Church Planting & Finance - 3 Common Mistakes
As we begin a new year, I thought it might be helpful to point out a few common mistakes that church planters can make regarding their finances. Church finance and minister taxes can be confusing, and very rarely have church planters (or most pastors) been well prepared to navigate these complexities. While I can’t address every pitfall in this post, I wanted to point out three areas where I experienced this in my church planting journey.
Mistake #1 - Payroll Setup - When I moved from teaching to church planting, I learned that ordained ministers are not taxed like typical employees. Ministers can designate a portion of their salary to housing which can significantly reduce their federal tax liability. It is important to note that if a minister does this, the governing body of the church (typically a board of elders or finance board) must have signed documentation showing approval of the housing allowance. This housing benefit can come “in cash” (salary designated for housing expenses) or “in kind” if the church provides actual housing.
Another unique thing about ministers’ salaries is that ministers pay self-employment tax. They are responsible for the full 15.3% of social security and medicare. This 15.3% applies to the gross salary paid to the minister (including housing). A typical employee is only responsible for 7.65%, while the employer pays the other 7.65%. Ministers need to recognize this as they will be responsible for paying it on their taxes. Some churches give a salary “bump” to help offset this cost, but ultimately they cannot pay it like a typical employee.
Some ministers will decide to opt out of social security and medicare. While there are good arguments on both sides (opting out or staying in), it is important to note that you must choose to opt out within the first two years of being an ordained minister.
As your church grows and you hire other employees, you must ensure their payroll is set up appropriately for their employment status. Employees who are not ordained ministers or serving in pastoral roles will be paid as regular employees. As discussed above, those qualified as pastors are eligible for housing and will be taxed accordingly. If you're a church planter setting up your payroll for the first time, I will encourage you to talk with a tax professional who understands the ministry taxes and can help your church get set up. It might cost a bit more upfront to get help, but it can save you from much more significant issues.
A helpful resource for exploring ministers’ taxes - Guidestone’s Ministers Tax Guide
Mistake #2 - Losing Track of Expenses - When we planted Redeemer Round Rock in 2012, I knew I needed to keep up with what I was spending on the church account. Still, I had no systems in place to help me. I remember our volunteer/free CPA (about as good as the price you pay, in my experience) would have me go back through the bank feed at the end of the year and try to guess what everything was for. This took hours and ultimately was not a sustainable way to track expenses.
It is a huge responsibility to steward resources given to a church. We believe that good stewardship means setting a budget and working hard to stick within the boundaries of that budget. Tracking your expenses (or money-out procedures) is vital to godly stewardship. How can we ensure we are spending in line with our approved budget? How can we know whether the Amazon purchase was for the kid’s ministry or your kids at home? Expense management procedures help us account for the money that we spend. Healthy expense management procedures connect purchases with specific budget categories and have receipts as proof that the money was spent on what is stated.
If your church or church plant struggles with expense management, my last blog looked at common tools that might help (check it out here). #3 - Not reporting 1099 Income - Many church planters do not have a large staff team around them. Because of this, it is common for church planters to bring in other pastors to teach when they are out. It is also true that while many pastors can teach, they cannot (and should not) lead musical worship. In our church plant, we often relied on outside worship leaders to come to help us with music. There is also the eternal shortage of childcare volunteers to consider. Many church planters need help with kids’ volunteers and, sometimes, will bring in outside help. There are probably a dozen other scenarios where we could imagine a church needing someone to fill in or help with something the pastor or volunteer team can’t do.
Typically when you bring someone in, you will need to pay them for their time and help (and you should if possible!). But there are some essential things you need to do when you pay someone who is not an employee.
First, it is a good practice to have anyone you pay to fill out a W9 form. If you end up paying that person $600 or more in a given year (which means you need to track how much you are paying them), you will need to file a 1099 for them. This is how the IRS ensures the wages you pay to this person are taxed (they are essentially a contract employee for you). Some people work for you and are not required to have a 1099 filed. A lawn mowing business owned by a sole proprietor might need to be tracked as a 1099 employee. On the other side, there could be an A/C company that does repairs but doesn’t need 1099 because they pay taxes as an S-corp (Here is a helpful article I found that walks through who needs a 1099 and who doesn’t). A W-9 form will let you know who needs a 1099 filed and who does not.
Stressed yet? Take a deep breath. You likely have someone on your core leadership team who can help you navigate this. Don’t try to do it all on your own. And if you need professional help, the team at ChurchBiz would love to help you navigate these issues. We have a podcast scheduled in the next couple of weeks to explore this in more detail. We want to help take this off your shoulders so you can focus on the work of ministry and do so with financial integrity.
