Can a Church Show a Profit?

It’s the end of the year. You sent out an end-of-year giving letter and your congregation responded. 

Suddenly you have more money than you anticipated having. But then you worry: 

  • Is this a bad thing to have excess funds at the end of the year?  
  • Do I need to run out and spend it immediately? 
  • What should I do with this money? 
  • Will we lose our nonprofit status? 

You can breathe a sigh of relief. You’re not about to lose your status.  

There are four big questions that churches frequently ask about end-of-year finances. What most churches want to know is: 

  • Can we have a surplus of money at the end of the year? 
  • Should we aim to have a surplus at the end of the year? 
  • How much of a surplus should we aim for? 
  • What should we do with that surplus? 

When we say surplus, what we’re really talking about is the amount of money a church has after all donations and income have been accounted for, and after all expenses have been subtracted. In accounting terms, this is either a “profit” or a “loss.” 

Terminology is important here, since churches are not-for-profit organizations. As a not-for-profit, there are strict legal guidelines and laws that must be followed. Therefore, we need to be careful with the term “profit.” In this case, the more accurate term would be “net proceeds.” 

Let’s address each of these questions in order. 

Q1. Is it okay to have a surplus of money at the end of the year? 

The short answer is yes. Just because you’re a church doesn’t necessarily mean you can’t show a “profit” at the end of the year. 

A nonprofit can make a profit.  

But there are limits to what you can do with that profit. 

Your not-for-profit status impacts what you can do with the money that is left over. It ultimately it comes down to the purpose of your organization. 

A traditional for-profit organization makes money for its owners or shareholders. Profit is usually distributed to shareholders or put back into the business. 

On the other hand, a not-for-profit must have a “public or charitable” purpose. This means any end-of-year surplus should be used for a public or charitable purpose. 

What does this mean for you? As a church, you cannot distribute that money in any way to shareholders, investors or other people that may have a stake in the church.  

Pro tip: Just don’t give that money to individuals in any way at the end of the year. 

Q2. Should we plan to have money left over at the end of the year? 

You should absolutely have money in the bank at the end of the year. That is simply being a good steward of the resources God has given your church. Plus, it just makes smart financial sense.  

You want a financial cushion to prepare for the unexpected. This could be an unexpected expense, a downturn in giving or simply an unexpected opportunity. 

Q3. How much should a church plan to have left over after all expenses have been paid?

 The quick answer is it depends. 

There is no one-size-fits-all answer to this question. We’ve seen churches approach this question in a variety of ways. 

Some organizations take a very conservative budgeting approach. They intentionally plan to spend less than they anticipate they will receive in a given year.  

Other organizations budget based on what they received in the previous year. They then take whatever excess they receive from growth and allocate that money at the end of the year. 

Still others plan for an end-of-year giving campaign that they hope will bring the organization surplus at the end of the year. 

 I’ll give some more thoughts on this in a moment, but first, let’s discuss the last question. 

Q4. What should we do with this money? 

The answer to this question is also, it depends. Some churches allocate this surplus for specific needs within the church, some use it to establish savings and some use it to fund future ministry growth.   

Our advice is to strike a balance between savings and ministry. It’s always a good idea to save for a rainy day. In church life, you never know what the next week, month or even what tomorrow may bring. It’s fiscally responsible to have some margin in your accounts that allows for flexibility and financial security in the organization. 

It’s also good stewardship, however, to be able to distribute those funds to missions, local ministries or other ministry needs of the church. Does your church need some new equipment that perhaps you’ve been putting off? Does your facility need updates or improvements? Are you able to bring on some staff support or outsource some work that is causing you additional stress? 

However you choose to allocate these funds, the bigger point is that having a surplus at year end puts your church in a position where these decisions can be made. It gives you options. 

Let’s return for a moment to the previous question of how much to put aside. 

While it’s true that the exact amount depends on the circumstances of your church, there are a few principles that can guide us in this discussion. 

We’d contend that having too much left over at the end of the year means that you didn’t fully invest into your full ministry potential. Ultimately it comes back to the foundation of stewardship. We are called as churches to be wise stewards of the resources that God has entrusted to us.   

