July 22, 2021

Starting Accounting in Your Church Plant

Category: Administration, Church Plants | Tags: accounting framework, church finances, financial statements

Posted by Meagan

Today we will go over the basics of how to set up an accounting system and what to report, as it relates to church plant finances. The following tips are coming directly from our top Accountants here at Miller Management.

Accounting Framework for Churches

Churches are classified as a non-profit organization by statute. Therefore, there are a few things that you are not required to do. We will list some of those things now, with a few caveats.

• It is not necessary to pay organization income taxes or file a 990.  (NOTE:  Employee income taxes are different than the organizational income taxes.  Churches are required to pay the employer portion of social security and Medicare, as well as file all payroll income tax withholding reports.)
• Churches are not required to file with the federal government to obtain a 501(c)3 status.  However, the church/organization should obtain a federal ID# and payroll tax numbers for state and city taxes.
• Paying sales tax is also not required, IF it is authorized by the State Sales Tax department and a certificate is provided to the church.
• Lastly, churches are not required to pay property taxes, IF an exemption is allowed and obtained from the local taxing authority.

For a deep dive into Payroll, visit our Payroll 101 post.

Assets & Liabilities

To simplify accounting, it is not necessary to capitalize furniture, fixture and equipment, then depreciate. Simply expense the purchase when the money is spent instead of spreading the expense over the life of the asset. Depreciation is a tax tool that does not benefit non-profit organizations. 

You may want to track assets for insurance and asset management purposes. When you are accruing your expenses, you should not accrue one year and not accrue the next. Be consistent from year to year for comparative purposes. In accounting terminology, this is a special purpose framework and is called either the Cash Basis or Modified Cash Basis of Accounting.

Software

Gone are the days of writing amounts into a ledger. And realistically, an excel spreadsheet is the modern equivalent of that. Purchasing software that can handle the complexity of your organization should be a top priority. There are a few options you can use for that, but the software you purchase should be able to track the following:

• Payroll by employee and reporting to the IRS, state, and local tax authorities (unless you have a third-party processor)
• Payments by vendor
• 1099 reporting
• Tracking of restricted giving and expenses, so you can pull a report of what is left to spend
• Contribution statements (reconciled to deposits)
• Both the Statement of Financial Position and Statement of Activities (Unrestricted and Restricted)

Read more about Access to your information in our Outsourcing series.

Purpose for Accounting

It is important to know why you are doing a thing so that you do it well. This is a great mantra for finances, especially when related to the church! The goal of financial statements is to provide a clear picture of the financial position of an organization that is easily understood by a broad audience.

Reporting Internally

When reporting to the board and membership, it is key to report ALL financial data. This includes the Statement of Financial Position (what you own as of the date on the report) and the Statement of Activities (what is happening year to date by account).

A few Church Plant Finance Notes

Unless it is a reimbursement of expenses, income should not be reported in an expense account. Expenses should not be reported in income accounts because it would net and not reflect the true amount received by givers. Also, do not have accounts such as “Trustee Expense” or “Use of Reserves.” This does not tell a reader of the financials how money was spent. These accounts also create an opportunity for fraud.

The equity account should be the total of all Statements of Activities over the life of the church except the current year. There should be no entries directly to the equity account without being reflected in the Statement of Activity. The net balance of the Statement of Activity closes to the equity account at the end of each year.

Report the balance of restricted funds available to spend. The equation is Restricted Giving minus Purchases using those funds. Of the cash, report how much is available for general operations. The equation for this metric is total cash minus restricted and designated fund balances.

Reporting Externally

When reporting to the IRS, include Payroll withholding and employer paid taxes for Federal, State, and City governments. If requested, housing allowances documented in the minutes of meeting(s) prior to the year should also be submitted.

Each year, you are also required to submit:

• W-2s for all employees
• Contract labor via 1099 filing to the Federal government
• 990 only if you applied and obtained a 503(c)3 status letter ruling (NOT required for churches)
• Contribution statements given to donors who report to the IRS on their individual tax returns

Tracking Payments

Each expense should be tracked by vendor to know what you have already paid and what you owe. You are also responsible for obtaining and tracking W-9 forms from vendors doing work for you (i.e. lawn care, contract musicians) to verify that they do not require deductions for backup withholding. MM suggests to receive documentation for any amount of payment.

Recording Income

It is important to report unrestricted income, donor restricted income, and board designations properly so that you have honored the givers’ intentions. Keep documentation as to the purpose and intention of the giver of donor restricted funds. It is especially important to keep record of contributions by giver so that you can produce a tax statement at year end.

Unpacking the Reports Produced Monthly and Annually

Financial statements should be produced monthly and a compilation report produced at the end of each fiscal year. This gives the organization a better picture of expenses versus giving each month, which helps leadership make more informed decisions.

1. The Statement of Financial Position (often referred to as the Balance sheet) should include:
   • Bank accounts – ALL accounts opened with the church’s federal ID#
   • Building and Land owned by the church (ALL, not just the church)
   • Liabilities – short- and long-term loans
   • Restrictions on cash
   • Unrestricted Equity
   • Net Balance from the Statement of Activities (Income Statement)
2. The Statement of Activities (otherwise known as the Income Statement) will include ALL income and expenses.

To Sum up Church Plant Finances

As you can see, a lot of information (and hard work) goes into the financial health of an organization. This is one reason to use as much technology as you feasibly can, and to outsource as much of the tasks to qualified professionals as feasibly possible.

But, when that is not in the budget, make sure you have the following things in order to set your new church plant up for success:

1. It is important to obtain a Federal Tax ID# and payroll tax number, while a 501c-3 status is not always necessary.
2. Do file the correct paperwork to avoid paying sales tax and property tax.
3. Use either a Cash Basis or a Modified Cash Basis to track your assets.
4. Find the right software to fit your needs.
5. Report all financial information to your board and members.
6. Have anti-fraud measurers in place.
7. Give the IRS all information regarding employees, contract labors, and donation information.
8. Track expenses by vendor, and obtain a W-9 for contract workers.
9. Track giving by constituent.
10. Produce a monthly financial statement that includes the financial position and lists all income and expenses.