My Treasurer Quit; What Now?
By Raul Rivera
It was early December and Alejandro had just left his pastor’s office, telling him he was resigning his post as the church treasurer. It did not seem like a big deal at the time. Alejandro turned the books over to the new treasurer, and they seemed to be in order. However, did the new treasurer understand everything he was supposed to do once January and February rolled around? What priorities should the church have had at the forefront during this time of year? Alejandro departed in 2012. Fast-forward to 2014, and things are not as the church had hoped. The new treasurer, though sincere, was not able to handle the transition because the church did not have a structure that allowed it to go through such changes. Problems began when the church received a letter that the quarterly 941 tax returns for the final quarter of 2012 were not filed. The new treasurer had assumed that Alejandro had filed them. What the new treasurer was experiencing is common. At conferences, I have had hundreds of conversations with pastors and church treasurers going through similar circumstances.
Transitioning is not always easy
Transition of people is a very common reason why churches go from compliance to non-compliance. It is not common for someone to exit a position at a church and have in motion a great training program that prepares the next individual replacing him or her. Moreover, it is not uncommon for someone to leave his or her church because of a disturbance in a relationship. What a church does at this critical point in the game matters. One of the greatest blows to a church’s momentum is a letter from the IRS or State Department of Revenue asking for back taxes because of missing reports. Below are 3 things to do when you transition treasurers.
1. Study the church budget: Operating a church under a budget is paramount. The church budget reveals what the church is doing or is planning to do. If the church does not have a budget, run a financial report to see the areas in which the church is spending its money. It is difficult for very young churches to create a budget, but if the church simply takes the time to create one, as each year passes, it will get better and better. The budget will show you things like what expenses the church has, what, if any, salaries exist, and to whom and if any contractors received compensation. Additionally, take a close look at the church’s chart of accounts (Page 87 of the conference manual teaches you how to create a chart of accounts).
2. Find out if anyone received compensation: People receive compensation in the following two ways. As employees or as contractors. If the church has employees, look for the following:
a. Salary agreements: Did the church create salary agreements with those that have been employed with the church? I specifically refer to the pastor because the penalties can be very severe. Treasury Regulation 53.4958- 4(c)(1) requires that the church clearly document any salary paid to the pastor or other person in a place of influence or control over the church. Under section 4958, failure to properly document the salary requires the IRS to treat it as an “excess benefit transaction.” The penalty for failure to document it is as low as 25% and as high as 225%.
b. Most recently paid paychecks: Looking at the most recent paychecks helps to bring perspective on what is going on in regards to compensation. The story of whether the church has been properly doing payroll is in the paychecks. Were any taxes withheld?
c. 941 quarterly reports: The church is required to file Form 941 (Employer’s Quarterly Federal Tax Return) and to periodically deposit the employment taxes and income taxes at an authorized financial institution or pay the employment taxes to the IRS. Treasury Regulations 31.6302-1 and 31.6302-2 require that these be done in a timely manner, under penalties of law. Did the previous treasurer file these returns? Was he/she supposed to file them but failed to do so?
If the church hired contractors like guest speakers, guest musicians, and others, look for the following:
a. W-9 forms: Look in the church files for W-9 forms. In particular, match the W-9 forms to the payments the church made to guest speakers, contractors, landlords, attorneys, or doctors. If any are missing, try to collect them. Section 6041 requires the church to collect the contractor’s/guest speaker’s Social Security number using Form W-9. When the church does not collect this information, it is required to withhold 28% of payments made to the contractor/guest speaker. These are called backup withholdings.
b. 1099-Misc forms: Did the previous treasurer file 1099-Misc forms with the IRS to report all payments? While the steps required to properly file this form are simple, an overwhelming number of churches do not do it each year. Among the reasons why churches fail to file this form, transitioning treasures is a common reason.
c. Backup withholdings: If your church wants to be in compliance with the law concerning payments made to self-employed individuals, such as contractors, guest speakers, the landlord, an attorney, or a doctor, then you must require each one to submit to you a fully filled out Form W-9. If they refuse to submit one to you, then you must withhold 28% of any payment you make to them and submit those funds to the IRS by the 15th day of the following month. You must file tax return 945 by the 31st day of the following year.
3. Review current financial policies: Every church has to operate under a set of financial policies if it is going to govern itself. These policies are in the bylaws of the church and/or in the church’s corporate records book. The new treasurer needs to understand that the church is bound to operate under these policies. Oftentimes, the new treasurer finds that the church has not officially adopted financial policies and that the bylaws are deficient of them. If you find that your church does not have clear and concise financial policies, call us at 770-638-3444 and speak to one of our consultants. We can help you with that.
State and IRS tax compliance
Scripture tells us that plans fail for lack of counsel. Today’s tax laws are filled with pitfalls, as there are hundreds of laws that affect the way we handle money at the church. Moreover, we are living in the most litigious society in the history of the world, requiring leaders to be judiciously discerning as they encounter a lost and broken world. I believe we can help! Why not attend a conference, or call us and speak to one of our consultants? I believe you have many questions. I know we have answers.