COGIC Church Administration Module 7 Ministry Non-Profit

COGIC Church Administration Module 7 Ministry & Non-Profit Law Part 2

General Legal Considerations

Legal/Financial Issues u Legal Documents: Start your ministry with a solid, legal foundation. Have a qualified lawyer or business expert write your bylaws, charter and formational documents. – See Module 6 for specifics on incorporation, bylaws, and non-profit status – 501 (c)3 status – You will regret it later if some of the long-term considerations were not anticipated up front. – The law is constantly changing relating to ministries and nonprofit organizations. Make sure you ministry’s expertise in this area is kept current.

Legal/Financial Issues u IRS Requirements: The same principle of excellence applies to your financial foundation. You need a specialist to help you prepare for the future. Have a nonprofit expert help you with the IRS during startup and growth. Do not try to tackle this area with people who are not qualified. Build a strong foundation of excellence for the future. – Tax exempt application (1023 A) – Initial quarterly tax returns (941) and annual reporting (990) – Special Clergy Issues: housing allowances, accountable reimbursement policy, exemption from Social Security, salary package, etc.

Legal/Financial Issues u Financial Accountability and Excellence: Maintain the financial area with excellence continually. Do the right things to get positive results. – Become a member of the ECFA (financial accountability group) as soon as you are able. – Get a professional to be your auditor. – Maintain high standards for honest and diligence in all financial reporting. u Have a weekly Bookkeeper. u Treat designated funds very strictly. Do not allow any misuses of these gifts. u Send quarterly summary statements of donor giving.

Specific Financial Considerations

Corporate Checking Account u The by-laws must contain provision that empowers the corporation to have and hold a corporate business checking account u Have as FEW accounts as possible (one by preference, but not more than three). This ensures fewer ways “in and out” of the bank and is easier to track and audit

Corporate Checking Account u Have as few signators as possible on the checking accounts. – They should not be related – They should have at least one officer, preferably the treasurer – They should NOT be the pastor if possible – There should always be at least two signators, not stamped, but signed – Signators should be rotated – Secure the corporate seal!

Employee Compensation u Non-profit corporations are allowed to have employees – and pay them fairly! u Payment for a job or service performed is NOT inurement to gain! u All compensation plans must follow bylaws regulations as well as state and federal guidelines and requirements

Employee Compensation u u Employee compensation guidelines can be found in IRS Publication 15. This can be found in the Supplemental Materials section of this week’s module as Exhibit #7 Each employee must fill out a W-4 form that gives specific directions from the employee for tax withholding (Exhibit #8). The corporation must fill out a W-2 form for the employee that summarized wages, taxes, and withholdings (Exhibit #9) The corporation must file a IRS Form 941 (at least quarterly) which sates and reconciles withholding of federal taxes from employee paychecks (Exhibit #10)

Specific Compensation Issues u u u Specific compensation issues have their authority and origination with the Board of Trustees and are made official (and legal) by a vote of the Board per by-laws and as recorded in the Board minutes – this is LAW! Specific Board resolutions should be made as close to the first business meeting as possible near the time of incorporation. It is usual to take care of incorporation, non-profit items, and salary/compensation issues right in the first minutes, using technical and legally correct format and descriptions. See a sample of the minutes from a first Board meeting in the Supplemental Materials section of this module, as Exhibit #11

Specific Compensation Issues u These original minutes of the Board may be used to define the following specific compensation issues (or this may be done later by revision of the by-laws and addition to the minutes per vote of the Board: ) – – – u Definition of officers of the corporation by vote Reiteration of the purpose of the corporation Definition of ministerial (parsonage) housing allowance Definition of an Accountable Reimbursement Policy Salary Package considerations (salary, specific adoption of housing request, company vehicle and use, retirement, access and limits to accountable reimbursement benefits, cafeteria plan for benefits) This is where solid planning saves time and money!

Ministerial Compensation u There are multiple ways provided by federal law that can add value to a minister’s compensation package while assuring the best use of resources. THE BEST WAY TO COMPENSATE A MINISTER IS NOT BY SALARY ALONE! Considerations include: – Base salary (taxable income) – Housing (parsonage) allowance – Accountable Reimbursement Policy – Social Security Bonus (SECA Bonus) – Pension & retirement – Health and disability – Medical and Dependant Cafeteria Plans – Life Insurance – Sabbatical, Vacation, Holiday provisions – Scholarship and Educational Benefits

Base Salary for Ministers u u Base salary is an amount paid in compensation apart from special considerations. It is the most used method of compensation, but the least creative and also causes the highest tax consequences for both minister and ministry. A minister is considered “self employed for the purposes of social security” by the federal government – that means that the minister does not pay FICA social security taxes (Federal Insurance Contribution Act – 6. 2% Social security tax up to $97, 500 income in 2007 & 1. 45% Medicare Tax with no income limit in 2007 – 7. 35% total; the employee pays this by deduction, and the employee contributes the same – total is 15. 3%) The minister pays SECA taxes on salary (Self-Employed Contribution Act) – the entire 15. 3%!, making the salary portion a big hit in federal taxes (wage taxes, SECA taxes, state & local taxes) Note that the minister should be given a “SECA Bonus” – more later!

