Two Common Mistakes Pastors Make with Church vs. Personal Expenses
By Kevin Camon
Read Time: 5 Minutes
Many pastors spend a lot of time digging into the Scriptures, caring for the church members, and sharing the gospel. However, few pastors devote their time to researching financial management skills. Some do a fine job of managing the business side of the church, and they develop a team to help them with that side of things.
Unfortunately, many pastors discover that they are unknowingly commingling funds. It is usually rooted in the belief that it belongs to them. Understanding that some pastors may have started a church because of a call deeply rooted in their soul, it is always best to clarify and establish boundaries that put you in a position of being a steward rather than an owner. This may not be easy to accept, but we are talking about your life's calling. You want to be sure that it cannot be taken away from you.
Below are two common ways pastors mix their personal expenses with the church's expenses and solutions for fixing them.
Mistake 1: The pastor opens a bank account in the church's name, but with their social security number.
Many pastors start churches in their homes before they officially incorporate and legally establish their ministries. In the meantime, the pastor opens an account in their name, using their social security number. This creates serious commingling issues because all of the church's money is personally tied to the pastor. Any tax issues the pastor has can cause the church serious problems because the pastor and the church's finances are the same to the IRS.
The solution
The church ought to incorporate and get its own EIN (tax-ID). It is important that the church's EIN is in the proper delineation. Make sure when the application for the number is filled out that it is for a church and not a nonprofit organization. Once the church does this, move all of the money to the church's new bank account number.
Mistake 2: The pastor uses church funds for personal expenses.
- There are many times when the church pays for expenses that are legitimate "church business expenses." Some can travel to attend a conference or a retreat or expenses involved in performing hospital visitations. However, there are times when those same expenses are not legitimate, such as when there is an improperly documented reimbursement that does not meet the requirements of section 62(a). Or when the church pays for lunch meals for the pastor's convenience, or when the pastor's gas tank is filled using the church debit card, etc.
This kind of commingling can bring three types of legal consequences, as listed below.
- Penalties and fines of up to 200% for each transaction;
- In some circumstances, imprisonment; and
- Loss of personal liability protection from lawsuits.
The solution
To correct this error, one must first learn what a legitimate church business expense is and what can be classified as personal. This can be difficult, but in essence, a valid church business expense must involve a necessary activity that furthers the exempt purposes of the church in a way that is usually understood as a generally accepted business practice for churches or ministries.
The IRS states it this way:
- A business expense must be both ordinary and necessary.
- An ordinary expense is "common and accepted," while a necessary expense is "helpful and appropriate" to further the church's purposes.
Even with the above two definitions, additional guidance may be necessary. Below are a few more personal expenses that many pastors think are church business expenses.
- Meals while running church errands
- Using the church debit card when filling up the pastor's gas tank
- Paying any of the pastor's bills as a housing allowance such as utilities, credit cards, mortgage, or rent
- Suits for preaching
- Making car payments
Accidents do happen
Accidents happen every day, but it's how you handle the situation that matters.
For example, if you picked the wrong card when you were in the check-out line at the store, it's okay! Have the cashier cancel the transaction if you noticed before it was completed. If you missed it, and the purchase went through before you could stop it, or you got home and realized that the wrong card number was on the receipt, use best practices.
Here's how: write a letter explaining what happened and include a check for the amount for personal use. Records of this will help the church keep track and prevent it from showing up in taxable income that you receive throughout the year.
Start implementing best practices now
Credit and debit cards are useful tools for churches and ministries everywhere. They are helpful with reporting and budgeting if each department head is issued one and tracks the spending. Spending limits are common factors of companies such as PEX and Dash and help those tracking a budget. End the stress and headaches associated with utilizing cards and move forward, knowing that you are informed on how best to use them!
As a StartCHURCH bookkeeper, I find it helpful to see specialized cards when putting together financial reports as it limits the questions I may have on transactions. So, if you decide to use them, make sure that you are aware and implementing best practices that will help keep you light-hearted and focused on your calling!
Do you need assistance?
Without fail, many pastors will read this article and realize they might be in trouble. If you think that you've experienced some of the improper practices within your church mentioned above, it is not too late to make things right! Be encouraged and empowered by realizing that you can correct those errors and get your ministry in alignment with God's best. We can help you on the journey.
Our Bookkeeping Service at StartCHURCH is focused on religious nonprofits, churches, and ministries. Our ministry-minded bookkeepers provide years of experience for ministers and pastors to rely on for situations such as these.
Give us a call today at 770-638-3444 or schedule a call below to find out how to add one of our bookkeeping specialists to your team!
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