Monday, June 25, 2018

Budget Allocations - Part 2: Practical Steps


Churches readily understand the importance of preparing an annual budget and having it duly approved by the appropriate church committee, board, and/or the congregation—whichever is charged with financial accountability and oversight responsibility.

But here’s the catch: A budget is a largely useless document unless the monthly budget allocations are done well. Decisions of whether to make spending adjustments must be informed by sound allocations of revenue and expenses. Unfortunate decisions can be made based on poor allocations. What is the church financial team to do?

Take these simple steps:
  1. Take monthly budget allocations seriously. Don’t go through the arduous budget development process and destroy the usefulness of the budget by failing to do the further hard work of making sound revenue and expense allocations by month.
  2. Study prior year actual data by month. The starting point for current year budget allocations is the prior year actual data. Study it to determine the significant data that will change for the current year. For example, in the prior year, suppose a large expense for attorney fees occurred over a four-month period because of a lawsuit brought against the church. The matter is now closed and only a modest amount is in budget as a legal retainer—this amount might well be spread ratably over the current year.
  3. Reflect on changes in revenue or expenses patterns for the current year. Certain new or increased activity for the current year may modify the monthly revenue or allocation pattern for the current year. For example, a new program may be scheduled only to run for three months in the spring and three months in the fall, therefore the budget allocations by month must match the anticipated expense pattern.

Sound budget allocations will help your church make more informed decisions. Try it and see for yourself how useful a budget can be.

For more great tips on budgeting, check out the 10 Essentials of Church Budgeting eBook (free to ECFA certified churches). 



Don’t live with your bad budget allocations for the entire year! Read more in this article from ECFA President Dan Busby. (Published in The Church Network inSight Journal - Summer 2018.)

Monday, June 18, 2018

Budget Allocations - Part 1: Common Budgeting Mistakes


How do some churches short-change the budget allocation process?

Here are three possibilities:

  • A church takes the easy way out on budget allocations. The simplest and most inaccurate way to arrive at monthly budget numbers is to divide each budget line-item by 12 months. This may work for monthly rent payments and insurance premiums but for most line-items, it is not a valid approach. If January and February always have disproportionate heating bills plus a big annual insurance premium, then every single year you’ll start off quickly sinking behind budget, and then spending the next several months saying, “we are way behind.” Then if a truly “way behind the budget” situation occurs, your appeal may then find resistance or giver fatigue from people saying, “but we just went through that!”
  • A church allocates the line-items based solely on previous year data. This approach is better than dividing the line items by 12 months. However, it falls short of sound allocations because it fails to take into account changes in circumstances for the current year. There may be changes in one-time or cyclical program expenses, such as new or increases in line items that are effective only for part of the year. Suppose last year’s women’s retreat was in the spring and this year moves to the fall. If you don’t reallocate your budget, you might unwittingly spend any spring excess and get caught short in the fall.
  • Budget allocations do not match where expenses are charged. When the budget was adopted, there was an expectation that certain expenses would be charged to particular expense accounts. However, there is a significant mismatch on the charging of some large expenses. Therefore, some categories show major variances only because the budget dollars are on one line and the actual expenses are on another.

What can happen if your budget is not properly allocated?

Here are just two unfortunate decisions that could be made from the report based on poor allocations:

  • Programs are started and jettisoned based on poor information. A new ministry to millennials was started at the beginning of the new church year. Because the comparative data outlook is so gloomy, the church board decides to temporarily stop the new program until finances improve. By the time the accurate data is available, the church restarts the program, but considerable momentum is lost because of starting, stopping, and restarting the program.
  • Staff are hired or terminated based on poor allocations. Based on the inaccurate data at the six-month point, the church board reduces two full-time staff members to half-time and eliminates four part-time positions. A few months later, the church board realizes it took these extreme actions based on faulty information.

Don’t live with your bad budget allocations for the entire year! Read more in this article from ECFA President Dan Busby. (Published in The Church Network inSight Journal - Summer 2018.)



Monday, June 11, 2018

Church Reporting Refreshers


Proper church reporting really matters, and we’re here to help make sure your church does it right. This snapshot from the 3 Church Reporting Refreshers Podcast features some of the most common mistakes made by churches in respect to compensation paid to employees. Catch these at year end before the W-2’s are filed to avoid complicated filing territory later on.

Top 4 Common Compensation Reporting Mistakes

  • Failure to report taxable fringe benefits and social security reimbursements as taxable compensation on the form W-2. Retirement contributions, automobile allowances, and other fringe benefits must be properly reported as taxable compensation to avoid underreporting.
  • Reporting social security and Medicare wages and withholding in boxes 3, 4, 5, and 6 of the form W-2 for pastors. Pastors are always subject to SECA-type social security (never FICA) which is calculated on the Schedule SE. If you have social security data in these boxes on the W-2, the incorrect type of social security has been filed.
  • Failure to report non-cash compensation as taxable compensation on form W-2. This includes gift cards and other benefits given to a pastor. They are seen as taxable compensation in exchange for services rendered.
  • Including a designated housing allowance as taxable compensation in box 1 of Form W-2. The housing allowance is typically fully taxable for social security purposes, but tax-free for income tax purposes. 

Catch the full podcast for further discussion and companion resources to help you excel in church administration:





Monday, June 4, 2018

What's Happening With the Housing Allowance?


After a few quiet years, a new case is challenging the constitutionality of the minister’s housing exclusion. With recent legal challenges to the housing exclusion, many church leaders are asking: “What’s happening with the housing allowance?”

Under the current law, here are the three major housing exclusion traps to avoid:


  • Trap #1: Wrong workers claiming a housing exclusion.

Being a minister does not automatically entitle someone to this tax benefit. Generally, there are four factors that need to be considered: Does the individual perform sacerdotal functions such as marriages or funerals? Are they considered to be a religious leader by a church or association? Are they conducting religious worship? Are they carrying out management responsibilities in the control, conduct, and maintenance of the local church or an association of churches? For a qualified minister, these functions would be written as part of their official job description. There needs to be a legitimate reason for appointing a housing allowance besides providing a tax break. When in doubt about qualifications, bring in a professional who is experienced in ministerial taxes.

  • Trap #2: Wrong amounts excluded from tax.  

This happens when a pastor fails to exclude the correct housing exclusion limitations. Firstly, for church-provided housing, the lowest of either the actual housing expenses or the amount prospectively and officially designated needs to be applied. In the instance of minister-provided housing, the same two amounts must be considered, as well as the fair rental value of the furnished home plus utilities. The failure to apply these limitations could result in underreported income and underreported taxes due.

  • Trap #3: Wrong action by the employer related to the housing exclusion.


In order for a minister to receive a housing allowance, it must be properly designated from the minister’s salary by the church or other employer. The top two mistakes occur when no official action is taken by the employer at all, or the action is not done in a timely fashion. The allowance itself must be officially designated by the church in writing and approved by a governing body. It must also be made ahead of time by the employer. Any payments for housing made prior to a designation are fully taxable for income tax purposes. It is helpful to carefully word your housing allowance resolutions to remain in effect until a subsequent resolution is provided.

Tune in for more discussion of the developing story here: