Tuesday, October 30, 2018

Not Reporting All Hours on a Time Card

Question: Hey Fletch... I hope your ongoing national workshop tour with Smart Money for Church Salaries is going well. I have a question for my church. We have a part-time hourly administrative assistant in the office. I hear they are often working more hours than they are actually putting on their time card. I believe in for-profit businesses this is against the rules. Is that the case for the church? By allowing the practice, are we open to problems down the road? I value your expertise!

Answers: There are no separate rules for reporting hours in business versus church for hourly workers. They are all treated the same. Non-exempt employees are all in the same class, “non-exempt.”

A worker cannot volunteer to do more work in their area. This leads to abuse because people are told or expected to “volunteer” more hours. If a person works in their assigned area, they must be paid.
The only way that a non-exempt employee can volunteer is it to serve in an entirely different part of church life. For example a high school administrative assistant can sing in the choir or serve in children’s VBS. This must be voluntary and the service have no bearing on their job. The high school assistant cannot go on a high school retreat and “help” without being paid.

Your church is breaking the labor laws and regulations. If reported, the church would be subject to a complete review of all wages paid for every employee for the last one to three years. There would be a fine and back payment would need to be made.

I would suggest that your church immediately correct the situation. Pay the unpaid wages.


Monday, October 15, 2018

Policies on Allegations of Staff Misconduct

Question: Hey Fletch... I am doing research to update our policy manual and personnel handbook. What policies can you point me to that pertain to allegations toward a staff person about physical, verbal or safety improprieties?

Answer: What a week to get this question! Bill Cosby was sentenced and Brett Kavanaugh was in the Senate confirmation hearings. You are hitting a challenging issue in America today.

Here are some resources on XPastor that may be of help. What you will find is various statements of how each church will investigate allegations of misconduct. Learn from these. Craft a policy that is clear. Set a process of how incidents are to be reported, who will investigate them and how the issue will be handled. The links will give you the full text.

Parma Heights has a policy document that says: “Parma Heights Baptist Church has instituted the following three-step procedure for reporting and investigating allegations of unlawful harassment, including sexual harassment.”

Foothills Christian Church has a document that says: “All incidents of prohibited harassment that are reported will be investigated. The church will immediately undertake or direct an effective, thorough, and objective investigation of the harassment allegations. The investigation will be completed and a determination regarding the reported harassment will be made and communicated to the staff member who complained and to the accused harasser(s).”

“If the church determines that prohibited harassment has occurred, the church will take effective immediate action commensurate with the circumstances. Appropriate action will also be taken to deter any future harassment. If a complaint of prohibited harassment is substantiated, appropriate disciplinary action, up to and including discharge, will be taken. Whatever action is taken against the harasser will be communicated to the staff member who complained.”

Seven Mile Road Church says about sexual harassment investigation: “When we receive the complaint, we will promptly investigate the allegation in a fair and expeditious manner. The investigation will be conducted in such a way as to maintain confidentiality to the extent practicable under the circumstances. Our investigation will include a private interview with the person filing the complaint and with witnesses. We will also interview the person alleged to have committed sexual harassment. When we have completed our investigation, we will, to the extent appropriate, inform the person filing the complaint and the person alleged to have committed the conduct of the results of that investigation.”

“If it is determined that inappropriate conduct has occurred, we will act promptly to eliminate the offending conduct, and where it is appropriate we will also impose disciplinary action.”

I would add to these a policy on when an external investigator should be used. Several churches have attempted internal investigations of sexual misconduct, only to find that their work was flawed.


Wednesday, October 3, 2018

Receipts for Purchases Are So, So Late

Question: Hey Fletch...Our church staff can purchase items from their own funds and then be
reimbursed. This happens a lot with youth trips and out-of-town ministry. We have a policy that says that all receipts should be turned in within 60 days. Otherwise the reimbursement may be considered as taxable income. I have a staff member who turned in receipts that are 6 months old, then they hit the roof when I reminded them of our policy. Are we wrong or doing something illegal with this policy?

