Church Accounting 101

Tip #1

Here is a common scenario in the church accounting world:

Say a church board decides they want to pay all the staff a bonus. 

The pastor directs the church bookkeeper to issue bonus checks.  The bookkeeper enters and issues the checks through the churches accounting software using the accounts payable module. 

Makes sense because it is an expense, right?

Wrong!

This is actually a very common accounting mistake.

All employee compensation must be processed as payroll, not as an expense in AP.

Compensations run through AP are not calculated as income and create issues with tax reporting.   

Imagine finding out that your W-2 was incorrect, and you hadn’t reported all your taxable income? 

Imagine if it was the IRS that was telling you so!

Here are some of the most common compensations we see this issue with:

Bonuses (especially Christmas!)

Pay raises and back pay.

Appreciation gifts.

Severance pay.

Bereavement pay.

Payment for unused time, like vacations or sick days.

What about reimbursements? They are not compensation.  You are returning funds that the employee has basically “lent” to the church.  Process them through AP unless you can post as a non-taxable reimbursement in payroll.

Just remember, all pay is payroll!  Enter it in payroll!

Not sure?  Give us a call!

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Tip #2

Do churches need to provide 1099 forms for non-employees?

The 1099-NEC is a specific type of Form 1099 used to report nonemployee compensation. It is important for churches who pay independent contractors or freelancers for their services.  This includes guest speakers and staff who receive stipends.

Here are some key points about the 1099-NEC:

1. Nonemployee Compensation: The 1099-NEC is used to report payments of $600 or more made to individuals who are not employees. This typically includes payments to freelancers, independent contractors, and other service providers.

2. Filing Threshold: If you pay an individual or unincorporated business $600 or more in nonemployee compensation during the tax year, you are required to file a 1099-NEC for that payee.

3. Timing: The deadline for providing the recipient with a copy of the 1099-NEC and filing with the IRS is generally January 31st of the year following the tax year in which the payments were made. For example, for payments made in 2022, the deadline is January 31, 2023.

4. Separate from 1099-MISC: Prior to the reintroduction of the 1099-NEC, nonemployee compensation was reported on Form 1099-MISC. However, starting with the 2020 tax year, the IRS reinstated the 1099-NEC specifically for reporting nonemployee compensation, and Form 1099-MISC is used for other types of payments.

If you have paid independent contractors or freelancers and meet the filing threshold, it's important to issue a 1099-NEC to report those payments. Failure to do so could result in penalties. As tax regulations can change, it's advisable to check the latest IRS guidelines or consult with a tax professional for the most up-to-date information.