When A Church Member Pays Staff Directly (?)

I recently received an email with this question:

Several years ago our church was having budget issues and cut salaries, including the organist. Apparently a member started giving the organist a monthly ‘gift’ to make up for the loss of pay. The church just became aware of this because the member didn’t give a check last month and the organist is looking for her monthly gift. The church knew nothing about it and that was between her and the member that the church was not involved. The church presumes the income is not being reported. Our question is can the church get in trouble for this?  Our thought is no because it is a ‘gift’ and the church is not involved.

My Response

Let me dissect this:

  • If the donor gave the money for the organist and the donor received tax deduction credit, then you have a problem.
  • If the organist got the money in a church check and it was not reported on the W-2, then you have a problem.
  • If the organist got the money in a church check and it was reported on the W-2, then you have a problem with #1.
  • If the organist got the money directly from the donor and the donor never got tax credit and the money never went through the church’s finances, then you are fine (no problem).

Going forward:

  • You still have time to change the tax deduction statement for the donor and the W-2 statement for 2014.
  • You can restate the organist’s W-2 for the prior years (however far back that goes) and quite frankly, that should be done, It will be a headache and it may trigger an IRS audit (BTW, the IRS rarely does a church audit for tax deduction purposes anymore but they are heavily into payroll fraud and will do a payroll audit in a heartbeat).
  • It will almost certainly cause the IRS to issue a penalty and interest statement for unpaid employer FICA.
  • I would also re-issue the donor tax deduction statements for the prior years. If the IRS audits the donor, then the donor can choose to show the IRS the incorrect statements (which were sent out years before) or the newer/corrected statements.
  • Someone needs to have a conversation with the financial assistant.
  • AND (strongly encouraged), get the financial assistant some continuing ed.
  • Everyone should have continuing ed since laws & taxes change.
  • It’s required in some professions (lawyers, doctors, CPAs) and should be required in every profession

Whether or not it is a gift is inconsequential. It is income to the organist and thus should be taxed: Federal, State, and BOTH employee and employer FICA. What matters is whether the gift went through the church’s financial system for both the donor and organist.

As to your financial assistant: at the least she needs some continuing education and training; at the worst she should be terminated. Either way, this incident should be documented and placed in her personnel jacket.


The good news in this case is that evidently the money was not going through the church but going directly from the member to the organist, circumventing the church. But that is also the bad news – there is a church member going rogue and funding his or her own favorite thing.


Lead On!




What Should Churches Opposed to Gay Marriages Do?

This post addresses only the church’s legal concerns that have arisen related to same-sex marriage.

Recently, many courts in the US have ruled that marriage by the LGBTQ community (Lesbian, Gay, Bisexual, Transgender, and Questioning) are legal. There is still much in legal limbo – the ultimate legal ruling will be done by the US Supreme Court in a few months or years. In the meantime, should churches enact policies to protect themselves and their ministers from being forced to perform these marriages for those congregations opposed to this on theological grounds?

The short answer is no. It is not necessary.

The long answer is that never in the history of the US has a church or a minister of a church been required to perform a ceremony which is against the theological positions of the church/minister. That includes things which today (December 2014) are considered acceptable but which were not socially acceptable decades ago. The courts never forced a church to do or forbade a church from doing any of the following:

  • Marrying teenagers
  • Marrying divorced people
  • Marrying people of different races
  • Marrying people of different ages
  • Marrying people of different faiths or no faith

While a church can pass a series of policies, it is unnecessary and it is needless time expended when there are so many more worthwhile things for a church to be doing. If a civil servant were to threaten a church with a legal suit, the courts would throw it out because it violates both clauses of the religion part of the first amendment: the establishment clause and the free exercise clause. The state cannot tell a church how to do its business (period).

BTW, churches are increasingly bombarded with alarmist emails and paper mail trying to scare them about their security issues, tax situation, legal matters, and government intrusion. It will require an increasing amount of work for churches to investigate to see which of these claims is real and thus should be addressed and which ones are opportunists trying to get churches to buy their services. The other name for these opportunists is “quacks” and there are a lot of them out there. Do not give them your attention and certainly not your business.

Lead On!


IRS Payroll Audit Checklist

A friend of mine had an IRS payroll audit (and passed with flying colors). Below is the actual checklist required by the IRS (I changed only the dates; all other information is original). If you fail this, they won’t revoke your tax-exempt status but they can issue fees and penalties.

