Various critical financial tasks should be completed before January 1, 2021. To help church treasurers navigate this, Church Law & Tax asked tax and accounting experts to review and update our list of tasks that might affect a treasurer’s year-end to-do list.
Here, then, is an updated list that should help you finish 2020 strong and get started right in 2021.
1. Designate a housing allowance
The board or congregation should designate a housing allowance for 2021 for ministers who own or rent their home (and for ministers who live in a parsonage and who pay some of their housing expenses). Find sample housing allowance and parsonage allowance resolutions in chapter 6 of Richard Hammar’s annual Church & Clergy Tax Guide.
“Because housing allowances can only be provided prospectively (that is, after they have been approved by the board or the board’s designee), obtain approval from the board prior to January 1,” advised Rob Faulk, a CPA and partner with CapinCrouse.
2. Review W-4 forms
All employees should review their W-4 form and submit a new form if circumstances have changed. This will ensure accurate tax withholding.
“Many employees are surprised when they complete their tax return and find they owe money,” said Elaine Sommerville, a CPA and senior editorial advisor for Church Law & Tax. “Employees are still adjusting to the effects of the changes to the tax withholding tables created by the Tax Cuts and Jobs Act of 2017. Other employees may be caught short on taxes paid in due to both spouses working.”
She explained that the tax withholding tables “don’t appropriately take a dual-earner household into consideration. It is advisable for employees who owed money with their 2019 Form 1040 to complete a new Form W-4 at this time.”
And don’t leave out ministers, stressed Frank Sommerville, a CPA, tax attorney, and senior editorial advisor for Church Law & Tax. Unfortunately, “many ministers just go to the treasurer and say, ‘Withhold such and such from a paycheck,’” he said. “But the pastor should also fill out a W-4 or provide other written documentation for withholding income tax.” (For more information on this aspect of the topic, see #9 below.)
3. Provide a notice to donors
Donors should be advised in the church bulletin or newsletter, on the church website, or in a letter or email from the church, not to file their federal income tax return before they receive their contribution summary from the church. Donors may not be able to deduct individual contributions of $250 or more if they file a tax return before receiving a qualified contribution receipt from their church.
Churches should also double check software used for preparing charitable contributions receipts to confirm that the vital “no goods or services” statement will be included when the receipts are prepared.
“Making sure donors have those contribution acknowledgements prior to filing is definitely important,” added Kaylyn Varnum, a partner and assistant national director for tax services for the accounting firm Batts Morrison Wales & Lee.
While the Tax Cuts and Jobs Act of 2017 made deductions available to fewer donors, it’s still important to notify all donors, Frank Sommerville stressed, because churches simply don’t know who might qualify for a deduction. This is especially true with the new provision in the CARES Act allowing taxpayers who do not itemize their deductions to claim a charitable contribution of up to $300 as an above-the-line deduction in determining their adjusted gross income.
Additionally, “the CARES Act increased the contribution deduction for itemized taxpayers to 100 percent of adjusted gross income (AGI) for qualifying 2020 contributions, which would include contributions made in 2020 to churches,” Varnum said.
Tip. Answer many of your members’ questions about charitable giving and tax law with the Charitable Contributions Tax Reminder (for their 2020 returns).
4. Determine if contributions are effective for 2020 or 2021
The general rule is that a contribution is effective when delivered. A check deposited in the church offering in January of 2021 cannot be deducted in 2020, even if it is backdated to 2020. One exception—checks that are mailed and postmarked in 2020 are deductible in 2020, even if they are not received until 2021.
IRS Publication 526 offers these guidelines for three other types of giving (adapted):
- Text message. Contributions made by text message are deductible in the year the donor sends the text message if the contribution is charged to the telephone or wireless account.
- Credit card. Contributions charged on the donor’s bank credit card are deductible in the year the donor makes the charge.
- Pay-by-phone account. Contributions made through a pay-by-phone account are considered delivered on the date the financial institution pays the amount. This date should be shown on the statement the financial institution sends the donor.