Base Salary for Ministers u Ministerial compensation is traditionally low, but there are good reasons NOT to make the minister and his or her family “suffer for Jesus: ” – Creates perception to the world that God is cheap! – Affects the attitude of the minister and his or her family – May make a second job necessary for the minister – May make it necessary for the spouse to work and leave family – Does not fulfill “workman worthy of wages” (I Tim 5: 18) – “Muzzles the ox – not benefit or incentive! (I Tim 5: 18) – Does not honor the “prophet” or God’s point person – Poor witness to outsiders – Does not model the character or heart of God (provider) – Can be a power play or source of control!

Ministers Housing Allowance u When preparing a housing allowance request, ALL items to buy, maintain, or keep a house should be included: – Cost of buying a house (down payment, closing costs) – Rent or Mortgage (Principle and Interest) – Real estate taxes – Insurances – Improvements (remodeling, roof, room, garage, patio, fences, appliances, repairs) – Furnishings (furniture, dishwasher, dryer, freezer, refrigerator, TV, VCR, Stereo, piano, computer, beds, small kitchen items, cookware, dishes, sewing machines, garage door openers, lawnmower, hedge trimmers, etc. ) – Decoration Items (drapes, rugs, throws, pictures, knick-knacks, paintings, wallpaper, bedding, sheets, towels, etc. ) – Utilities (heat, water, sewage, garbage, Cable, phone, Internet, etc)

Ministers Housing Allowance u u u A housing request must be submitted to the Board once per year PRIOR to it being activated as part of compensation. See an example in Supplemental Materials as Exhibit #13 Another huge advantage is that the mortgage taxes and interest ARE STILL deductible on Schedule A of the minister’s 1040 tax filing, making this a “double dip” tax shelter that often adds substantial savings! Declare as much as possible in your housing request to the Board – overestimate or add 10% to the final figure you justify. What you don’t use in a year can be declared on your 1040 tax return and taxes paid – you cannot go back and increase retroactively if you spend more on housing! You can resubmit a new request at any time, BUT you cannot make it retroactive – it is in effect from the day the Board approves SAVE EVERY RECEIPT (seven year rule!)

Accountable Reimbursement u u The Accountable Reimbursement Policy (ARP) is a PRETAX method to add value to a minister’s (or other employee’s) compensation plan. It sets aside predetermined sums of money for specific expenses that the minister may encounter through the year, that are accessed by submission of receipts or advance requests. The accountable amount is them reimbursed to the employee WITH NO TAX CONSEQUENCES The policy must be set up and defined, in the minutes of a Board meeting, with specific categories, limits of reimbursement, procedures to reimburse, and Supplemental Materials section of the module for an example of an ARP, as Exhibit #12

Accountable Reimbursement u Categories to consider for Accountable Reimbursement include: – – – u Auto Expenses (Mileage, etc. for business purposes) Education (tuition and books/fees) Travel (allowance for business purposes) Entertainment (meals, time out with guests, etc. ) Miscellaneous (business expenses) The ARP is superior to merely deducting business expenses on Schedule A of the 1040 tax return – it is pretax, so not subject not any federal, state, or local taxes!

SECA Bonus u u u Since a minister is considered “self-employed for the purposes of social security, ” regardless of whether he or she is self-employed or employed b y the church, he or she must pay SECA rather than FICA social security and medical taxes With FICA, the employee pays half of the 15. 3% taxes (7. 65%) and the employer pays the other half (7. 65%). When the minister pays SECA, he or she pays the whole 15. 3% by themselves. The ministry customarily provides a partial offset for this loss, by paying the minister a SECA Bonus of 7. 65%, equivalent to what they would have paid in FICA taxes anyway. The SECA bonus is taxable income for the minister but goes a long way toward making up the difference in loss between FICA employer contribution and self-employment SECA The minister usually “withholds” SECA as extra federal tax withholding requested on the W-4 equivalent to the annual projected SECA taxes (15. 3%) divided by the pay period

Pension and Retirement u u u A wonderful pre-tax benefit is savings and corporate contribution to a retirement or pension account There a series of IRS regulations in sections 403 (b) and 408 (k) that describe the kinds of retirement and pension funds set up by non-profits, that are usually more flexible and less expensive than for-profit regulations (section 401 (a) Consult a tax professional to construct the pre-tax plan that is right for your organization and its size