Stewardship involves both saving and investing. Good stewardship means that we’re using the resources to expand the mission of our church. It also means that we’re not putting our organization in a financially untenable position.  

If you want to learn more about how you can better steward of the resources God has provided your church, or you simply want to gain a better understanding of how to effectively manage church finances, sign up to receive free church finance, administration and growth tips delivered right to your inbox.  

If you’re ready to take the next step of taking the burden of managing your church finances off your plate, then let’s schedule a time to chat! We’ll show you how having a done-for-you financial management and accounting solution can help you and your church thrive! 

Three Misconceptions About Meal Expenses for Churches and Pastors

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When I was in the youth group late in high school we had a new youth pastor join our church. He was great and came from a significantly smaller church when he joined us. By smaller I mean the jump in size was fairly significant. Our youth group alone had an average attendance of more than his previous church. Needless to say there were a lot of new things for him.

One of those things was he now had a sizeable ministry expense budget. That line was there for him to be used to expense items that benefited his personal ministry. The funds could be used for books, conference registrations, mileage, and also food for meals with others.

I’ll never forget coming back after a few years of college to have lunch with the pastor and heard his story. He’d put on nearly 25 pounds that he attributed solely to his ministry expense budget.

Now, he was not using that money inappropriately, but at the same time he realized that perhaps eating out consistently may not have been the best use of that budget line.

How does this relate?

As a church bookkeeper, we see the expenses from hundreds of churches across the country and there is definitely a mis-perception that I’d like to address here.

Here’s the question we get asked a lot, Are Meal Expenses Limited for Churches and Church Staff?

Here are three misconceptions about using ministry funds for eating out.

1. Meal expenses are handled much the same as they would in a for profit business.

We see churches and pastors all the time using the church funds at Starbucks several times per week. We see pastors buying lunch out several times per week. While it would seem that there is a justification to use the church funds when working from the local Starbucks, unfortunately, that is not the case.

Much like in a business, meals can only be expensed when they serve a legitimate business purpose, and that purpose needs to be documented.

The measure here is to ask “What would a reasonable person say?”

If a pastor takes the staff out to lunch several times throughout the week and pays for everyone on the church’s card, a reasonable person may say that is abusive.

“But we need to eat” you may say.

While that is true, that meeting could have just as easily been pushed a couple hours before or after lunch and not required the meal to happen.

In a for profit business that files tax returns, the owner can only expense 50% of meals anyway. This is due to the fact that the IRS will claim that half of the meal was for the owner and therefore not able to be expensed.

In the case of Wells v. Commissioner, Docket No. 6088-76, 1977 Tax Ct. Memo LEXIS 22 (U.S. T.C. Dec. 7, 1977), the meals of attorneys who met monthly for lunch were considered too frequent to be business-related expenses.

While frequency is not defined, what was deemed here was meeting with the same people, frequently could not be considered a business related expense.

2. Using church funds for personal meals and coffee is inappropriate

We work with many churches that don’t have a physical office or location. Throughout the week pastor will work from a local coffee shop or other location. It can be tempting to get a cup of coffee and use the church’s card to pay for it. It’s easy to justify and say that you’re doing church business and therefore the church should cover that expense.

Unfortunately, that is not the case.

The IRS makes it very clear how to handle meals & entertainment expenses and does not provide any distinction between for profit and nonprofit entities.

There are some ways that a church can put an Accountable Reimbursement Plan in place which would give guidance and direction and provide some assistance to the pastor. Unfortunately, without this plan the IRS would deem this use of funds to be a benefit provided to the pastor and therefore taxable as personal income.

3. Remember, we’re called to be good stewards.

This is a very sticky issue and I’ll admit there is some grey area in the discussion.

I always will contend for churches in areas where the answer is grey that we hold ourselves to a higher standard. Just because something can be justified doesn’t make it right. Many churches are already under scrutiny so why would we voluntarily enter into situations to increase that?

