Three Common Mistakes Made When Launching a Church

The other day I was talking with a pastor from Chicago who was experiencing some personal trouble with his tax return because he reported his housing allowance incorrectly.   The IRS had reviewed his taxes and asked him to substantiate the reported housing allowance on his schedule C.

Church Issued a 1099

When the pastor went to do his taxes in 2007, he did them as he had always done them.  He reported all of the income he made at the church on schedule C, because the church issued him a 1099-Misc instead of a W-2.  To make matters more complicated the church reported $74,000.00 of income on box seven, which forced him to report his housing allowance of $39,000.00 as a business deduction.

Everything seemed OK, until he got a letter asking him to substantiate the housing allowance.  He sent to the IRS a copy of all of his home expenses, but unfortunately, that was not enough.  Next, the IRS asked for official minutes designating the housing allowance.  He was not able to find them.  Without the official minutes, the housing allowance is not of any value to the pastor. 

How the IRS wiped clean the church account

Let's go back 9 years in time.  When the pastor started the church, he had $50.00 to his name.  His vision, as it is today, was to win the lost, preach the Word with zeal, and teach people to obey all of God's commands.  Though to this day he has been faithful to the vision that God gave him, the steps he took to establish the church on its legal foundation were lacking in strategy.  The following rundown of his church's legal inception shows you what I mean.

After picking out a name, he opened a checking account for the church.  He did this without incorporating or applying for a tax ID number.  Lacking a Tax ID number, he used his social security number to open the account.  The church got off to a good start and did fairly well.  In fact, the church reached almost 200 members and had a weekly average of 175 in attendance. 

In late 2008, when he was not able to substantiate the housing allowance, the IRS assessed a tax, with penalties and interest, to the tune of $9,875.00.  He was saddened and decided that the only way to fix the problem was to go into a payment plan.  That put him in a real difficult position and about 7 months later he began to miss payments.  The IRS computers sent letter after letter to him until they sent him one that said they would search for assets and put liens on them.

 When the IRS system did searches of bank accounts it found the church's checking account with his social security number and it wiped it clean.  Well, it wiped out over $10,000.00 from the church checking account. 

The grief that simple mistakes can cause

It is always the little things that cause churches the greatest grief.  Scripture reminds us that it is the little foxes that ruin the vineyards (Song of Solomon 2:15).  One simple oversight here and there can add up.  Let's review the mistakes that his church made and how they could have been avoided.

Mistake #1:  The church checking account was opened before they incorporated and got a tax ID.  Never open the church checking account with your social security number.  The IRS will see the bank account as a DBA of you personally and have access to it when it comes to your personal taxes.  You should first incorporate, get a tax ID number and then open the church checking account as a corporation, using its own Tax ID number.  I am certain that many of you reading this are swallowing hard right now realizing you made the same mistake.

Mistake #2:  The church issued the pastor a 1099-Misc.  Though a lot of churches do that, it is not correct.  The church should have issued him a W-2 reporting $35,000.00 in box 1 and $39,000.00 in box 14. 

Mistake #3:  The church assumed that the housing allowance was something that was paid, and called housing allowance, but not actually designated in minutes at an official board meeting.

How is the pastor's church doing?

Thankfully, his church felt the initial sting, but it recovered.  It canceled some outreach events, and pulled back on some repairs that were needed.  He learned the lesson of getting a good start.  Starting is not just preaching and getting numbers.  It is also planting a church on a solid foundation by paying careful attention to the details.  As a rule, when in doubt, ask for help and when certain, you are probably wrong.  Help always comes to you...if you are willing to find it.