As an administrator, please look at this checklist and see if you could give this information immediately to the IRS officer so that he or she is in your office for only a day or two. You don’t want them to stay long and the better organized your records are, the sooner you can return to your normal hectic work.

When a staff person or a committee member complains that you want too much paperwork, show them this checklist and explain that the IRS really does visit churches every single year and asks for this stuff; you’re just trying to protect the staff and church, not trying to do more paperwork.

The instructions below are directly from the IRS:

The following information is being requested for the examination of your Forms 941 for the period covering January 01, 20XX and ending December 31, 20XX. The information being requested will be used in examining the information provided on the return and will be used to determine the employment tax liability for your organization for the period of January 01, 20XX through December 31, 20XX.

Please provide the following documentation:

  1. Copies of Forms W-4 for all employees during 20XX
  2. Copies of Forms W-3 & W-2 for all employees during 20XX
  3. 20XX payroll ledger, check register, employee earning record and year end payroll summary
  4. 20XX general ledger, trial balance, and a chart of accounts
  5. All Bank statements for accounts used in 20XX
  6. 20XX Time cards, sign in sheets, or other method used to track employee hours
  7. Please provide copies of Forms 1096 & 1099 Misc. issued and filed for 20XX
  8. Copies of all employee credit card statements for 20XX
  9. Detailed explanation of payroll procedures, including whether reimbursement is handled under an Accountable or Non-Accountable plan
  10. List of names & addresses of all officers, directors & trustees to include compensation, if paid in 20XX. Also a current list of officers.
  11. Minute books of your governing body (Session) (Officers, Directors , Trustees) including compensation committees if available from January 1, 20XX to December 31, 20XX
  12. Employee personnel manual, job descriptions, compensation policy, and compensation comparable data if used
  13. Copies of Forms W-9
  14. Copies of prior and subsequent year employment tax returns Forms 941.
  15. If your employees were “leased” through a third party management company, or you used the services of a temporary staffing agency, please provide a copy of the contract(s) for 20XX
  16. Provide documentation for any resident or non-resident aliens used in 20XX; include copies of applicable 1042s filed
  17. A tour of the organization’s facilities, as well as a desk or work-area to work in during the examination

NOTE: Additional information may be requested in the future, including a meeting to discuss the supporting documentation you provide. It is to your benefit to provide clear and concise explanations and supporting documentation regarding the information being requested.


Ruts & Routines


What’s the difference? A routine is a pattern of behavior that guides you through the mundane, while a rut is a routine that is completely ingrained. A routine can be as simple as the steps you take to get dressed in the morning or how you get to work. A rut is much deeper, though.

Routines are good – they help you get things done without having to put much thought into what you’re doing, because what you’re doing doesn’t require much thought (such as what to eat for breakfast or where to put your car keys when you come home). They help make life easier and more settled. I encourage routines because they allow you to use your brain power for other activities requiring more thought, such as work or family interaction.

Routines that become ruts are sometimes bad. How do you know if a rut has gone bad? Ask yourself this question: “Am I willing to change what I’m doing?” If you are not open to a new pattern of behavior, then you are in a rut. The main characteristic of a rut is that it is cut so deep that you cannot see over the edges to see anything else that is out there. Ruts force you to stay on the same (often narrow) path. They don’t open your eyes to other opportunities. Ruts are hard to break out of; you have to do this intentionally. And when a rut is work or family-related, the entrenched behavior can lead to stubbornness when those two areas require people to be truly flexible.

Routines are good and necessary; ruts are not. As you go through today, ask yourself if what you are doing is a routine or a rut. Could you change if you wanted to? For the sake of others, would you alter what you’re doing? It’s easy to say yes, so I dare you to try it with something simple and see how you react to that small change. You may have more ruts in your life than you know.


Lead On!





Lead On!








Background Checks

Background checks are one of the many things in the past few years which have changed the way we do church. It is a legal necessity and not doing them can put a church in a legal hot spot. The best question to ask is the prudent person rule: What would a prudent person do in this situation? That is the rule of thumb I’ll use to answer the following

  • Frequency

o   There is no legal requirement for how often a background check should be done. A good rule is to do them once every three years. Every five years is too infrequent and every year is too expensive.