Something that a previous pastor I worked for told me when stewarding and making decisions about church funds was to keep my grandma in mind. My grandma lived for many years on her Social Security income so needless to say she was not rich. However, she was a faithful tither. She made sacrifices to faithfully give and we needed to hold her sacrifice in regard when it came to using church resources.

Another way to think about it is to ask what your average church member would think. Now I’ll admit many in the church want pastors to live on peanuts and they want to go cheap. I get it. However, can you justify your expenses to the average church member? If you showed them the amount of money or percentage of budget that was spent on staff meals would they deem that as appropriate?

Now some churches have taken that too far and become cheap. I’m not advocating for hoarding and not using funds for ministry, but rather using those funds to further the ministry.

Unfortunately, the ramifications here are extreme. IRS field agents are given the authority to deem what they think is excessive or inappropriate. The fines and penalties enough should prevent us but you may also be putting your church’s nonprofit status in jeopardy. It’s really not worth it for a $3 cup of coffee.

Now this post is not intended to be an exhaustive comment on this situation and there is much more that could be said. If you want to dive deeper, comment below and we can discuss more.

If you need help in these areas or putting together a financial system that better tracks and manages your expenses let us know. We’re here to simplify so you can do ministry better.

Are Churches Required to Provide a Contribution Statement Every Year?

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Church Answers

Are churches legally obligated to provide contributions statements or donor receipts every year?

The quick and easy answer is no.

There is no obligation on the church or ministry to provide a statement of giving to donors who have made a donation to the church in the previous year. There is no deadline to provide it and there are no penalties if a letter is not provided.

Many churches are still operating under the assumption that to maintain their not for profit status, something has to be provided, but that is not the case.

For many, this goes back to a situation very similar to those statements and phrases that people mistakenly think are actually scripture. Those things that sound good enough to be biblical but have actually just evolved over tradition.

That is the case here. The IRS has made it very clear in their guidelines for contributions that the organization is not responsible to provide any documentation of the gifts. In fact, they go on to say that it is the donor’s responsibility to request a statement if they want to itemize those donations on their tax return.

Now, let’s get into the practical fact of the matter.

It’s always a good idea to provide a contribution letter to your donors. Most churches, if not all, are completely reliant on the faithfulness of their givers to pay the bills and keep the power on. Without faithful givers, ministry doesn’t happen.

Giving is already hard enough in church and most churches struggle when it comes to cash flow. A sincere thankfulness for their generosity starts with a contribution letter.

What does that do?

A contribution letter is an opportunity for you to speak to your church. You have an open door to thank them for their generosity, but also share how those donations impacted the ministry of your church.

A contribution letter is an opportunity for you to speak to your church. You have an open door to thank them for their generosity, but also share how those donations impacted the ministry of your church. Let them know how many people were saved in the previous time period, how many baptisms and the other tangible things the ministry was able to do only because the donor was faithful and generous. As always, a simple thank you can go a long way.

We have many more articles around the site speaking to encouraging generosity so you can look around for those but for now, just know, that your church is NOT required to provide a donation letter, but it’s still probably a good idea to do anyways.

Does the Overtime Law Affect Pastors?

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The new overtime law that goes into effect December 1, 2016 will require many churches to review how they are managing their staff. Churches are not exempt from the New Overtime Law and it will have affect the way employees are compensated.

One big question we’re getting Does the New Overtime Law Affect Pastors?

The short answer is NO!

While that maybe is not definitive, all the initial considerations are showing that Ministerial (clergy) Employees will not be affected because of the ministerial exemption that exists in the FLSA. Furthermore, we can also conclude that even with no specific comment about pastors in the new law, their is a “duties test”put out by the Department of Labor that would provide job duties that would exempt an employee from the New Overtime Law. Since most pastors serve as the leader of their ministry or organization, it may be fair to determine that they would be exempt as an “Executive, Administrative or Professional” employee.

