sarah E. Merkle is a professional parliamentarian and presiding officer. One of five lawyers worldwide to have earned the credentials Certified Professional Parliamentarian-Teacher (CPP-T) and Professional Registered Parliamentarian (PRP), she helps boards, associations, corporations, and public bodies navigate rules applicable to governance and business meetings.
Part 2 of 4: Managing Meeting Motions
Knowing how to make—and manage—a motion is a crucial aspect of a successful church business meeting.
Editor’s Note:Managing motions during a church business meeting is essential to ensuring the meeting accomplishes its intended purposes. Continuing her look at effective business meetings through the hypothetical lens of Liz Jones, an experienced business administrator at First Church, Sarah E. Merkle explains how to plan, draft, and make a meeting motion.
Liz Jones spent months preparing the agenda for First Church’s annual business meeting. As her work progressed, it became apparent that the facilities committee’s report would suggest more potential work would be needed than just repaving the church’s parking lot.
One motion—and possibly more—would likely come up for facilities-related needs.
Cindy Martinez, the facilities committee’s chair, sent an email to Jones several weeks prior to the meeting warning her as much.
Martinez detailed the parking lot project. She also relayed desires from some individuals to repaint the children’s ministry wing, as well as preliminary concerns from others about the church’s aging HVAC system (though some contend the concerns are premature).
The primary tension point?Next year’s proposed annual budget doesn’t account for the expenses to do all three.
“We already know there will be differing opinions about which projects need to be addressed, and which should get priority,” Martinez wrote to Jones. “At least a few also believe the church should borrow some money now and do all three projects, with the goal to have the loan paid off in two years.”
Planning the motion
Working through Sarah E. Merkle’s article on motions, Jones decides the smart approach will be to have Martinez present the facilities committee report, including the three possible projects. But Jones gets nervous about the ensuing discussion and how things might bog down in the meeting.
She again reaches out to Merkle with an email. Merkle replied soon after, reminding her she couldn’t provide legal advice but could generally help.
“In general, it’s smart to come to a meeting with a proposed motion drafted,” Merkle wrote. “You don’t want all the information presented about all the projects, say all three need to happen, and stop there. At that point, someone will just present a motion that isn’t well-crafted.”
Jones confers with the finance committee chair, Alex Armstrong, about how next year’s annual budget is taking shape. He tells her a potentially reasonable budget amount for the developing projects based on current financial projections, pending bids for the projects.
Jones then proceeds to help Martinez craft a draft motion that reads as follows:
RESOLVED, that the Facilities Committee obtain bids to begin the following capital projects during the next fiscal year:
Repave the parking lot;
Replace the HVAC system;
Repaint the children’s ministry wing; and,
that the Facilities Committee be authorized to proceed with these projects, provided they do not exceed a combined total cost of $200,000.
Making the motion
The annual business meeting day arrives and 300 voting members show up, more than enough to satisfy the quorum requirement for First Church’s annual business meeting.
As planned, the agenda begins with the ministries, financial health, and facilities reports.
The ministries report includes exciting developments for First Church, such as big growth in its children’s ministry and a new missions opportunity in Ecuador.
Armstrong’s financial health report reads mostly positive, too. First Church’s only debt is the loan it received to purchase its building and property from another church about seven years ago. Giving over the past year remained steady, a welcome development after years of local and national economic uncertainty.
Then it’s Martinez’s turn to provide her committee’s report on the facilities. She references the packet of information sent out to members a couple of weeks before the meeting.
Martinez uses the PowerPoint that Jones helped create to provide descriptions and photos detailing the parking lot’s rapid deterioration, which was already evident when First Church bought the property seven years ago. She also explains the children’s ministry’s growth, and the children’s ministry director’s desire to freshen things up. Then she discusses some of the HVAC system’s recent problems, including an unexpected breakdown last winter that left the building colder than usual for worship one Sunday.
Martinez finishes and makes the motion that Jones helped her prepare. Since it comes from the committee, the motion doesn’t require anyone to second it.
“Is there any discussion?” asks Terry Christensen, the church’s board chairwoman.
Jones shifts uncomfortably in her first-row seat. This would be the first opportunity for the meeting to go off the rails.
Lively discussion
The discussion was as lively as Jones and Martinez anticipated. Thankfully they warned Christensen ahead of time so that presiding over it wouldn’t surprise her.
Some members express immediate opposition to the repainting. “The wing doesn’t look that bad, and the money should be used for the HVAC,” an older man opines.
Another member jumps in: “I move we strike the children’s ministry wing repainting from the motion.”
“Is there a second to the amendment?” Christensen asks. Since the amendment didn’t come from the committee, a second to this motion is needed. The older man seconds the motion.
“Is there discussion about the amendment?” Christensen asks.
A young mother raises her hand. “I know repainting may seem unnecessary. But we’ve heard about how the children’s ministry has grown,” she says. “Anyone who serves downstairs knows how dingy everything looks.”
Other members speak up. Some support the repainting. Others oppose it. One suggests doing all three but borrowing money, which elicits a somewhat snarky response from a longtime member who boasts how the church has historically avoided debt beyond its mortgage. Eventually, a majority votes to adopt the amendment.
Discussion then resumes on the motion as amended. Nearly 20 minutes pass. Sensing it’s time to move things along, a longtime member makes a motion to close debate that gets seconded and then approved by a two-thirds majority of the votes cast.
Now it’s time to see if enough support exists to approve the motion as amended with the children’s ministry project removed. Another voice vote must be done, but this time, only a majority is needed to approve it.
Holding an effective church meeting includes knowing who should be keeping minutes and how they should be kept.
Sarah E. Merkle is a professional parliamentarian and presiding officer. One of five lawyers worldwide to have earned the credentials Certified Professional Parliamentarian-Teacher (CPP-T) and Professional Registered Parliamentarian (PRP), she helps boards, associations, corporations, and public bodies navigate rules applicable to governance and business meetings.
Four Steps Needed For An Effective Church Meeting
Parliamentarian Sarah E. Merkle partners with Church Law & Tax to show church leaders how to hold an effective church meeting.
“Many church members and leaders don’t know the risk to churches that do not understand parliamentary procedure or carefully follow it,” Merkle says. “There can be legal implications for not keeping minutes of actions taken by the church. Churches that don’t think through quorum or are careless about voting or the election of officers will often find themselves in a procedural mess. And spiritually, a congregation may experience strife and contention if there is a lack of good leadership or poor member involvement in church business. Avoid problems by following principles of parliamentary procedure and good governance.”