  • Cost

o   Basic background checks cost $10 to $15 for a social security number check, sex offender, criminal check, and address confirmation. However, some state, county, or city governments do not put their information online which means the background check companies spend extra money to obtain that info and they’ll pass that cost on to their customers. These additional fees can push a check up to $30 or $35.

o   There are more extensive background checks which cost more money but those should only be done if there is cause.

  • Who

o   The scope of who gets a background check must be defined clearly. The recommendation from a professional in this field is that your “average” volunteer have a basic background check. If something is uncovered, then a more extensive background check could be done or using that information, eliminate the person immediately.

o   Minors cannot have a background check without the permission of their parents. Typically I do not do background checks on minors. However, minors can be charged with adult crimes. For instance, I did a background check on an 18 year old woman who, the year before, had been charged with two counts of attempted murder.

  • How “deep”

o   Most background checks are pretty superficial and that is sufficient. You don’t want to go prying into someone’s past. That is not what a prudent person would do – do just enough to get the necessary info without being intrusive.

  • Who receives the reports?

o   There should be one responsible person to receive and review the background checks. Never share this information unless it is absolutely necessary and typically it is not.

o   If something is discovered, it is best to meet with the person and explain what was found and how, if at all, that will affect their work at the church, whether as a volunteer or employee. The person already knows the reason for the visit but it is good for them to know that the church knows, too.

o   For instance, I have a three-year rule for traffic citations but DUI citations are a lack of good judgment which require more time to elapse (about 5-10 years).

  • Sharing the information

o   The data in the report is personal and confidential. Only a very few people at a church should have access to this information. The person on whom the check was done can get a copy of their background check – that is perfectly acceptable since it is all about that person. I’ve even given the background check to an employee who volunteered in another organization; he gave the report to them and saved them the cost of a background check.

  • Finance Office Staff

o   Those with access to the church’s money have a higher threshold. For this staff I recommend an annual credit check. That is more expensive but it means that once a year, someone is reviewing a document which will reveal if a person has undue debt and is thus open to embezzlement to take care of their financial problems.

Always be sure that you can, with integrity, answer this question:

“Can you stand in front of a judge and tell him or her that you did everything that a prudent person did to protect the children who were in your care?”


Lead On!



Personnel Files

Accurate and complete personnel records are only nice, they are a legal necessity. The Department of Labor has auditors who come to employers without an appointment and demand to see the personnel files. If the employer’s records are incomplete or inaccurate, the DoL can levy significant fines and fees. Churches are not exempt from these spot inspections and fees. Thus, churches must have good personnel files for that reason alone. However, churches must have good records so that as an employer it is following its employees’ requests when it comes to payroll deductions. If an employer’s Finance Office does not do what the employee wants, the employee may have a legal case against the employer

The legal minimums in a personnel file are:

  • W-4 – this documents the employees name, address, and number of deductions for tax purposes
  • I-9 – this documents that the employee is legally eligible to work in the US. The I-9 also requires additional identification forms. The most common are a US passport or a driver’s license plus a social security card.
  • For states with income tax, a state version of the Federal W-4

The employer minimums for a personnel file are:

  • An Employee Information Form which lists the employee’s personal info (name, address, phone numbers, emergency contact, birthdate, etc.) and wage information (salary or hourly rate).
  • Annual sheets listing changes in wages
  • Every document related to an employee’s payroll deductions for health & dental insurance, retirement, long-term and short-term disability, etc.
  • Anything else related to an employee and his or her work at the employer

Annual Reviews:

  • Employee evaluations should be kept in a confidential file, usually with the supervisor. Sometimes those evaluations are kept with the Finance Office’s employee files and that is acceptable.
  • When an employee leaves, then all files related to that employee should be merged into one file and kept with the Finance Office’s permanent files.

Record Retention:

  • The US government requires employee files to be kept for at least three years after termination. I usually recommend keeping the files for at least 10 years.
  • Sometimes an employee will call and ask questions about his or her employment and these records can provide specific data that the employee may not have.
  • Sometimes a prospective employer will call, too. Having the employment records, even the evaluations at that time, enables the former employer to answer questions better. By the way, it is ALWAYS best if a former employer will tell a prospective employer ONLY the dates of employment of a former employee.
  • Many employers will include in the employee’s file a note stating whether or not the employee is eligible for re-hire. That is helpful especially for the future as memories fade.

Make sure your files are in order. Go do a self-audit today and see if you’d pass an inspection by the Department of Labor. It is better for you to do your own checkup than get fines and fees.


Lead On!



When a Pastor Leaves

A pastor will typically serve three to eight churches in his or her career. Coming to a new job is usually filled with joy and excitement but often the departure is tinged with disappointment and even legal threats. In our litigious society, and now with a propensity for retroactive lawsuits, what should a pastor and the church do to ensure there isn’t any lingering ill will so that the pastor can leave well and to protect all sides from frivolous accusations after the separation?

Here is a list of issues to be settled. I strongly suggest getting the answers to all these in a written document which both sides sign and keep. The church should place its copy in the minister’s personnel file.

  • Who owns the books/materials the pastor purchased using church continuing education money while he was the pastor? Can the pastor take those with him or is the church requiring him/her to leave them?
  • Who owns the sermons and other published material he wrote on church time, church computers, and using church staff for research? All material produced by the pastor using church time and resources (office, computer, paper, etc.) belong to the church – the pastor needs to get the church to release those docs.
  • Who will conduct an exit interview so the pastor can tell someone what are some things that need to be done to help his/her successor be set up for success?
  • Who will the pastor give the annual personnel review files to since these contain confidential info?
  • Who will the pastor tell of confidential information he/she knows which involve current members/attendees of the church and that someone must know for the health/safety of the church and its members?
  • A release from ministerial negligence is not legally possible, but the church can pay for the pastor to visit a lawyer so the minister can share with the attorney any info which might jeopardize the church and/or the pastor in the future. Then let the attorney decide what action needs to be done. This conversation is “double protected” by the lawyer and ministerial confidentially understanding in the law.
  • The church can do an “exit background check” to ensure that nothing has occurred recently that they are not aware of. Churches do a background check when a staff person comes but they should also do one when a key staff person leaves.
  • For some staff positions, the church and minister should have a financial/credit background check so that if there is some major debt, the church will learn about it. That debt might have caused him or her to leave because he or she was embezzling to cover the debt.
  • Are there any discrimination issues related to his or her supervision? This can be uncovered through an interview by a member of the personnel team or attorney with each of the pastor’s direct reports to determine if there are any potential issues.
  • What are the specific details and considerations of a severance package, disclosure of that package, what happens if the pastor gets a new job while he is still receiving benefits from that package, etc.?
  • Do you have a release for all financial transactions: personal loans, unreimbursed business expense, credit card payments, perhaps a loan for down payment on house purchase, etc.?

The personnel file of the departing minister must be kept by the church for at least three years (legal requirement) but 10-15 years after the employee leaves is better. That ensures the church has a written record of what happened when the minister was on staff (by then memories have faded or are no longer as accurate about events as they used to be).

All sides need to protect themselves from useless accusations. Having these issues and questions answered allows both sides to separate with dignity.


Lead On!


Church Administrator’s Office

I rearranged the furniture in my office a few years ago. I had the typical setup: desk in the middle of the office with cabinets and shelves behind me and a couple of chairs on the other side of the desk for guests to sit in. When people visited me, there was always a desk between us. When I handed papers across the desk, it was perceived as impersonal and by some even imperial. If I wanted to explain a document, I had to come around the desk and sit in one of the chairs – it was sometimes awkward but it did lend a sense of control and power on my part.

A church administrator, by definition, already has a lot of authority in a church. He or she doesn’t need to have an office that reinforces that. The work the administrator does should demonstrate his or her position in the church, not the office. Many people are intimidated when they go to the administrator’s office just because of the position – some people are even quite fearful. I believe the layout of administrator’s office should help put people at ease. Here’s what I did to my office:

I moved my desk to a corner of the office in a position such that I could see anyone who was at my door (which always remains open).

  • I even downsized my desk because I keep most files electronically and don’t need a big desk to hold files (a lateral file cabinet holds most files).
  • I put a small round table in my office with four chairs. I like round tables because they have no “head” so all chairs are equal.

My office was now set – the round table was the centerpiece (not the desk) and all other furniture was pushed to the sides. Whenever anyone came to my door, I invited them to sit at the table. Most of the time people refused and just asked their question but about once a day, someone did sit and we had a conversation about whatever they needed (I got about 10-15 visitors a day). A couple of times I came to my office only to see others using it because they liked the set up; I took that as a compliment.

Whatever your position in the church, if you have a private office, I encourage you to physically structure your office to eliminate barriers between you and the people you serve. Instead, have a meeting place such as a round table as the main feature which will make your place inviting and less threatening.


Lead On!