To view for your own knowledge, Ministers are considered exempt from any FLSA coverage which can be viewed on Table 3-1 of the final regulations which lists “clergy and religious workers” as one of the six categories of “Occupations Exempt from FLSA’s Overtime Provisions.” In plain English, pastors are not subject to minimum wage or overtime requirements of the FLSA. This would encompass people that function in a “spiritual/pastoral” function and not only through ordination. You can see that in the DOL Final Report on page 7 of the .pdf

The New Overtime Law for Churches

The new overtime law raises the minimum salary level for which a salaried employee must be compensated if they worked more than 40 hours per week. The former salary level was $23,600 per year which has now been raised to $47,476. Basically, anyone earning less than that amount (including salary, bonuses & commissions) is eligible for overtime pay.

What Does The New Overtime Law Mean for Pastors?

In general, pastors compensation will not be affected as they perform their duties as a minister for the church. Since they are exempted from FLSA under the ministerial exemption, they are not eligible for overtime pay.

4 Things Your Church Can Do To Prepare For The New Overtime Rule?

1. Consult legal advice. We’ll do our best to give you the facts, but your situation may be fact dependent on your current organization. You should view this article as legal advice.
2. Adjust pastor job descriptions with the following line: ” Religious Worker Not Covered By FLSA, Not Entitled to Overtime or Minimum Wage”
3. Review your church employment policies – it’s always good to do this periodically to make sure everything is up to date and current. Don’t let this document get out of date as your church grows.
4. Review your other employees to see if they may be affected by the new law – Here’s another article we wrote on how the new Overtime Law Will Affect Churches

As always, our goal is to help your church be freed up to focus on ministry. This stuff can get very complex and confusing and pull you away from focusing on your Church Mission and Vision. Let us partner and help you manage your payroll and accounting so you can focus on ministry. If you’d like to know more about how we help churches manage these parts of ministries, Get In Touch With Us.

Does That Person You Paid Actually Qualify For a 1099?

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A current hot debate in the church world is when a person qualifies for a 1099-MISC for monies they were paid.  The big question is when does a person qualify for a 1099?
OK, I’ll admit, it’s kind of a nerdy topic, but you’ll be thankful you took a few minutes to read what’s next.
do they qualify for a 1099Many churches have unfortunately fallen victim to the idea that they can make the decision on whether or not someone qualifies to receive a 1099 vs. a W-2.
Unfortunately, that decision is not left up to the church.
Some have decided to issue a 1099-MISC because it seems easier.  It’s too tedious to add this person to payroll and we’re only going to pay them one-time.  Adding a person to payroll costs more money so we’ll just do it this way.
The problem with each of those statements is that it is not a decision the church has the authority to make.
The IRS has made it very clear when a person does and does not qualify to receive a 1099-MISC.  They have released a “filter test” form of 20 questions.  Here is a link to the IRS filter test to determine if a person is Self-Employed or a W-2 Employee.  If any one of the questions is true, that person is considered the result of that question (vague right?) Take a look at the form and you’ll get what I mean.
So what now?
Make sure you’re correctly classifying people that you pay individually at your church.
Here’s an example.
We had a church ask us about paying childcare workers.  They had a girl who worked for them one time during the year and wondered if they still needed to pay her through payroll.
It’s easy to attempt to avoid it because for one, there’s a good chance they’ll be paying her less than the $600 threshold where you are required to provide a 1099 MISC.
But let’s change the context.
What if this girl was working for your small business bakery that you owned.  She came by to help ice donuts one day and you paid her cash for her work.  Many in the business world would call this “paying under the table”.
Sounds a bit shady in that context right?
Well the same thing is basically happening in the church childcare scenario.  They are wanting to pay her “under the table” to avoid the work of getting her payroll documents and doing things above reproach.

What are the consequences?

Well, the IRS has been known when a decision has been made that the church paid people incorrectly where the entity (the church) has to pay the amounts that should have been withheld PLUS fines and penalties they can apply.  Where at one time the church was trying to save some money and time, it’s not coming back to bite them.

It’s a very tough situation and in some ways I will agree there seems to be some grey area.  however, do yourself and the church a favor and error on the side of caution.  If you are paying a person, chances are very likely you should pay them as a W-2 employee.
If you’d like to know more about this issue or to have a chat regarding your individual situation, get in touch with us, we’d love to hear your thoughts.