Churches sometimes pay money to people out of a desire to be helpful and gracious. But precautions must be taken! Be careful when your church pays money to any individual. Any time a person receives money from a non-profit organization, like a church, the money must be spent in a way that is consistent with the church’s non-profit purposes. Otherwise, the church risks what the IRS calls “private inurement” which can cost a church its tax-exempt status.
Any time your church pays money to an individual person for any reason, it is vitally important that leaders understand exactly why the church is doing so. For every dollar spent, somebody needs to be asking whether the payment is:
- Compensation to an employee,
- Payment to a contractor,
- Reimbursement for a legitimate expense, or
Money paid to an individual for any other purpose is likely improper, and the payment could be deemed as private inurement.
Beyond determining what kind of payment is being made, there are specific guidelines for each kind of payment that must be followed.
Employees & Contractors: When paying an employee for the performance of his or her job, the payment should be run through a payroll system and be reported as income to the recipient. This includes money that is thought of as a gift, a bonus, or for the purpose of meeting a medical need.
All too often churches mistakenly assume that their interns, musicians, and custodians are independent contractors and report their payments on Form 1099. Often churches think that if a person works part-time, temporarily, or has little responsibility, then that person can be treated as a contractor instead of an employee. Yet these are not the factors the IRS uses to determine the difference between an employee and a contractor! If an intern (or anyone else) reports to your office, is under the instruction of an overseer, performs work at your facility with your tools/equipment, works only for your church, and can be terminated by the church, then chances are high that the IRS would consider that person to be a W2 employee, not a 1099 contractor.
Expense Reimbursements: If the payment is for the reimbursement of an expense, it is best if it is paid as part of an accountable reimbursement plan if it is being paid to an employee. Such a plan must be implemented with specific language by the church’s board before such expenses are incurred. Expense reimbursements to volunteers should also be properly substantiated (the dreaded turning in of receipts) and clearly tracked as consistent with the church’s non-profit purposes.
Benevolence: Payment to help a person with physical needs, whether an employee, church attendee or a person in the community, should be paid consistent with a pre-approved benevolence policy that clearly establishes the criteria to be used for determining who will receive gifts. Decisions about who will receive benevolence payments should be made by a pre-determined and disinterested team of people.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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