Answer: Since this is a tax issue, let’s see what the IRS has to say about the topic. In Publication 463, the issue is raised when talking about an Accountable Plan:

To be an accountable plan, your employer’s reimbursement or allowance arrangement must include all of the following rules. Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. You must adequately account to your employer for these expenses within a reasonable period of time. You must return any excess reimbursement or allowance within a reasonable period of time.

The three elements are a valid business expense, adequate reporting and a reasonable time.

Your question hinges on how to “adequately account to your employer for these expenses within a reasonable period of time.” The IRS gives some guidelines on what is a reasonable amount of time:

The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. You receive an advance within 30 days of the time you have an expense. You adequately account for your expenses within 60 days after they were paid or incurred.

A good practice for reimbursing expenses is that receipts must be turned in no later than 60 days after the expense was made. If the receipts are not submitted in a timely fashion, the church may need to consider it income to the employee.

Your church is acting legally and in accordance with the tax laws. I would suggest that you have clear, written policy for the reimbursement process. You may want to have a summary of those procedures on every reimbursement form that your employees use. Pastors are hired primarily for their shepherding gifts, not for their financial abilities. Help them by providing them with good forms that include a summary of your church’s policy.


Thursday, September 20, 2018

Special Offering for a Woman with Cancer

Question: Hey Fletch...Our church wants to take up a special offering for a woman who has cancer. Can we ask people to give money through the church for her?

Answer: With the spirit of Christ’s love, we all care deeply for folks in a crisis. That crisis could be medical, a crisis event, housing related, or a natural disaster.

Let’s clarify the issue. Since the money is going through the church, the supposition is that the donations would be tax-deductible. If people want to give funds that are not tax-deductible, then anyone can give in any way that they like. However, most folks in church reasonably assume that any money given to the church will be tax-deductible. This is why Richard Hammar recommends that, “Since such contributions are not tax-deductible by the donor, the church should not receive them.” Notice that he said “should” and did not say “cannot.” If you receive gifts earmarked for an individual, they are not tax-deductible to the donor.

Now to the issue of tax-deductible contributions. The IRS is quite clear on tax-deductible contributions. IRS Publication 625 states:

You can’t deduct contributions to specific individuals, including the following:

Contributions to individuals who are needy or worthy. You can’t deduct these contributions even if you make them to a qualified organization for the benefit of a specific person. But you can deduct a contribution to a qualified organization that helps needy or worthy individuals if you don’t indicate that your contribution is for a specific person.

Example. You can deduct contributions to a qualified organization for flood relief, hurricane relief, or other disaster relief. However, you cannot deduct contributions earmarked for relief of a particular individual or family.

 There are two principles that the IRS articulated in a private letter ruling:

  • The organization must have full control of all donations.
  • No donation can be earmarked for an individual.

If your church is taking up an offering for “Mrs. Smith and her illness,” then this offering will not qualify for tax-deductible donations.

Your church can take a special offering for benevolence ministries and these donations can be tax-deductible. Donation envelopes, e-giving, notes accompanying the donation and checks cannot contain the name of the individual. The church has full control of the donations and can give assistance to individuals as the benevolence policy allows.


Thursday, September 13, 2018

What are Designated Funds?

Question: Hey Fletch...Can you educate me about “preferred ministry” rather than “designated” funds which are restricted? We are a church of 165 and struggling to make budget. As a member of the finance team, I can see that people are giving to certain ministries or projects at an average of about $500 per week. However, for most weeks, our general fund is below budget by more than $500. Should we stop designated giving? Should we ask for continued giving on that level and say it would be used for “preferred” ministries?  How can that be explained to the congregation?

Answer: Whether a church has a couple of hundred people or a few thousand, the issue that you presented is the same. Some in the congregation prefer to give to designated funds over the general fund. A designated fund is a donor restricted fund. By law you can only use the funds for the designation that the donor has placed on the funds. You cannot use designated funds for expenses in other areas. If someone gives money to “missions,” and your church accepts the check, then you can only use the money for missions. There are essentially no exceptions to this rule.

A problem with designated funds is that they allow people to give to preferred areas without “paying the freight” of the electricity bill, the staff costs, or other expenses of running a church. Many churches do this with a designated missions fund or benevolence fund, but people often understand that these are over and above their regular giving to support the church.

