Churches struggle for many reasons. They may struggle to connect with their surrounding community. As older members pass away, they may have a tough time drawing in younger people. Additionally, internal divisions can sometimes split the church.
But there’s a hidden church killer that’s often not on the radar of pastors and church boards—a failure to comply with local, state, and federal laws.
Take, for example, a church in Southern Indiana that started about 15 years ago. The church started well, baptizing the most people in its statewide denomination in its first few years of existence. About ten years after the church began, the church’s founding pastor left. The church had struggled to maintain momentum after the COVID-19 pandemic. Plus, the building where the church met wasn’t in good shape. Another church stepped in to help them get back on their feet. The core of the church began trying to bring life back to the congregation. Despite the recent struggles, the church had earned a reputation in the neighborhood as a caring place of worship that was willing to invest in the community.
But just a few months into the revitalization effort, leaders discovered the church had gone years without filing regular nonprofit reports with the state. Fines were possible, and back taxes may be assessed. In normal circumstances, this oversight may not have been fatal. Added to the building woes and the dwindling attendance, the church didn’t have much of a choice but to close.
No one in the church knew about the paperwork problems. The church’s lay leaders didn’t even know what the documents were, much less that the paperwork hadn’t been submitted recently. They were universally heartbroken that the church they had invested in for more than a decade would no longer be a light in their inner-city neighborhood.
Whether it’s your church council, elders, deacons, or your church board, it’s critical your leaders understand the compliance issues your church faces. It’s a financial stewardship issue. You don’t want to wake up one morning and everything good God is doing in your church is in jeopardy because paperwork wasn’t completed.
Understanding Key Compliance Issues
So, what are the important compliance issues your board needs to understand? This isn’t an exhaustive list, but it’s a place to start.
- Your tax-exempt status – A church’s tax-exempt status depends on whether it qualifies as a non-profit according to IRS guidelines. Political involvement and for-profit activities can impact your status. All of your leaders need to be aware if something threatens this status.
- Paperwork – Your church has several key pieces of paperwork (see the example in the introduction) that need to be completed in a timely manner.
- Unique fund accounting situation – Churches must show they’re spending money according to the intent of donors. Churches often establish multiple funds (general, missions, building, etc.) to honor donor intentions and ensure transparent financial management.
- Childcare – Most churches have some involvement in childcare. Some have associated daycares and preschools. Nearly all have childcare and Sunday School classes during adult gatherings. Church must comply with most state and federal rules governing childcare.
- Payroll taxes – Just like any other employer, your church must comply with payroll tax regulations. Churches often have a number of unique situations when it comes to payroll taxes, including the dual status of many ministers (self-employed for social security purposes and employees for income tax purposes) and housing allowances.
These are just a few of the compliance issues your board needs to understand if they are going to provide proper oversight.
Tips for Educating Your Board
It’s critical you help your board understand the compliance issues your church faces. Many church boards have ultimate legal responsibility for the compliance issues you face. (This depends on your church’s polity.) They deserve to understand the issues so they can provide proper oversight.
Here are five key ways you can help educate them.
- Establish Clear Financial Policies. Clarity helps everyone, but it particularly helps people trying to provide oversight. Your financial policies should reflect the compliance responsibilities your church has. If your church is following its own guidelines, your board should be able to expect that you are compliant.
Sound financial policies (that describe the budgeting process, internal controls, how offerings are handled, etc.) are the foundation of good financial decisions for churches. Your board will love you for providing clear policies. - Provide regular training. It may sound odd to “train” your board, but it’s important to remember that many board members don’t come to their positions with extensive financial management experience (particularly issues surrounding compliance). New board members need an overview of relevant local, state, and federal laws that apply to your church, including tax obligations, employment laws, and health and safety regulations. While no training can include all relevant laws (your board doesn’t need that either), you can still provide an effective summary. Provide them with resources (such as URLs) where they can find compliance information should they have questions.
It’s good to do these trainings on a regular cadence because of changes to compliance laws. Or consider doing updates when you’re alerted to important changes. - Invite experts to speak with your board. You could combine this with the training mentioned above. Asking people who are experts (or at least have more experience than you) in nonprofit compliance can provide another voice in the compliance conversation you’re regularly (hopefully) having with your board. Ask around to sister churches in your community to get some ideas of who might be able to help. If you’re a part of a denomination, they should have some suggestions as well.
- Recognize your board as allies. At times staff and volunteers who work with church finances can be wary of too much openness with their church board. But it’s important you realize your board is on your side. They want your church to be compliant. Like mentioned earlier, in many situations, they could be personally accountable for the compliance of the church. Don’t hide information from them with the hope you can fix a problem. Let them know about any compliance concerns as soon as you know.
- Develop transparent reporting systems. For your board to be staunch allies in compliance, you’ll need to provide transparent church reports to them, so they can easily compare the information in the report with compliance expectations. For example, you might create a “compliance checklist summary” that highlights key compliance areas and describes how the church meets those requirements. It could include items like tax filing status, payroll compliance, donation restrictions, etc. Effective church accounting software, like Realm, can help you do this pretty easily.
The key is you want to make it easy for board members to see the information. Doing so not only makes their job simpler, but it’ll improve overall trust in how your church is handling financial information.
Next Steps
Compliance isn’t a word that comes up when most people think of their local church, yet it has the potential to have an incredible impact on the future of many congregations. Your board needs to stay up to date with what you’re doing to stay compliant. Your regular cadence of involving your board in discussions about this will have long-lasting benefits.
To learn more about how your church can more effectively manage financial issues in your church, check out ACST’s free guide, Simplified Accounting: A Church Guide to Financial Clarity and Compliance.
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