Starting a Church? Avoid These Three Mistakes

By Raul Rivera

Is 2018 the year that you are going to start your church? Have you decided that this is the year you will answer ‘Yes’ to the call God has placed on your life?

If so, I want to celebrate with you and encourage you as you travel the path that God has set before you. 

I remember when I first answered the call to plant a church. There was much excitement mixed with an assortment of nerves. I felt confident in what I did know, but I also knew there was much that I did not know. 

Perhaps you are feeling the same as you prepare to launch your church - a lot of excitement mixed with some nerves. Well, that is okay, and it is perfectly normal to feel that way. 

Based on my experience in starting and pastoring a church, if I could give you just one piece of advice it would be this - don’t try to do it alone. We were created to be in community, and it is okay to ask for help and seek advice. In fact, I would say asking for help is a must if you want your church to be successful.

In this blog post, I want to provide you with some advice on three mistakes to avoid as you launch your church. To do this, allow me to introduce you to my friend, Pastor Josh.

A common story for many church planters

Pastor Josh had been a youth pastor for many years prior to planting a church. As the current lead pastor, he was doing a great job attracting new members and preaching relevant messages to a diverse congregation.

While Pastor Josh was handling the ministry side of starting a church quite well, he had very little experience with the legal side of establishing a church.

In fact, when the IRS reviewed Pastor Josh’s personal tax return last year and asked him to substantiate (or prove) his housing allowance, he was not sure where to begin or what they meant exactly.

Why the IRS questioned housing allowance

When Pastor Josh first received compensation from his church in 2015, he thought nothing of it when his church issued him a Form 1099-MISC instead of a Form W-2. When he completed his tax return in early 2016, he reported all income earned from the church on Schedule C - this is a form self-employed individuals use to report how much money they earned.

To make matters more complicated, Pastor Josh’s church reported all $45,000 of his income in box 7 for Form 1099-MISC (“Nonemployee compensation”). And as a result, Pastor Josh reported his housing allowance of $20,000 as a business deduction. 

Everything seemed fine until Pastor Josh received a letter from the IRS asking him to substantiate his housing allowance. He sent a copy of all of his home expenses to the IRS, but that was not enough. 

The IRS then asked for a copy of the church board meeting minutes approving his housing allowance. This was also a problem as he was unable to find them.

The truth of the matter is that without board meeting minutes, the housing allowance is of no value to the pastor.

(Recommended reading: "3 Things Every Minister Should Know About Housing Allowance")

To understand the present, we must go back to the beginning

Let us go back in time a few years. 

When Pastor Josh started his church, he only had $350.00 in the bank. His vision then (as it still is today) was to know God and make God known.

Although he has been faithful to the vision God gave him, the steps he took to legally establish his church were lacking in strategy. The following rundown of his church’s legal inception will show you what I mean.

After selecting a name for the church, Pastor Josh opened a bank account for the church. The church did not have a tax ID number, nor was it incorporated, so Pastor Josh had to open the church’s bank account with his social security number.

The church then got off to a good start, and it was doing fairly well. In fact, within 18 months Pastor Josh’s church reached almost 200 members and had a weekly average attendance of 175 people.

When Pastor Josh was unable to substantiate his housing allowance, the IRS assessed a tax (with penalties and interest) of more than $10,000 against him. He didn’t have that kind of money on hand, so the only way to fix the problem was to enter into a payment plan, which put him in a difficult financial position. 

About 7 months later, he began failing to make his payments. The IRS sent a letter to Pastor Josh that stated if he did not resume making payments, it would search for his assets and place liens on them.

Pastor Josh was not able to continue making payments. When the IRS completed a search of bank accounts for him, it found the church’s checking account with his social security number. As a result, the IRS removed over $10,000.00 from the church’s checking account.

It’s the little things that can cause the greatest grief

Oftentimes it is the little mistakes that can cause the greatest grief. Scripture reminds us that it is the little foxes that ruin the vineyards (Song of Solomon 2:15). 

Let us review the mistakes that Pastor Josh’s church made, and how those mistakes could have been avoided.

Mistake #1 - Opening the church bank account in the pastor’s name

The church’s checking account was opened before it incorporated and received a tax ID number. Here is a rule of thumb that every pastor should follow:

Never open your church’s checking account with a social security number.

The IRS will see the bank account as a “doing business as” (DBA) of you, personally, and can access it when it comes to your personal taxes. In addition, this is an unlawful conflict of interest.

You should first incorporate your church, obtain a tax ID number for it, then open the church’s checking account as a corporation (using its own tax ID number). I imagine that some of you reading this are realizing you made the same mistake as Pastor Josh. 

If you need assistance correcting this mistake, please give us a call at 877-494-4655.

Mistake #2 - Misclassifying the pastor for tax purposes

The church issued Pastor Josh a Form 1099-MISC. Though many churches do so, this is not correct. The church should have issued him a Form W-2, reporting $25,000 in box 1 and $20,000.00 in box 14.

If you are a minister and need help with your taxes, click here.

Mistake #3 - Implementing a housing allowance incorrectly

The housing allowance for Pastor Josh was never officially approved by the board of directors. Like many pastors, Pastor Josh mistakenly thought the housing allowance was a portion of money gifted to him to cover his housing needs. 

In actuality, the housing allowance is an exclusion of taxes. 

It must be approved by the board of directors and documented in board meeting minutes. At the end of the year, the pastor calculates how much of a deduction he can receive from what he earned during the year.

“His mercies are new every morning”

Pastor Josh’s church felt an initial sting from the IRS situation; but, thankfully, it recovered. Although his church had to cancel some outreach events and postpone some needed building repairs, Pastor Josh found rest and peace in God’s promise: “His mercies are new every morning.”

Establishing a healthy church is not just about good sermons and a growing congregation; it is also creating and establishing a solid legal foundation.

When in doubt, ask for help! Our purpose here at StartCHURCH is to help guide your church in establishing a solid legal foundation. Whether your church needs to get incorporated, or you need to set up a compensation agreement and a housing allowance, we can help! 

Give us a call at 877-494-4655 to find out more, or simply click on the link provided below for more information.

Recommended blogs for you:

• "6 Church Fundraising Ideas That Work"
• "Does a Church Need to be 501(c)(3) Approved?"
• "How to Create a Healthy Church Budget"

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