5. Correctly handle gifts and noncash/cash benefits to staff and volunteers
Consider these two categories of gifts:
- Cash Christmas gifts to employees. Be sure to handle correctly any Christmas gifts made by the church or congregation to a minister or lay staff member. In most cases, these transfers represent taxable income and not a tax-free gift, and must be reported as income on the recipient’s W-2. “If the gifts are paid through accounts payable, the value of the gifts will need to be submitted to the payroll system prior to the end of the year to allow for correct reporting on the recipient’s W-2 and on the church’s fourth quarter Form 941,” Elaine Sommerville explained.
- Noncash gifts to employees and volunteers. Noncash gifts may also create income requiring payroll reporting. A gift of property having a value so small “as to make accounting for it unreasonable or administratively impracticable” is a nontaxable “de minimis fringe benefit” (see Section 132(e)(1) of the tax code). This exception does not apply to cash or “cash equivalents” (such as gift certificates). “Information on noncash gifts that may not be considered as ‘de minimis’ will need to be provided to the payroll system prior to the end of the year to allow for correct reporting on the recipient’s Form W-2 and the church’s Form 941,” Elaine Sommerville said.
Caution. Monetary gifts to volunteers of any amount should be avoided, said Frank Sommerville. “Once you give people money, they are no longer volunteers,” he said. “They are employees. Once you compensate them, then you’re getting into all kinds of issues. Does employment law apply? Does workers’ comp apply? Once you give them anything of value, they no longer qualify as a volunteer under many, many statutes.”
6. Be careful about accepting certain types of end-of-the-year noncash donations
Near the end of the year, churches should be wary of a noncash donation of significant value, such as an antique car or a gift of real estate. Some gifts might be hard to sell. With land, there could be unresolvable zoning issues or issues with toxic soil. With a building, there could be structural issues or a problem with lead or asbestos.
“You don’t want to be rushed into making a decision,” said Frank Sommerville. “If a gift comes in near the end of the year, you don’t have the time to do your due diligence.” He stressed that the gift could end up costing you a lot more than it is worth. An exception: publicly traded stock. “Stock is pretty easy to address appropriately as a year-end gift,” he said.
Tip. For help handling noncash gifts of real property (buildings and land) see “Gifts of Property: Help Donors Get It Right.” For help with noncash gifts of personal property (such as cars, household items, and stock), see “Tax Rules for Gifts of Personal Property.”
7. Review classification of employees for US Department of Labor (DOL) purposes
“Now is the time to decide if employees are properly classified for wage and hour purposes,” Elaine Sommerville said. “Job descriptions should be reviewed to determine if employees qualify for the ministerial exception. And for all employees not qualifying under the ministerial exception, job descriptions and salary amounts should be reviewed to determine if the employee is exempt or nonexempt.
Past year determinations may be affected by the current minimum weekly salary requirement of $684 for exempt employees. While this change was effective January 1, 2020, many churches still are not aware of its implications. Churches may find that employees previously classified as exempt employees must be moved to the nonexempt classification due to the higher minimum weekly salary requirement. For further guidance, see Elaine Sommerville’s article “The Right Way to Handle Wage Classifications.”
8. Make sure ministers are properly classified for paying into the Social Security system
Separate from applying the DOL’s ministerial exception discussed above in #7, a church must also determine who is a minister for IRS and Social Security purposes.
Many churches incorrectly report ministers as employees for paying into the Social Security system by withholding Social Security and Medicare taxes from their wages. This is incorrect, since the tax code classifies ministers as self-employed for purposes of paying into the Social Security/Medicare system with respect to services they perform in the exercise of ministry. As a result, they pay the self-employment tax with their individual income tax returns and not through withholding and employer matching of Social Security and Medicare taxes.
Now is also a good time to provide information to ministers regarding their unique tax classifications, in order to make them aware of the unusual filing requirements.