Health and Disability u Another pretax benefit is a solid Healthcare plan with excellent medical, dental, and vision benefits – Check with small business associations to get group rates – Consider self-funding vision benefits – Offset deductibles with “Cafeteria Plans” - more later u Consider self-funding a short and long term disability plan for key employees: – Short term absence due to accident or illness might be covered after the first two weeks absence at 75% of salary for 12 weeks – Long term absence due to accident or illness might be covered after short term expires at 50% for up to 28 more weeks – These benefits can be self funded by the corporation or through an insurance plan – Define the plans in Board minutes by resolution

Cafeteria Plans u u An excellent way to allow for pre-tax benefits for specific medical or dependent care purposes is a “cafeteria plan” that allows for selection of specific benefits of value to the employee In this plan, pre-tax money is set aside by employee contribution to be applied for medical or dependent care purposes, and then can be accessed by receipt and accountable reimbursement This saves all federal, state, and local taxes on anticipated expenses related to medical and dependent care Consult a tax professional for specifics on how to set up this kind of valuable plan

Life Insurance u u u Life insurance was actually a Christian idea at first, to enable a community of people to cover the loss of one family or individual. Group Life can be provided for very little cost up to $50, 000 with no tax liability to the employee Supplemental Life policies can be added by company funded or employee funded methods – any employee provided insurance over $50, 000 have premium tax consequences for the employee “Key man” insurance, usually in $1 million increments is often gotten for the senior leader, in case of sudden loss, to provide a buffer for the ministry Prudent planning says that I should multiply my annual salary by 10 and purchase that much simple life insurance face value on a policy. That allows the survivors to invest the lump sum and live off the interest, without touching the principle, at roughly the same economic level as before their loss

Vacation , Holiday, & Sabbatical u u u Rest in ministry is not an option, but rather commanded for all Christians Ministers are notorious for long hours, seven-day weeks, with little or no rest, followed by burn-out Vacation time off should be defined and fully funded – 3 – 4 weeks per year (may reward time served) is usual Defined vacation and holidays should be a part of a Board resolution and minutes of a meeting The senior ministers should be given sabbaticals or regular breaks (i. e. 1 month – summers) to recharge and retool – INVESTMENT IN HEALTH – Freshness!

Corporate Tax Filing Requirements

Non-Profit Tax Filings u u There are two key tax filing requirements for non-profit corporations – the 941 quarterly tax withholding reconciliation (already mentioned) and the yearly CORPORATE TAX RETURN (990 or 990 EZ). The corporation must file a yearly tax return, because it is seen as a “legal person” in the eyes of the law as a corporation. The filing date is May 15 of each year, or the Monday after a weekend on which the 15 th falls. The form you use to file (990 or 990 EZ) depends on the level of income and assets for your ministry. An example of the 990 and 990 EZ can be found in the Supplemental Materials section of this module as Exhibits # 14 and 15 respectively.

Non-Profit Tax Filings u The form 990 and 990 EZ filings provide an accountability with the federal government for your stewardship of the non-profit tax status you hold. They report on: – – – u Revenues, Expenses, Fund Balances, Assets Donors, Board members, officers Program services and accomplishments Balance sheets and use of funds to accomplish mission Audit certifications of finances and financial systems Other compliance data of interest to demonstrate strict adherence to 501(c)3 code The 990 EZ is less involved and complicated to prepare

Non-Profit Tax Filings u u The 990 form is filed if your corporation normally has more than $100, 000 in revenue in a year and/or more than $250, 000 in assets The 990 EZ is filed if your corporation normally has between $25, 000 - $100, 000 in income per year AND less than $250, 000 in assets No filing is required is your corporation has less than $25, 000 in assets per year, BUT you must use a 990 EZ form filed with the box checked “no filing required” to let them know. In the event of declining income, the form is determined by the average of the last previous three years income

Final Considerations u u Consider joining the Evangelical Council for Financial Accountability (EFCA) for added accountability and credibility, in addition to their resources Plan for yearly financial reviews, and a full financial audit at least every three years by an outside CPA firm to add safety and accountability to the ministry Use the accrual method of accounting, which considers bills which are not yet paid as expenses to be tougher on accounting and budgeting Build in strict internal and external controls and policy for every step of the financial process, with double independent accountability checks at each point – this is to avoid temptation, by reducing the likelihood of success at deception!

Final Considerations u u u Limit the number of checking accounts (1 preferred 3 at most!) Limit the number of check signators (two on each check, limited people who are not related and have no vested interest) Limit access to checks (locked up); limit cash on site! Different person prepares checks and balances the checking account: no one every handles or counts money alone! Prepare key monthly updates for the Board, and quarterly updates for the congregation All expenses must have an invoice to back them up – no exceptions!

In Closing…. u u u Solid financial structures contributes to sound stewardship of God’s resources Reducing temptation to do wrong is actually a favor to those who are still maturing in character Adequate compensation for ministers and other ministry employees glorifies God and is an investment in ministry! Use financial and legal professionals to set up the more complicated aspects of the corporation and to provide auditing services. Hang on: God will never ask you to do something that you could do by yourself – He is counting on you partnering with Him!