In this companion to “Mastering Meeting Basics,” Merkle offers this hypothetical case study, a four-part series on how to plan, hold, and document an effective church meeting. From planning the meeting to making motions, and from taking votes to capturing minutes, this series can offer valuable insights.
Any church leader responsible for planning and holding effective church meetings should bookmark this resource.
If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly.
Monthly deposits are due by the 15th day of the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church or organization need not deposit the taxes.
Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
Semiweekly requirements
If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semiweekly.
For paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday.
For all other paydays, the payroll taxes must be deposited on the Friday following the payday.
Large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
June 15, 2023: Quarterly estimated tax payments for certain employees and churches
Filing for certain ministers and self-employed workers
Ministers who have not elected voluntary withholding and self-employed workers must file their second quarterly estimated federal tax payment for 2023 by June 15. A similar rule applies in many states to payments of estimated state taxes.
Nonminister employees of churches that filed a timely Form 8274 (waiving the church’s obligation to withhold and pay FICA taxes) are treated as self-employed for Social Security. They are subject to the estimated tax deadlines with respect to their self-employment (Social Security) taxes unless they ask their employing church to withhold an additional amount of income taxes from each paycheck that will be sufficient to cover self-employment taxes (use a new Form W-4, Step 4(c), to make this request).
Payments for unrelated business income tax liability
A church must make quarterly estimated tax payments if it expects an unrelated business income tax liability for the year to be $500 or more. Use IRS Form 990-W to figure your estimated taxes. Quarterly estimated tax payments of one-fourth of the total tax liability are due by April 15, June 15, September 15, and December 15, 2023, for churches on a calendar-year basis. Deposit quarterly tax payments electronically using the Electronic Federal Tax Payment System (EFTPS).
June 30, 2023: Review housing or parsonage allowance designations
Now is a good time to review the 2023 housing or parsonage allowances designated for all ministers on staff. If an allowance designated for 2023 is clearly below actual housing expenses, then the church board should consider declaring a larger portion of the minister’s remaining compensation as a housing or parsonage allowance.
A church is free to designate any portion of a minister’s compensation as a housing allowance but remember that clergy who own their home cannot claim a housing allowance exclusion greater than the fair rental value of the home (furnished, including utilities).
Therefore, the allowance ordinarily should not be significantly more than this amount.
Note: If a date listed for filing a return or making a tax payment falls on a Saturday, Sunday, or legal holiday (either national or statewide in a state where the return is required to be filed), the return or tax payment is due on the following business day.
Note: You must use electronic funds transfer to make all federal employment tax deposits. This is generally done using the Electronic Federal Tax Payment System, a free service provided by the US Department of Treasury. If you don’t wish to use EFTPS, you can arrange for your tax professional, financial institution, or payroll service to make deposits on your behalf. Failure to make a timely deposit may subject you to a 10-percent penalty.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: Getty/Andrii Dodonov
IRS Again Alerts Employers to Improper ERC Claims
Third parties are using aggressive tactics and lucrative promises related to ERC claims.
The Editors
Editor’s Note: On September 14, 2023, the Internal Revenue Service (IRS) announced it has immediately stopped processing new Employee Retention Credit (ERC) claims “amid [a] surge of questionable claims.”
Concerns raised by tax professionals, coupled with aggressive marketing to ineligible applicants, “highlights unacceptable risk to businesses and the tax system,” the agency said.
The IRS will continue processing previously filed claims and pay out claims it approves, it said, but processing times will take longer as the agency applies more scrutiny to address fraud concerns.
The IRS also said it is finalizing details to help entities victimized by “aggressive promoters” who have used repeated advertising and direct-contact methods to entice claim applications without carefully evaluating whether an entity truly qualifies for the credit.
Taxpayers who already have a claim submitted, but fear they were misled–including churches and small businesses–will be eligible for a special withdrawal option as well, the IRS said. It plans to announce details for the option soon.
The IRS said more than 600,000 claims remain unprocessed.
Church Law & Tax will continue to monitor developments.
The Internal Revenue Service (IRS) is again warning employers, including churches, to exercise caution if they’re contacted by a third party regarding the Employee Retention Credit (ERC).
The ERC is legitimate. However, third parties are using aggressive tactics to try and entice employers to seek it, and sometimes, the third parties aren’t carefully evaluating an employer’s eligibility, putting the employer in jeopardy with the IRS.
In other instances, the third parties have fraudulent intentions altogether.
How to navigate the government’s $2.2 trillion stimulus plan responding to COVID-19’s economic fallout.
Many churches may be eligible for the ERC, a provision providing employers relief due to hardships experienced in the early days of the COVID-19 pandemic. Specific criteria must be met, however.
“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel, in the agency’s latest alert. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”
Join Church Law & Tax today for access to thousands of helpful articles, resources, expert analysis and live webinars.
The IRS provided a list of “warning signs” that employers should look for when dealing with a third party about the ERC, including:
Unsolicited calls or advertisements mentioning an “easy application process.”
Statements that the promoter or company can determine ERC eligibility within minutes.
Large upfront fees to claim the credit.
Fees based on a percentage of the refund amount claimed. This is a similar warning sign for everyday taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. The ERC is a complex credit that requires careful review before applying.
Wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. Those improperly receiving the credit could have to repay the credit—along with substantial interest and penalties.
“These promoters may lie about eligibility requirements,” the IRS added. “In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit.”
Image: Getty/blackred
WATCH: The Dangers of Raising Money For One Thing—And Spending It On Another
Church leaders would do well to pay attention to this fraud lawsuit against a Michigan archdiocese.
In this update, Church Law & Tax Editor and Attorney-at-Law Matthew Branaugh highlights a fraud lawsuit out of Michigan to explain the risks of churches raising money for one thing, only to spend it for something else.
Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, they learn that their state’s statute of limitations prevents them from seeking damages.
In many cases, this includes claims against the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. States are helping victims by changing or even removing these barriers.
This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications.
This part looks specifically at the “discovery rule,” an exception to statutes of limitation long available to victims. This is especially relevant to churches in states that have not extended or removed statutes of limitations. This rule also applies in states where extensions have been granted, but deadlines still exist.