Caution. ”Ministers incorrectly classified for Social Security and Medicare jeopardize their ability to receive the tax-free housing allowance,” Elaine Sommerville warned.
Tip. The ideal time to reclassify these ministers as self-employed for Social Security is January 1. “However, the prior year’s reporting should be corrected to preserve the other benefits afforded to ministers,” Elaine Sommerville said.
9. Voluntary withholding
Since ministers’ wages are exempt from Social Security, Medicare, and federal income tax withholding (with respect to services performed in the exercise of their ministry), they use the quarterly estimated tax procedure to prepay their federal taxes.
However, ministers who report their income taxes as employees can enter into a voluntary withholding arrangement with their employing church by submitting written authorization—such as a letter, email, or a W-4 form—to the appropriate church representative. Under such an arrangement, the employing church withholds income taxes as it would for any other employee, and also can withhold an additional amount of income taxes to cover the minister’s self-employment tax liability.
Tip. The ideal time to start voluntary withholding is January 1. However, adjustments in voluntary withholding can be made at any time during the year, clarified Ted Batson, CPA and tax attorney with CapinCrouse, and advisor at large for Church Law & Tax.
In addition, some churches have filed a Form 8274 with the IRS exempting themselves from the employer’s share of Social Security and Medicare taxes. Lay employees of such churches are treated as self-employed for Social Security, meaning that they must pay self-employment taxes. These taxes must be paid by making quarterly estimated tax payments to the IRS, unless additional voluntary withholding is requested. Under such an arrangement, the church withholds an additional amount of federal income taxes to cover their estimated self-employment tax liability.
Tip. “For ministers who prefer to continue to make estimated tax payments rather than allowing the church to withhold federal income tax, it is beneficial to enroll in the IRS Electronic Funds Transfer Payment System (EFTPS),” Elaine Sommerville suggested. “Making tax payments through the EFTPS system provides the minister with the ability to preschedule estimated tax payments and to receive immediate confirmations of the payments. The 2020 pandemic has raised awareness of the benefits of the system as many tax payments were held up for months while the IRS was closed or at reduced operating capacity.”
10. Review plans for compensation in 2021
Review compensation and benefits for employees for the upcoming year. Doing so will “provide for the proper documentation of compensation packages and proper taxation of benefits provided to employees,” said Elaine Sommerville.
Tip. Find help for your various compensation issues in Elaine Sommerville’s book , Church Compensation: From Strategic Plan to Compliance. Note that the second edition of the book will be in the Church Law & Tax Store early in the new year. Fill out this form to be notified by email when the new edition becomes available.
11. Have applicable employees fill out various required elections
Certain benefit plans require elections to be completed by the beginning of the plan year. These include benefit elections for a church’s cafeteria plan or Section 125 plan, enrollment in insurance plans that begin on January 1, and the required health insurance opt-out election certificates required by large employers.
For any church that’s an applicable large employer—and currently in its annual benefit enrollment period—Faulk offers this guidance:
Ensure that any employee who chooses to opt out of the health benefit plan completes an opt-out election certificate [or waiver] and furnishes proof of enrollment in another qualified group health benefit plan from a source other than your church’s plan before coverage is terminated.
12. Review payments to any independent contractors
The all-new Form 1099-NEC is now used for reporting payments previously reported in Box 7 of the Form 1099-MISC. Preparations for filing should include a review of payments to independent contractors and related W-9 forms.
“If a Form W-9 hasn’t been obtained for a contractor, determine if the church has the correct address and Social Security/employer identification number for the contractor,” Elaine Sommerville stressed. “And don’t forget to include payments to attorneys even if paid to a law firm that is incorporated.”
Tip. The Form 1099-MISC is still used for other reportable payments, so make sure the church orders the right forms to report all necessary payments. For example, payments made to unincorporated lessors are still reported in Box 1 of Form 1099-MISC. Forms 1099-NEC are due to the IRS and the recipients by January 31, 2021, and Forms 1099-MISC are due to recipients by January 31, 2021, and to the IRS by February 28, 2021.