A simple question highlights the issue, “What if everyone gave to a designated fund?” This leads to a follow-up question, “Will anyone pay for the staff to administer those areas, process checks, or keep the lights on?”

A way to resolve the issue is to do stop receiving designated funds. Many churches have a “one-fund” approach to ministry. Give to the general fund and the church budget will allocate all expenses.


Wednesday, September 12, 2018

Can an Auto Allowance Be Tax-Free?

Question: Hey Fletch...I believe I’m clear on the minister’s housing allowance designation. What about a car allowance? We have a new employee who says ministers can claim a car allowance that’s much like a housing allowance. I’ve not heard of that. Is it something we can leverage for our ministerial employees? Thanks!

Answer: A car allowance is essentially a taxable bonus. No documentation is needed because it is a bonus. There is nothing in a car allowance that is comparable with the housing allowance … it doesn’t reduce taxes but increases them.

There is a way for auto use to be tax-free. The IRS each year publishes standard mileage rates for “costs of operating an automobile for business.” If you want tax-free reimbursement for auto uses, each trip has to be documented for the purpose, miles, date, etc. This is called an “accountable plan” and the individual must record a log of every trip. The rate for business mileage for 2018 is 54.5 cents per mile. IRS Publication 463 outlines the policy and what is required in a log.

For example, with a log, a pastor can drive 51 miles round trip to visit someone in the hospital. The church can reimburse the pastor $27.79 for the trip. Generally, logs are kept for an entire month and a reimbursement check is then drafted for all logged miles. Some churches do not allow staff members to drive their own vehicles on long trips, say 1,500 miles round trip, which would an $817.50 reimbursement! For long trips, the church can have a policy in place that requires rental cars to be used.

Making a log of each trip can be a pain. Often pastors forget to log their miles. At a recent workshop, a pastor mentioned that he used a smart phone app for the purpose. Without a log, you can’t reimburse tax-free.

If you give an automobile allowance, it is taxable.


Saturday, September 8, 2018

Who is Exempt on the Church Staff?

Question: Hey Fletch...I am confused about exempt and nonexempt employees. My understanding is that an employee paid an hourly rate is not exempt. Are there exceptions? I’m under the impression our employee “Ann” would be eligible for overtime for any hours worked over 40 in a one-week time period. But my manager is telling me that’s not true.

My manager replied that it depends not only on hours, but also on the “class” of the employee, whether they are exempt or non-exempt.  An HR director from a sizable company walked through it all with us. They said that we can have hourly employees that are exempt and non-exempt. It depends on the nature of their duties and whether or not they have “supervisory” responsibilities and independent decision making which Ann does. I believe Ann averages 39 hours.

Thank you for helping me understand this!

Answer: First let me say that pastors are exempt from the Fair Labor Standards Act. The Department of Labor writes about the FLSA that it “establishes minimum wage, overtime pay, recordkeeping, and child labor standards.” Workers who are exempt from the FLSA can work more than 40 hours in a week without extra compensation, are not required to keep a timecard and do not need to take meal and rest breaks, among other regulations.

Pastors are exempt because, like some other workers, they are considered “professional.” Other kinds of exempt employees are executives, managers and certain administrative personnel. Each of these three classes of exemption have job requirements associated with it. You can read about those here.

In addition to the job requirements for FLSA exemption, the employee must exceed the federal salary minimum of $23,660 a year. Certain states have a higher salary minimum for exemption. For example, California requires that exempt employees receive at least two times minimum wage. In 2018, that comes to $45,760. Exempt employees must be paid a salary … you cannot pay them for the number of hours worked.

For executives, managers and some administrative personnel to be exempt, the job requirements and the salary minimums must both be met. Otherwise, you must pay the staff person overtime if they work more than 40 hours in a week. California, and perhaps your state, has extra provisions, such as overtime is required if the employee works more than 8 hours a day, or more than 40 hours a week or seven days in a row.

Whether a church classifies an employee as “hourly” or “salary” has no bearing on their exemption status. Suppose that a church pays a non-exempt employee a salary and that employee works overtime. The church must compute the employee’s hourly wage (which is their annual salary divided by 2080 working hours in a year) and then pay at least time and a half for every hour worked overtime.

Get this right for your church … otherwise you will be in a heap of trouble.