Under this rule, the statute of limitations does not begin to run until a person “discovers” that his or her injuries were caused by a particular event or condition, or, with the exercise of reasonable vigilance, should have discovered the connection. It does not matter how long ago the injury occurred.
The discovery rule has been applied most often in the following three situations:
1. Medical malpractice.
In some cases, medical malpractice is difficult, if not impossible, to recognize until after the statute of limitations has expired. Under the discovery rule, the statute of limitations begins to run when the patient knew or should have known of it.
2. Child molestation.
Some courts have applied the discovery rule in cases of child sex abuse. These courts have concluded that young children may “block out” memories of molestation for many years. The statute of limitations does not begin until the victim’s eighteenth birthday, or until the victim knew or should have known that his or her emotional or physical injuries were caused by the acts of molestation. Some courts that have applied this rule have limited it to victims who were very young at the time of the molestation. Adults who claim that they repressed memories of abuse occurring when they were adolescents often have a difficult time convincing juries that they are telling the truth.
3. Seduction of adult counselees.
Some courts have applied the discovery rule in cases of sexual contact between a minister and an adult counselee. These courts have concluded that adults who engage in such acts with a minister may attempt to repress their memory of them. They may also be intimidated to the point that they lack the capacity to file a lawsuit.
Key point. Any rescission or extension of the statute of limitations in child sex abuse cases, or any “revival” of child abuse claims barred under prior law, presents extraordinary difficulties for a church that is sued as a result of an alleged incident of sexual misconduct that occurred many years ago. In some cases, church leaders cannot even remember the alleged wrongdoer, much less the precautions that were followed in selecting or supervising this person.
Several courts have been reluctant to apply the discovery rule in cases of child abuse. This is because of the difficulty of repressing knowledge of such events, especially for victims who were adolescents when the alleged abuse occurred. As one court noted, “The discovery rule does not generally apply to claims from a violent assault because the plaintiff is usually aware of the assault.” Doe v. Jesuit College Preparatory School, 2022 WL 2352953 (Tex. App. 2022).
Example.
A federal court in Vermont ruled that an adult who claimed to have been sexually abused by a nun some 40 years earlier could sue a Catholic diocese for his alleged injuries.
An adult male (the plaintiff) began receiving intensive psychotherapy for what he alleges were severe emotional problems. As a result of this therapy, the plaintiff claimed that he discovered he was the victim of “childhood sexual abuse, physical abuse and psychological abuse.” These things allegedly happened when he was a resident of a church orphanage.
The plaintiff filed a lawsuit against “Sister Jane Doe” and various religious organizations allegedly responsible for hiring and supervising her.
The plaintiff alleged in his lawsuit that he had “used all due diligence, given the nature, extent, and severity of his psychological injuries and the circumstances of their infliction, to discover the fact that he has been injured by the sexual abuse.” The diocese urged the court to dismiss the case on the ground that the statute of limitations had expired.
Under Vermont law, when a plaintiff sues to recover damages for injuries “suffered as a result of childhood sexual abuse,” the lawsuit must be brought within “six years of the act alleged to have caused the injury or condition, or six years of the time the victim discovered that the injury or condition was caused by that act, whichever period expires later.”
The diocese claimed that since the alleged abuse occurred over forty years ago it is reasonable to assume that the plaintiff should have discovered the cause of his injuries long ago. It also argued that forcing it to defend against an alleged injury occurring so long ago violates the very purpose of a statute of limitations, which is to relieve defendants of the difficult if not impossible task of defending against such claims.
The court rejected these arguments and ruled that the statute of limitations had not expired on all but one of the plaintiff’s claims. It also excepted assault and battery, which the court deemed to be unrelated to childhood sexual abuse. The court observed that under Vermont law, the test is when the plaintiff in fact discovered that his injuries were caused by childhood abuse, and not when he reasonably could have made this discovery. Barquin v. Roman Catholic Diocese, 839 F. Supp. 275 (D. Vt. 1993).
‘Active Concealment’ and fraud can also extend statutes of limitations
Some courts have permitted the statute of limitations to be suspended in limited circumstances. This includes fraud or the “active concealment” of the existence of a civil claim against a wrongdoer.
Example.
A Tennessee appellate court ruled the trial court wrongly dismissed a complaint against church entities involving sexual abuse by a pastor. The court found victims claimed church leaders hid the abuse and created a “whitewash,” amounting to fraudulent concealment. Because of this alleged concealment, the statute of limitations had not begun before the lawsuit was filed.
Doe v. Presbyterian, 2022 WL 1837455 (Tenn. App. 2022).
Editor’s Note: Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, often years or decades after suffering alleged abuses, they learn their state’s statute of limitations prevent them from seeking damages from the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. These time bars have become subject to changes—and in some instances, outright removals—by state legislatures in an effort to help victims.
This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications. This part looks specifically at changes made by Congress as a way to offer victims a path to seek legal remedies if their states’ statutes of limitations have not been extended.
Certain activities relating to material involving the sexual exploitation of minors
18 USC 2252
Certain activities relating to material involving the sexual exploitation of minors
18 USC 2252A
Production of sexually explicit depictions of a minor for importation into the United States
18 USC 2260
Transportation generally
18 USC 2421
Coercion and enticement
18 USC 2422
Transportation of minors
18 USC 2423
It remains to be seen how effective this legislation will be since most sex abuse claims are brought in state court. However, it likely will benefit victims of child sexual abuse whose claims are barred by state statutes of limitation.
Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, they learn that their state’s statute of limitations prevents them from seeking damages.
In many cases, this includes claims against the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. States are helping victims by changing or even removing these barriers.
This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications.
This part looks specifically at the legal, financial, and administrative tolls a church may face if a civil lawsuit dating back years or decades moves forward in the courts.
Understand what’s at stake
Church leaders must understand that their church is probably not in a financial position to respond to an abuse claim reaching back several decades, and that in some cases, liability for an abuse claim could extend to board members or even individual members.
The motivation behind states extending victims’ rights when it comes to abuse involving churches is both understandable and laudable: Legislators want to “give voice” to persons sexually abused as minors who, for whatever reason, were reluctant or unwilling to bring their claims in court.
After all, several studies have demonstrated that most child abuse victims find it difficult to seek remedies for their claims in civil court. This is often due to one or more of the following factors:
Repressed memory of the abuse.