13. Report all taxable fringe benefits on W-2 forms
Did your church give a low-interest or interest-free loan to your pastor this year? Did you forgive interest or principal on a loan to your pastor during the year? Did you allow children of employees to attend your summer camp without charge? Did you provide employees with free memberships to the local gym?
The value of such benefits needs to be reported on your employees’ W-2s “and included on your Form 941 with tax withholdings and payroll taxes paid as applicable,” said Batson.
Tip. “Whenever possible, taxes for fringe benefits should be withheld throughout the year and at the time the fringe benefit was received,” Batson said. “But in cases where that has not happened, the value of the fringe benefit should still be included on the W-2s at the end of the year.” Elaine Sommerville added that “taxes associated with the fringe benefits may still be calculated and paid through additional withholding from employees’ final paychecks this year, if not calculated at the time the benefit was provided.”
Tip. “Fringe benefit plans should be reviewed to determine the plan documents are still in compliance with applicable law and the church is operating within the boundaries of the applicable benefit plan,” Elaine Sommerville said.
Tip. “A church that provides its minister a car should download IRS Publication 15-B and review the Fringe Benefit Valuation Rules to ensure the proper amount for personal use is included in the pastor’s W-2,” Batson recommended.
14. Obtain IRS tax forms and IRS Publication 15
Now is a good time to review how the church will obtain all of its forms needed for processing payroll at the end of the year. There are many easy systems allowing for electronic filing of payroll reports. Hard copy forms may be obtained from local office supply stores. While many forms may be downloaded at irs.gov/forms, Form 1096, Form 1099-MISC, and Form 1099-NEC still require original red-colored forms to be used if filing paper forms.
Go to irs.gov/publications to download the 2021 edition of IRS Publication 15 for the new withholding tables. (This publication is regularly updated each December for the upcoming year.)
15. Finalize 2020 budgets and take care of any budgeting issues
If your budget year ends on December 31, finalize your 2020 budget, Faulk advises. Further, he says to perform a variance review of income statement (actual vs. budget). “This process may affect decisions about next year’s budget, and may be particularly challenging due to the changes caused by the pandemic.” Faulk explained. “To help, CapinCrouse offers a free e-book How to Budget Effectively in Changing Times.”
Tip. See “Managing Tough Financial Times,” offering several helpful articles and a video on budgeting and financial management for churches.
16. List and take care of any additional year-end items
Sit down and list any additional items that could easily slip through the cracks, which are particular to your church, then take care of them before the end of the year. Here are a number of items Faulk mentions:
- Reconcile your church’s donor system to your general ledger, and then investigate any significant differences. This is an important internal control to help detect any errors and to prevent fraud.
- If your church has a loan, talk to your lender about instances of noncompliance before year end, including any debt covenant issues that may be created by liabilities for PPP loans that are still on the books at the end of the year.
- Get annual conflict-of-interest forms signed and reviewed.
- Reconcile detailed property and equipment depreciation listings to the general ledger.
- Record destroyed items in accordance with document retention and destruction policies.
- Review insurance policies and update as appropriate.
- Document a list of authorized check signers and update bank records.
- Document a list of those authorized to approve expenditures.
- Document a list of approved bank accounts and close any that are not needed.
- If your church will have an audit or review, your finance or audit committee should be in the process of selecting the independent auditors.
- Make sure the church has adopted an accountable expense reimbursement plan and it has been made available to all employees, especially those with church-issued credit cards.
17. Order copies of Church Compensation and the new Tax Guide
If you have not already done so, now is a good time to order Church Compensation: From Strategic Plan to Compliance by Elaine Sommerville (or sign up to receive a notification about the upcoming second edition) and preorder the 2021 edition of Richard Hammar’s Church & Clergy Tax Guide. These resources will help you properly answer the various tax, payroll, and compensation questions that will invariably arise throughout the coming year.