Church accounting is unique to any other industry, and because of that it is prone to mistakes. Most of them are never intentional, just inexperience and misunderstanding from well-meaning volunteers or part-time help. I see common accounting mistakes in these five areas.
1. Inaccurate or Incomplete Books
This is the biggest mistake I see in church’s books.
It’s never intentional, maybe a volunteer or part-time bookkeeper is not as experienced in accounting and doesn’t categorize transactions correctly. Maybe you have a big CPA firm that handles the books, but they only update the numbers once a quarter, or even once a year.
Bookkeeping may not feel important, but …
not having accurate and updated numbers will not allow you to make accurate and updated decisions.
Without accurate and up-to-date financials, you won’t know If you can afford to hire a new staff or what capital is available for big purchases. This is important to stay on budget and know how to plan for the future.
To help this become less of a mistake, make sure you are doing the following …
- Using a cloud-based accounting system – There’s no perfect system out there, but use one that can pull in your banking information and make the process as automated as possible
- Reconcile every financial account, MONTHLY! – This needs to be done every month, for every account. Checking, savings, investments, credit cards, mortgages, and loans.
- Get professional help – Outsource your books to someone who knows how to handle church bookkeeping.
2. Payroll
The next biggest mistake I see is improper payroll management.
There are a lot of areas to talk about here, but I’ll stick with a handful …
Employer vs Contractor
A lot of churches like to pay individuals as a 1099 contractor, but the IRS is cracking down on this classification and it needs to be taken seriously. There’s several questions that can be asked to help determine, but the two biggest to ask are …
- Does the church have control over what the worker does?
- Is the pay determined by the church?
If you answered yes to these two questions, there’s a good chance the person is an employee rather than a 1099 contractor. Childcare help, musicians, and custodians are common paid roles that can be classified either way depending on how it’s handled in the church.
Pastoral Payroll Tax
Let’s face it, Pastors’ tax situations are different from any other paid position out there. Pastors who qualify for a housing allowance are considered “dual-tax status” according to the IRS.
Because of this designation, they should not have FICA taxes (7.65%) withheld and the church should not be paying the employer portion of FICA taxes. I see this all the time when a church has self setup its payroll system and it defaults a new employee with these taxes, which do not apply to Pastors.
Housing Allowances
Going along with the previous topic, Pastors should utilize their housing allowance to minimize their federal and state income taxes and voluntarily withhold additional federal income taxes from their paycheck to help with what they owe in SECA taxes at the end of the year.
3. Designated Funds
Churches are required to keep track of any designated funds, specifically talking about donor-restricted funds. These should be tracked separately from general or undesignated funds.
An accounting system is essential in tracking these funds. I see churches that do not track designated funds at all and I see other churches that keep track of 20-30 plus designated accounts.
Contrary to what many church leaders think, I believe churches should limit what designations the congregation can donate towards.
When most or all the funds brought in are undesignated, the church has the freedom to choose how they spend the money with no restrictions, this helps you manage cash flow. You don’t want to be a church with $1M plus in your bank, but you can’t touch any of it for your needs because of restrictions.
Best practices include …
- Track Funds in an accounting system. Use class tracking, or equity accounts to track all your designations
- Minimize your designations. Don’t offer many options to fund designated accounts with your giving platforms.
- Monitor your designated accounts. Keep track of them regularly and plan accordingly so that you are raising cash in all the right buckets.
4. Internal Controls
As a CPA, I can not speak to this issue enough. Churches and Pastors should be concerned about their internal controls in place. The more in place, the better.
From a high level, there are three main areas of internal controls that should be focused on for churches.
- Access to Cash
- Approval of Payments
- Reconciliation of the Financials
Cash is the most important aspect that needs safeguards in place at churches. As a general rule, there should be at least two unrelated trustworthy people handling cash at all times from taking up an offering, transporting it to the secure count area or safe, as it’s counted, and as it’s deposited or placed into a tamper proof bag for deposit after the count is checked.
Churches need to be “above reproach” when it comes to their finances. Separating these three responsibilities will help protect the church against all types of fraud.
5. Not Understanding the Numbers
I talk to church leaders and pastors often, and I realize they don’t fully understand their numbers. Financial statements can definitely be confusing, but we are told to be stewards of what God has given us and we have a responsibility to manage it well.
Numbers can be scary, but they are just telling the truth. You need to partner yourself with an accountant or bookkeeper who can provide the information necessary to understand the financials.
Here are a few areas to keep track of …
- Budgets – keeping track of your budgets regularly throughout the year is important to reach the financial goals and visions that God has called you to.
- Giving/Spending Trends – tracking financial trends like giving and spending help you forecast and plan for the future.
- Vision – It’s important to have a plan and be transparent with the church about that God-given vision. A congregation behind the vision will help motivate generosity and produce results
Do You Need Help?
Do you recognize any of these mistakes in your church’s accounting? If so let me help you take your finances to the next level.
Overflow Accounting offers bookkeeping, accounting, and CFO services for churches only. Whether it’s monthly reconciliations, payroll, bill-pay, donation management or CFO services, we can help get you on track today.