Shame and embarrassment.
An unwillingness to publicly disclose in court the details of the abuse.
An unwillingness to testify in court regarding the details of the abuse.
An unwillingness to confront one’s abuser in court.
A reluctance to disclose the details of the abuse to family and friends who may know nothing about it.
But church leaders need to understand that if a church’s assets are below the amount a victim is seeking in court, and a church’s insurance coverage is insufficient to cover the claim, then the victim’s attorney may seek to recover damages against the personal assets of church board members.
Churches are financially ill-prepared to meet new claims
But many churches, schools and other defendants are not adequately positioned to answer for abuse that happened before current staff and members were born.
Inadequate insurance coverage
Unfortunately, insurance policies that are several years or decades old are often discarded by church staff who see no point in keeping them and adding to the general “clutter” in the church office, and most churches do not have liability insurance providing coverage for claims of sexual abuse alleged to have occurred years or decades in the past.
Even if liability insurance is available and no exception applies, the policy often will provide low limits of coverage for providing a defense and paying toward any damages awarded.
Bankruptcy
In any event, if a liability insurance policy for the year that a case of child abuse occurred is not available, then bankruptcy must be considered. This would involve identifying all church assets that are available to pay a sex abuse claim, including buildings, vehicles, bank accounts, and so on.
Furthermore, liability might extend to board members or even individual members if a church’s assets are far below the amount a victim is seeking in court.
Federal law and the laws of most states protect volunteers and uncompensated board members of tax-exempt corporations (including churches) from personal liability for their decisions as members of the board.
Exceptions
In most states, the immunity of uncompensated church board members does not extend to willful and wanton acts or gross negligence, or to board members of unincorporated churches. To illustrate, if an old claim of child abuse occurred because of a failure by the board to institute reasonable protective policies and procedures, it is possible that this will constitute gross negligence. This will expose the board members to the personal liability exception.
Immunity statutes providing limited relief to church board members only apply to uncompensated directors. This is an important point for church leaders to understand. Some churches provide limited amounts of compensation to board members. These may include a gift or stipend at Christmas, or non-accountable expense reimbursements. Even limited forms of compensation jeopardize the significant protection that uncompensated directors enjoy from personal liability, making it important for church leaders to review any future examples of compensation provided by the church to its board members.
Also note that some courts have suggested that members of an unincorporated church may be personally liable for the acts and obligations of other members, or the church itself, opening the door for victims to recover damages from individual members if the church cannot pay out of its own assets and insurance.
Understanding insurance is key
Clergy and church leaders evaluating possible abuse claims past or present need to understand the insurance coverage their churches possess (or possessed in the past). Of particular importance is whether a church secured an occurrence policy or a “claims made” policy.
Claims made and occurence insurance policies
“Occurrence” policies only cover injuries that occur during the policy period, regardless of when a claim is made.
Advantages to an “occurence” policy:
Covers any injury that occurs during the policy period, regardless of when a lawsuit is filed
No “prior acts” coverage needed if a church maintains a succession of “occurrence” policies
Disadvantages:
Does not cover lawsuits filed during the policy period for injuries occurring prior to the policy period.
Insurance premiums usually higher than for a “claims made” policy.
A “claims made” policy covers injuries for which a claim is made during the policy period if the insured has continuously been insured with claims made policies with the same insurer since the injury occurred.
Advantages to a “claims made” policy:
Covers any lawsuit filed during the policy period, regardless of when the injury occurred
Coverage limits are the current limits, not the limits in effect when the injury occurred
Insurance premiums often are lower than for an occurrence policy
Disadvantages:
Must have carried “claims made” insurance continuously with the same insurer from the date of the injury to the date of the claim, or have purchased “prior acts coverage,” which can be costly.
A brief lapse in insurance coverage for any reason can result in no “claims made” coverage
Coverage for prior claims is lost if a church switches from a “claims made” to an “occurrence” policy
When a policy expires or is terminated, for any reason, coverage ceases (even for claims that are later made for injuries occurring during the policy period)
Claims for injuries occurring in more than one year may be filed during the same year, meaning that the policy’s “aggregate” coverage limit is more quickly reached (the aggregate limit is the total amount the insurer will pay out during that year for all covered claims)
Claims must not only be made during the policy period to be covered—they also must be reported to the insurer (a technicality that is sometimes overlooked)
“Prior acts” coverage, available for an additional cost and at the insurer’s discretion, covers claims made during the current policy period for injuries occurring in the past when the insured carried insurance with another insurer.
Example: A church purchases “claims made” counseling insurance from Company A each year for several years. It switches to an “occurrence policy” with Company B this year.
A lawsuit is brought against the church this year for an alleged act of counseling malpractice that occurred three years ago. The church’s policy with Company A will not cover this claim since the claim was not “made” during the policy period (even though it occurred during the policy period). Had the church not switched insurers this year, the claim would have been covered. Does the policy with Company B cover the claim? No, since the injury did not occur during the policy period.
As a result, there is no coverage for this claim. Note that the result would have been the same had the church purchased a claims made policy from Company B, unless it also purchased “prior acts” coverage.
This example illustrates an important point. Churches should not switch from a claims made to an occurrence policy (with the same or a different insurer), or switch claims made insurers, without legal counsel.
Church leaders should ensure that liability insurance policies are never discarded. Policies often are the only means of establishing the existence and availability of insurance for old claims—both now and in the future.
Church leaders should periodically review the policies and procedures the church has adopted to address the risk of child abuse and ensure both their adequacy and consistent application.
Insurance ‘archeology’
If a church cannot locate an insurance policy covering a case of child abuse occurring many years in the past, the services of an “insurance archaeologist” may be helpful. Insurance archaeologists are trained to locate missing insurance policies. Even if successful, conditions may apply. Further, the coverage limits under old policies often will be far below the damages sought, making the services of an archaeologist of limited value in many cases.
Editor’s Note: Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, often years or decades after suffering alleged abuses, they learn their state’s statute of limitations prevent them from seeking damages from the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits.
These time bars have become subject to changes—and in some instances, outright removals—by state legislatures in an effort to help victims.
This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications. This part looks specifically at how many states are changing statutes of limitation, and court cases illustrating how those changes affect the legal process.
Most states have several statutes of limitations specifying the deadline for filing a civil lawsuit seeking a legal remedy (such as compensation) for an injury that can range from a breach of contract to a personal injury to property damage. Different deadlines apply for different types of claims.
