Common Mistakes Made By Ministers that May Take their Churches Down!, Part 3!

By Raul Rivera

A Three-Part Series on Common Mistakes Made by Ministers!

Welcome to part three of our series titled "Common Mistakes Made By Ministers."

Congress has tightened its grip on the legislation that governs the way nonprofits, including churches and ministries, handle their finances.  This gives us good reason to understand the new rules and regulations that have come about.  Many of these new rules can be costly to the church; causing major setbacks in growth. 

Over the last two weeks, we highlighted 5 common mistakes ministers make.  To read more about them, click on the links below.

Common Mistakes Made By Ministers Part 1,  Common Mistakes Made By Ministers Part 2.

But I Am Called to Preach!

Often I hear ministers tell me that they have been called only to preach, and not to do paperwork. This excuse is used to validate the belief that God will somehow step in and cover up a multitude of infractions caused by our unwillingness to take steps toward excellence in ministry.  Isaiah 9:7 says " . . . of the increase of His government and peace There will be no end." He is forever establishing His government in order to increase peace.  The mistakes covered below deal directly with government and your future.

Mistake # 6  Assigning people to the board of directors too early

In order for a church to be tax exempt, it has to have a board of directors that is made up of three people; the majority of which are not related by blood or marriage, and the majority must also be uncompensated.  In an effort to get into compliance, pastors may carelessly ask individuals in the church to serve on the board that ought not be serving in that capacity.  Sometimes they'll ask family members or other people who may have other callings.  Many ministers today are paying the consequences of having the wrong people on the board of directors.

It is a lot easier to give out authority than it is to take it away.  I have counseled pastors who have had to deal with rebellious and self-centered board members.  One pastor I know got voted out of the very organization he started; all because he had the wrong board members.  He was the flounder and had his 501(c)(3) status done by an attorney.  No sooner did he realize that two of his board members had exploited a weakness in his bylaws and he was voted out. 

Do not think that it will not happen to you.  It happens frequently in churches all across America.  What is the best solution for churches that do not have many members?  My best recommendation is twofold.

First, Make sure that your Constitution and Bylaws are foolproof. 

Second, when you have a shortage of people to choose from, ask people that are serving in other ministries to serve on your board.  These people can even live in other states.  They are much more likely to serve on the board and be very supportive of the pastor because they are not involved in the day-to-day activities of the church.

Mistake # 7 Not Thinking About or Planning For Retirement Income

Many ministers today do not think about or plan for retirement.  Sadly, many retire in poverty when they didn't have to.  Law under section 457(e)(13) provides flexibility for churches to create their own retirement/deferred salary programs that allows a minister to receive tax free income for life.  If a minister properly plans his retirement, and takes advantage of this special tax preferred plan, he or she can retire with affluence.  I have a simple, yet effective retirement strategy for ministers that allows them to retire with mostly tax free income for life.  I categorize these into three streams of income, as shown below:

1.  Roth IRA

2.  Deferred Salary plan (Also called deferred Housing Allowance program)

3.  Social Security

Not taking advantage of these three steams of income is a big mistake.  Proverbs 6:6-8 says "Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest."  Proverbs 30:25 says "Ants are creatures of little strength, yet they store up their food in the summer;" 

Mistake # 8 Not Issuing for 1099-Misc.

Failing to issue form 1099-Misc is by far the most common mistake made by ministers as they struggle through the tasks of church management. This mistake occurs mostly from not understanding tax law and the severe penalties that can result from not filing these informational returns.  Form 1099-Misc is called an informational return because you do not pay any tax with it.  It is simply information you submit to the IRS for payments made by the church to non-employee and unincorporated contractors/vendors who, in the course of any tax year, earn $600.00 or more from your church or ministry.  Here are some examples of people that ought to be receiving a 1099-Misc from your church.

1. Guest speakers; this includes foreign nationals

2. Musicians, singers, special music guests

3. Nursery workers, babysitters

4. Church attorney

5. Landlord; if you pay rent to your landlord, he/she needs to be issued a 1099-Misc

6. Health care professionals; if your church pays any of the pastor's or other employees' medical bills, the health care provider must get a 1099-Misc from the church.

7. Settlements; if the church ever pays out a settlement through an attorney, the church must issue that attorney a 1099-Misc.

8. Custodial contractors, landscapers, building contractors

9. A single owner of a LLC who elected to be taxed as sole proprietor.

How can the church get in trouble for not filing these returns?  First of all, the IRS, under Section 6721(a)(1), can fine your church up to $250,000.00 for failure to file.  Secondly, when an organization fails to gather the correct information required to file form 1099-Misc., the church is liable for a 28% penalty on all payments made to individuals who should have received a 1099-Misc.  This is one mistake you do not want to make.  Our new software program, W-2 and 1099 Builder, will be released in January of 2010.  This program asks very specific questions regarding your church's finances, and based on your answers it creates all W-2's and 1099-Misc. forms necessary for IRS and Social Security filings.

Consider attending one of our Church Compliance and Ministry Empowerment conferences!

We regularly host conferences all throughout America.  Not only do we cover these topics that you have read above, but we also cover a wide variety of other topics that you just cannot afford to miss.  Register today!

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