Key point 10-16.4The statute of limitations specifies the deadline for filing a civil lawsuit. Lawsuits cannot be brought after this deadline has passed.
There are a few exceptions that have been recognized by some courts:
(1) The statute of limitations for injuries suffered by a minor begins to run on the minor’s eighteenth birthday.
(2) The statute of limitations does not begin to run until an adult survivor of child sexual molestation “discovers” that he or she has experienced physical or emotional suffering as a result of the molestation.
(3) The statute of limitations does not begin to run until an adult with whom a minister or church counselor has had sexual contact “discovers” that his or her psychological damages were caused by the inappropriate contact.
(4) The statute of limitations is suspended due to fraud or concealment of a cause of action.
Persons who do not file a lawsuit by the deadline specified by law generally have no legal recourse.
But state lawmakers, federal lawmakers, and courts have come up with a variety of ways to extend the statute of limitations for injuries to minors, particularly as it relates to sexual abuse and molestation.
A report released in 2022 by CHILD USA notes:
50 states have eliminated the statute of limitations for child abuse criminal claims.
18 states have eliminated a statute of limitations for some or all child abuse civil claims.
27 states have enacted “revival statutes” that “revive” child sex abuse claims that expired under prior law.
Case Studies
North Carolina
An adult male sued a religious denomination in 2022 for injuries he sustained as a result of being sexually abused by a house parent at a denomination–run orphanage. A North Carolina appeals court observed:
The Sexual Assault Fast Reporting and Enforcement Act (“the Act”) was enacted in 2019 to “strengthen and modernize” our sexual assault laws. Among other revisions, the Act extended to ten years the statute of limitations for a civil action based on sexual abuse suffered while a minor.
Further, it provided that “a plaintiff may file a civil action within two years of the date of a criminal conviction for a related felony sexual offense against a defendant for claims related to sexual abuse suffered while the plaintiff was under 18 years of age.”
The Act also contained a provision, effective from 1 January 2020 to 31 December 2021, that revived “any civil action for child sexual abuse otherwise time-barred under [prior law] as it existed immediately before” the Act’s passage. Doe v. The Western North Carolina Conference of the United Methodist Church, 871 S.E.2d 877 (N.C. App. 2022).
New York
Example 1: The plaintiff, a 69 year old male, sued a church and others for sexual abuse from 1960 to 1964 by two persons associated with his Boy Scout troop, the suit was not time-barred because the Child Victims Act … extended the statute of limitations to bring a civil action based on sexual abuse until the child victim reached the age of 55, and … created a one-year revival window for time-barred claims, which was later extended by the Governor for an additional year regardless of the victim’s age. LG 67 Doe v. Resurrection Lutheran Church, 164 N.Y.S.3d 803 (N.Y. App. 2022).
Example 2: A federal district court in New York made the following comments regarding a sex abuse case:
On February 14, 2019, former New York Governor Andrew Cuomo signed into law the Child Victims Act. … The Child Victims Act allows individuals who were sexually abused as children to assert civil claims that had previously been barred by the statute of limitations. Specifically, the CVA extends the statute of limitations for actions against ‘any party whose intentional or negligent acts or omissions are alleged to have resulted in the commission of child sexual offenses.’
Those actions must be brought before the plaintiff reaches the age of 55. The CVA also created a ‘window of time’ during which previously time-barred claims alleging child sexual abuse could be brought. … After the CVA became law, more than 200 previously time-barred actions alleging child sexual abuse were brought against the Diocese and certain individuals and organizations affiliated with the Diocese.
Together, these suits allege acts of sexual abuse dating back more than six decades. The Diocese provided notice to its former insurers and requested that they defend and indemnify the Diocese in accordance with the requirements in the individual policies. The filing of more than 200 claims, and the possibility of additional claims, led the Diocese on October 1, 2020, to file for bankruptcy protection pursuant to Chapter 11 of the United States Bankruptcy Code. Roman Catholic Diocese of Rockville Ctr. v. Certain Underwriters at Lloyds, 2021 WL 4027020 (S.D.N.Y. 2021).
Old abuse claims pose challenges for both victims, churches
While the motivation behind such laws is understandable, churches will likely struggle to defend themselves against claims arising from decades-old abuse cases.
This is due to several factors, including:
memories have faded,
witnesses are dead,
alleged living witnesses have no recollection of the abuse,
few, if any, church members have any knowledge or recollection of the abuse,
no documentary evidence exists pertaining to the alleged abuse,
the victim has no corroborating physical evidence pertaining to the abuse, such as letters, email, social media posts, and photographs,
the victim cannot identify the alleged perpetrator,
a lack of evidence that the victim reported the abuse to parents, friends, or church staff.
Some courts have noted that the following factors tend to corroborate claims of child abuse occurring many years or decades ago:
an admission by the abuser,
a criminal conviction for the abuse,
a victim’s documented medical history of childhood sexual abuse,
contemporaneous records or written statements of the abuser, such as diaries or letters,
photographs or recordings of the abuse,
an objective eyewitness’s account,
evidence the abuser had sexually abused others,
“… proof of a chain of facts and circumstances having sufficient probative force to produce a reasonable and probable conclusion that sexual abuse occurred. …” Moriarty v. Garden Sanctuary Church of God, 534 S.E.2d 672 (SC 2000).
Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, often years or decades after suffering alleged abuses, they learn their state’s statute of limitations prevents them from seeking damages from the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. These time bars have become subject to changes—and in some instances, outright removals—by state legislatures in an effort to help victims.
This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications.
If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly.
Monthly deposits are due by the 15th day of the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church or organization need not deposit the taxes.
Instead, it can pay the total withheld taxes directly to the Internal Revenue Service (IRS) with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
Semiweekly requirements
If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semiweekly.
This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.
Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
May 10, 2023: Employer’s quarterly federal tax return—Form 941
Churches having non-minister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) may file their employer’s quarterly federal tax return (Form 941) by this date instead of April 30 if all taxes for the first calendar quarter have been deposited in full and on time.
May 15, 2023: File forms 990, 990-T, and 5578
Information return—Form 990
An annual information return (Form 990) for tax-exempt organizations is due by this date for tax year 2022. Form 990 summarizes revenue, expenses, and services rendered. Organizations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code must report additional information on Schedule A.
Note. Churches, conventions, and associations of churches, “integrated auxiliaries” of churches, and church-affiliated elementary and secondary schools are among the organizations that are exempt from this reporting requirement. Organizations not exempt from this reporting requirement must file Form 990 if they normally have annual gross receipts of $50,000 or more.
Unrelated business income tax return—Form 990-T
An unrelated business income tax return (Form 990-T) must be filed by this date by churches and any other organization exempt from federal income tax that had gross income from an unrelated trade or business of $1,000 or more in 2022. Learn more about unrelated business income on this Recommended Reading page.
Annual certification (for calendar year 2022) of racial nondiscrimination by a private school exempt from federal income tax (Form 5578) must be filed by this date by schools that operate on a calendar-year basis.
This form must be filed by preschools, primary and secondary schools, and colleges, whether operated as a separate legal entity or by a church.
Richard R. Hammar further explains Form 5578, including the steps for filing one,in this article.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: Image: Getty/Douglas Sacha
Can a Church Glorify God via the Property Tax Process? Absolutely.
What churches should know, especially when an unexpected property tax bill arrives.
The Editors
Churches meeting certain criteria are considered automatically exempt for federal tax purposes. That’s why many are caught off-guard when an unexpected bill arrives from the local assessor. Attorney Midgett Parker, a long-time senior editorial advisor for Church Law & Tax, explains what happens when property tax gets assessed, why it might happen, and how churches can work to avoid such problems by building good relationships and maintaining strong communications in the community.
Q: Churches meeting certain criteria are considered automatically tax-exempt for federal tax purposes. Does this mean any property they own is also automatically exempt from taxes?
No. Real property owned by a religious entity is not automatically tax-exempt. Churches that own property or rent their space are still paying property taxes until they apply for, and receive from the local jurisdiction, their tax exemption status for the real property.
In other words, churches must take steps to find out what the procedures are in their local jurisdiction to apply for the tax exemption status for the real property. In today’s world, it’s easy: just conduct an online search by typing in “real property tax exemption for churches in …” followed by the county and state name.
Did you know the practice of exempting religious organizations from property taxes is both ancient and widespread? From Joseph protecting priests’ lands from Pharoah to Constantine exempting churches from property taxes in the fourth century, the concept is not new to the United States.
Once you’ve found the address and phone number of the local tax assessment office, pick up the phone, ask for help applying for the exemption and perhaps even visit that office.
Build relationships. Look at it as a positive experience—an opportunity to spread the word that your church is in the community; that it has acquired a property or is leasing a property.
The next thing to do is talk to other church leaders. Ask them if their property is exempt and what processes they went through. Again, it’s about building relationships not just for advancement of the kingdom, but to obtain relief for your congregations whose tithes and offerings are supporting the church. It’s worth the time.
Q: What should a church be prepared to have ready when going through a tax exemption application at the local level?
The primary purpose behind the exemption is that the property is used exclusively for religious worship purposes (which is basically the standard across the United States). You want to present evidence (through written documentation and oral testimony) to show how the property is used EXCLUSIVELY for religious worship purposes.
If you’re not ready to build on a vacant property, obtain a permit for a tent, have a revival. Print out your program or have available a program showing the property is being used for religious worship purposes.
Sure, your church can have picnics, create exercise and meditation gardens, have and serve refreshments, but again, the primary use is religious worship.
Also, make sure you have a site plan that shows the actual property boundaries. You might even want to take a surveyor to the site and put stakes in the ground outlining the shape and size of the property.
Q: What about churches that lease space?
Storefront churches, and churches using similar spaces, are a growing trend because it’s easier to move into an existing building than build a new one from the ground up.
When renting space, the reality is that a portion of your rent is going to pay local real property taxes. And typically, in lease documents, they outline what the rent rate is and maybe mention your responsibility for your portion of the real property taxes. If the lease agreement includes such information, ask the assessor for any exemptions from real property taxes for your religious use on a portion of the real property in the lease.
Tip: Sometimes, a county government will offer an exemption from real property taxes for space used by a religious entity exclusively for religious worship purposes. Prince George County, Maryland, for example, offers an exemption that might make a good template to take to your local assessor or governing body to ask for a similar arrangement.
Q: Why is a church property tax exemption not permanent?
Because land uses change—and there are eyes watching you all the time. So be careful.
A church may sell its property and the government wants to receive its share of taxes, so it will add the property back to the tax rolls.
Learn how to evaluate your church’s property tax exemptions each year.
Or maybe a church owns the property and changes the use. For example, the church adds affordable housing or housing for the elderly, making it a residential use.
Another example: a church lost its exemption from real property tax when it decided to begin renting parking spaces in direct competition with the local metropolitan parking lot – typically near a mass transit rail line. As a result, it lost its property tax exemption for the portion of the property being used as a commercial parking lot.
Q: What if a church sells its property to another church?
Typically, the exemption will remain in place. But, again, relationships and communication are key. Talk to the assessor’s office, let them know what is going on, and remind them that the property will continue to be used exclusively for religious worship purposes.
Q: What types of situations might trigger a property tax assessment for a church, even if it has a valid exemption on record with its local assessor?
When activities cause others to question the activities on the property, it might bring a challenge.
Food banks are a good example, or perhaps a clothing thrift shop. An outsider might see such activity as a non-religious use without being aware the food bank or thrift shop is part of your mission. So, let the assessor know the missional aspect of the activity because, chances are, you will be challenged.
Q: What about building on vacant property or vacating an existing building to allow renovations or an addition? What should church leaders expect from the local taxing authority in these situations?
The period during construction for the church’s use may be targeted to be taxed because you’re not using the space exclusively for religious worship purposes. The key, though, is to continue worshiping there, even during construction.
Another key: building a morals and religious worship clause into all construction contracts spelling out that the property is God’s property and is to be treated as holy ground. Turn the project into a worship experience.
Dig Deeper: A New Jersey church was forced to pay taxes for a converted building. Click here to find out why.
Think creatively. Find a biblical basis—the nexus between what your activity is (construction) and the worshipful aspect of that activity. And be prepared to take your argument to the local tax assessor and your elected officials. They could change the local tax code to allow that a church in the midst of a construction project while continuing to hold religious worship services on the property does not violate the exclusive use requirement.
I’m an optimist about these things!
Q: If a church receives an unexpected property tax bill, what are the best steps that leaders can take to appeal it with the local assessor?
First, do not panic. Pray. Then, read the tax notice in detail, front-to-back, top to bottom. There ought to be in that tax bill a statement of how the recipient can appeal the assessment, along with an address and phone number. Be sure to call the number provided and ask about the appeal process.
Again, be communicative in a positive way. Typically, there is a very limited window of time to initiate an appeal of an adverse decision—often 30 days from the date of the letter. Missing the window means you’ll likely have to wait until the next year to appeal.
One of the best steps a church leader can take is to accept where you are now. If an appeal is possible, do it. If your church got taxed because its exemption lapsed for one reason or another, rededicate your use of the real property toward EXCLUSIVE religious worship purposes and then apply for the exemption. Then, renew the exemption every year going forward. Don’t look back. Look forward and continue to use the property EXCLUSIVELY for religious worship purposes.
(Editor’s Note: This interview was edited for length and clarity.)
Image: Getty/d3sign
Remote Work Expense Deductions for Pastors and Church Staff
Explore how pastors and church staff can benefit from tax-free reimbursements and deductions for remote work expenses.
Question: More churches have allowed pastors and employees to work from home one or more days a week. For income tax purposes, can those individuals deduct the business expenses they incur while working from home?
However, this does not mean that churches cannot assist pastors and staff with their home office expenses. Here are two key considerations:
Ministers and Dual Tax Status
Ministers are uniquely treated under the tax code due to their dual tax status. They are considered employees for income tax purposes but are treated as self-employed for Social Security and Medicare purposes under the Self-Employed Contributions Act (SECA). Because of this distinction, ministers may still be able to deduct unreimbursed business expenses when calculating net income subject to self-employment tax. Consulting with qualified tax counsel is essential to explore this possibility further.
Reimbursement for Work-from-Home Expenses
Churches can reimburse pastors and staff for valid business expenses incurred while working from home under an accountable reimbursement arrangement. Eligible expenses include costs for equipment and supplies used exclusively for employment purposes. Examples of reimbursable expenses include:
Computers or laptops (especially for cybersecurity and productivity needs)
Monthly internet service (to ensure adequate speeds for video calls and other activities)
Office supplies, such as paper, pens, or folders
Printers, scanners, or other office equipment
Office furniture, if necessary and approved by the employer
Advantages of Reimbursements
There are distinct advantages for churches to reimburse work-from-home expenses:
Tax-Free Reimbursements: Expenses reimbursed under an accountable reimbursement arrangement are not taxable income to the employee.
Improved Productivity and Security: Providing specific equipment or internet services ensures employees have the tools needed to perform their roles effectively and securely.
For a detailed look at accountable reimbursement arrangements, including key points and examples, see Chapter 7 of Richard Hammar’s “Church & Clergy Tax Guide”.
Important Considerations
For Pastors and Employees
If an employer pays for furniture or equipment, the employer retains ownership of these items. Employees are responsible for maintaining these items and returning them if their employment ends.
For Churches
Reimbursements can impact budgets, but they provide significant financial relief to employees and are generally not taxable. Churches should balance the financial benefit to staff with their overall budgetary constraints.
FAQs About Remote Work Expense Deductions
Can pastors deduct home office expenses on their taxes? Pastors may deduct unreimbursed business expenses for self-employment tax purposes but should consult with a tax professional for guidance. What is an accountable reimbursement arrangement? It is a plan that allows employers to reimburse employees for valid business expenses tax-free, provided detailed documentation is maintained. Which expenses qualify for reimbursement? Qualifying expenses include computers, internet service, office supplies, and other items used exclusively for work purposes. Do employees own reimbursed equipment? No, items purchased or reimbursed by the employer typically remain the property of the employer.
Conclusion
While pastors and church staff may not be able to deduct unreimbursed business expenses directly, churches can help by reimbursing valid work-from-home costs. This not only supports staff productivity but also provides financial relief through tax-free reimbursements. Churches should establish clear accountable reimbursement arrangements to ensure compliance and maximize the benefits for their teams.
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
Image: Image: Getty/Kevin Dietsch
Keeping Your Church’s Deposits Safe in a Jittery Bank Environment
Silicon Valley Bank’s failure shows we never really know whether a bank is truly safe and sound.
Editor’s Note: This article, which is provided for information only and is not an endorsement, has been edited and republished with permission from Batts Morrison Wales & Lee.
Many church and nonprofit leaders are wondering if their organizations’ bank deposits are safe in the current banking environment. And for good reason.
Immediately before Silicon Valley Bank (SVB) was taken over by the FDIC on March 10, 2023, one major ratings agency had an “A” rating outstanding for the bank, and another had a “B” rating outstanding.
SVB’s failure was the second largest in US history, according to The Wall Street Journal, which offered a truly remarkable observation about it: “The bank was in sound financial condition on Wednesday, the regulator said. A day later, it was insolvent.”
When a bank with “A” and “B” ratings is considered by regulators to be sound one day, and taken over by the FDIC two days later, it’s only logical to wonder how any reasonable, prudent person can know whether any bank is in healthy financial condition.
For more help with managing liquidity and financial position, see chapter 6 of Church Finance, Second Edition, by Michael E. Batts
Fortunately for SVB’s depositors, federal banking officials have indicated that all SVB depositors will be made whole, even beyond the $250,000-per-depositor FDIC coverage cap because of SVB’s systemic importance.
But a logical corollary is that one cannot assume that the same will be true for the next bank that fails. Another bank, Signature Bank, also recently failed.
Assessing where your organization banks
Given the practical limitations on the ability to know whether any bank is truly safe and sound, what can–and should—church and nonprofit leaders do to ensure that their organizations’ bank cash deposits are safe?
Some people are suggesting that perhaps the only safe banks are the very largest banks in the country … those that many believe regulators deem are “too big to fail.” It is important to note that the assumption that regulators would make all depositors of a very large bank whole in any failure scenario is just that…an assumption. There is no federal guarantee of regular deposits in any bank beyond the FDIC’s $250,000 per depositor insurance coverage.
Additionally, If all depositors decided to bank only with the largest banks, smaller local and regional banks would be wiped out, and local banking relationships could be more difficult to maintain. And depending on the size of your organization’s deposit balances, it may not be practical to try to spread deposits among multiple banks keeping balances below the FDIC coverage cap of $250,000 per depositor.
So, let’s turn to the topic of making deposits in the banking system.
Clearly, there are ways to protect cash outside of the banking system in an investment portfolio, such as investing (with the help of a properly credentialed investment advisor) in short-term US Treasury securities or in appropriate investment funds that hold such securities. But what about cash that your organization simply wants to keep in the bank?
It is probably true that the larger the bank, the more likely it is that federal regulators would deem it too big to fail.
So, if your organization wants to bank with a big bank, that could be an appropriate strategy. Bankrate offers a list of the 15 largest banks in the US. It is interesting to note, however, that #14 on the list, First Republic Bank, recently had a severe challenge. Bankrate’s website includes an update on First Republic Bank dated March 17, 2023, which states:
It’s also important to note that First Republic recently faced turmoil that threatened its solvency following the collapse of Silicon Valley Bank and Signature Bank. However, 11 of the largest US banks came together to save the bank, depositing $30 billion into First Republic to keep it afloat.
Just know the fact that a bank is large–even very large–is not, in and of itself, assurance of the bank’s financial health.
A word of caution: Any organizations or persons considering any strategy to manage the risk of their bank deposits or other assets should perform their own due diligence before taking action.
Tapping into IntraFi
Is there a way to ensure that an organization’s bank cash deposits are safe, even with a local or regional bank?
Many such banks would answer that question with a resounding “Yes!,” and a number of them would point to their participation in programs offered by IntraFi Network, LLC (IntraFi). IntraFi’s website describes its two main programs, ICSand CDARS, as follows:
Using IntraFi Cash Service℠, or ICS, and CDARS you can access millions in FDIC insurance for cash deposits from IntraFi® network banks and enjoy the simplicity of banking with just one trusted, local institution. Conveniently and easily secure funds placed into demand deposit accounts, money market deposit accounts, or CDs.
Banks that participate in the IntraFi network allow customers to maintain a relationship with one bank and have FDIC insurance coverage for deposits well beyond the standard FDIC coverage cap of $250,000 per depositor per bank. The network allows for the larger deposits to be spread among multiple banks in the network in amounts below the $250,000 FDIC cap while maintaining one point of contact with one participating bank.
IntraFi offers programs for demand deposit (checking) accounts, money market accounts, and CDs. Participation in the IntraFi program with a participating bank can carry a cost or fee . The cost can apply as a reduction in the interest rate you earn on your deposit balances. For example, in another alert about earning interest on your organization’s excess checking account funds, I quoted Texas Security Bank president, Craig Scheef, who stated that his bank reduces the interest rate it pays on money market accounts (currently, approximately 4% annualized) by 0.15% for deposits that participate in the IntraFi program.
The IntraFi website, which says that thousands of financial institutions across the country participate in its programs, has a web page that allows you to find banks that participate in the program as well as an FAQ page. In the current environment, interest in the IntraFi program has increased significantly, according to Scheef.
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
Image: AdobeStock/D.e.a.r
Why That “Gift” to Your Pastor Requires Caution
Church congregations naturally see giving gifts to pastors as a blessing. But there are some critical tax considerations.
Q: We are giving our pastor and wife of 40 years a cruise. Is this gift taxable to them?
It’s great your church wants to do this. But caution is needed—at least two significant issues are triggered when churches give gifts to ministers.
A gift poses potential income tax consequences for the pastor. It also raises concerns about reasonable compensation.
Chapter 12 of Church Law & Tax Senior Editorial Advisor and CPA Elaine Sommerville’s Church Compensation, Second Edition, does an excellent job of explaining the tax and reasonable compensation issues surrounding gifts:
Where the church pays directly to a minister or an employee, the amounts are not gifts, according to the Internal Revenue Code. This classification includes any payment of cash or transfer of a noncash item unless it is a qualified employee achievement award or a small de minimis item. (emphasis added)
In chapter 2 of her book, Sommerville also notes concerns related to excess benefit transactions, in which a person with presumed influence receives a benefit valued above a reasonable range of compensation for his or her position. An excess benefit transaction occurs “when a church pays a worker more than is reasonable for the services rendered, or when the church fails to report a taxable fringe benefit.”
The penalties for an excess benefit transaction are severe, both for the recipient (the pastor) and the church.
Retirement gifts
Church leaders also often ask whether the analysis changes for a gift when it involves a pastor who is retiring. Unfortunately, the answer is usually no.
Sommerville notes: Confusion arises when working with retirement gifts. An old IRS revenue ruling states it is possible that a gift to a retiring minister may not be taxable (Rev. Rul. 55-422, 1955-1 CB 14). (The revenue ruling has never formally been made obsolete by the IRS.) The ruling is often cited to support a tax-free retirement gift, but its application has changed with the 1986 change to the definition of a gift in the Internal Revenue Code. Since employers may not give a tax-free gift to an employee, a retirement gift may not be a tax-free payment. (emphasis added)
Also note that how a church collects, handles, and distributes funds matters a great deal in how any special-occasion gifts are analyzed. This article dives deeper into why.
Final point
Lastly, in very limited instances, there may be times when a gift associated to a retired pastor may not cause taxable income. A 2018 Tax Court ruling about a pastor who received monetary gifts from church members included an analysis discussing prior federal court decisions involving former ministers who received gifts from their former congregations that did not trigger income tax liability for the ministers.
Attorney and senior editor Richard Hammar, in reviewing the 2018 Tax Court decision, noted that gifts to a retired pastor may not be taxable when specific facts and circumstances are involved. Regarding one of the federal cases cited by the Tax Court (Schall v. Commissioner, 174 F.2d 893 (5th Cir. 1949), Hammar made this observation about the Fifth Circuit court’s analysis and its reason for concluding the gifts were not taxable: “[The pastor] made no request of the congregation that any amount be paid to him after his resignation, and he had no knowledge that the church would agree to do so. He did not agree to render any services in exchange for the gift and in fact did not do so.”
While the 2018 decision is insightful, churches still should evaluate their situations carefully, preferably in consultation with qualified local tax counsel, before reaching a similar conclusion.
Similarly, as noted above, for gifts involving employed pastors, it’s strongly recommended churches retain qualified local counsel to assist them with the income tax treatment of those gifts.
Matthew Branaugh is an attorney and editor for Church Law & Tax.