Not understanding intellectual property law can be a VERY EXPENSIVE TRAP! David Middlebrook defines intellectual property as “ownership of nonphysical property rights in creative thought or works that have basically been recorded or reduced to written form.” (Nonprofit Law for Religious Organizations; John Wiley & Sons, © 2008)
There are two types of intellectual property that a church needs to be aware of:
First, every church must be familiar with the intellectual property rights of creations by OTHERS. Examples include sheet music, video clips, song lyrics displayed on the screen during worship, and software licenses. The individuals and companies that created these things DESERVE TO BE PAID for their creations! Not adhering to copyright/trademark laws can result in some extreme financial penalties.
Second, every church must be aware of the rules regarding their OWN creations. This includes creations of church employees (including the senior pastor…) who create work in the course of their employment. Examples include music, videos/movies, books and software.
Not being attorneys we are reluctant to give much advice in this arena because intellectual property is more of a legal issue than tax and accounting.
Our advice is usually very short – “Seek legal counsel to help you determine your church’s compliance with these rather confusing laws.” (David Middlebrook’s Church Law Group would be a good place to get this help.)
Many churches pay little attention to the concept of “reasonable compensation”.
Nonprofit organizations, of which churches make up by far the largest percentage, must serve public interests not private. As a result, an individual should not receive assets from a nonprofit entity simply because they have a significant relationship with the charity. If this happens, the private inurement might have occurred. If the IRS finds that inurement has occurred, painful penalties, called “intermediate sanctions” may be assessed on the individual receiving the resources. Penalties may also be assessed on the organization’s board for allowing this to happen.
One often overlooked aspect of private inurement is the concept of compensation. Nonprofit organizations can only pay a reasonable compensation to its employees. Like beauty, reasonable can be in the eye of the beholder. So, what is reasonable compensation?
Fortunately, the IRS lays down some guidelines to help answer this question. If a church:
Requires an independent compensation committee to set salaries that,
Based its decisions on comparative data of other similar churches and,
Documents its decisions in writing,
a presumption of reasonableness is established.
Overlooked danger zone – The Pastor’s Discretionary Fund
Many churches, for privacy purposes, establish special funds in which the pastor has total control over to cover sensitive benevolence issues. While it is understandable why some churches take this course there is one point that must be made. If any of the funds can be, at the pastor’s sole discretion, be diverted to the pastor or his family, the entire amount could be considered income. If your church has such a fund it would be a good idea to review the terms the church has established (if any) to administer the account.
It’s so difficult to say goodbye – firing right
Churches should follow prudent steps in firing employees. This begins by making sure that the termination must be for a legitimate, nondiscriminatory reason. Prior disciplinary measures must be consistent with church personnel processes and policies
The first step should be to schedule a meeting that includes the terminated employee, the employee’s supervisor, the church HR director or supervisor’s manager and the church’s legal counsel. (If considered necessary.)
First and foremost, the church should make it a goal to preserve the employee’s dignity. Keeping the meeting as brief as possible contributes to achievement of this goal. A concise explanation to the employee of the reasons for termination should be given along with a carefully documented history of the issues. That is why the performance reviews mentioned in our previous post are so important. Having a documented case history prevents the employee from asserting they were never informed.
KEY: Do not let the employee drag the process into an argument!
If severance pay is offered to the employee, discuss the terms of the severance with the employee. Church property including passwords, office equipment should be collected from the employee by providing the employee with choices of when he or she may pick up personal belongings.
Also, unused benefits, unpaid expense reimbursements, and written permission in regard to references should be addressed.
KEY: In some cases it may be better to deem the termination a resignation, especially in the absence of animosity. It is another way for preserving the employee’s dignity
Happy together; managing your employees
The best way to avoid mistakes in hiring and in firing is to employ simple, repeatable processes to help insure that the right things are done at the right time. One way to do this is to develop a “New Hire Packet” which should be given to each new employee. Some of the items that should be submitted to each employee are:
KEY: A copy of the official church employee manual
A form W-4 to be completed by the new employee
A form I-9 (Department of Labor requires all I-9s to be filed in a stand-alone file)
In addition to providing new hires with relevant forms, the church should maintain a separate file for each employee. Personnel files should be kept in a secure location and it is a good idea to store active and inactive personnel files in separate locations. Medical information must be kept in a separate file from the regular personnel files in order to be in compliance with the Americans with Disabilities Act. Other confidential information that should be kept separately includes the I-9, grievance and investigation records, and garnishments and loans to employees.
In addition, personnel files should include the original application form submitted by the employee, a signed W-4 and a copy of ministerial credentials for all employees hired to serve as ministers. (Ordination, licensing or commissioning certificate.) This is not mandatory, but rather a “best practice” insuring that church ministers are treated properly for income tax purposes. Paycheck deduction authorizations signed by the employee should also be retained and updated.
KEY: Finally, a record of performance reviews, evaluations and reprimands must be maintained on a current basis.
KEY: Many churches keep up with all of this paper work by using a personnel file checklist which assists in making sure all t’s are crossed and i’s dotted.
Getting off on the right foot – hiring right
One way to avoid unhappy situations is to begin on the right foot. And in personnel matters, that means hiring right. Churches should follow prudent steps in hiring their employees. For starters, a church must know what it is looking for in a new employee. That means that job descriptions should be prepared prior to the interviewing process.
Once that is done, a church can then begin recruiting and evaluating potential employees. Here are a few tips to guide churches in the recruiting process:
- Maintain a record, in writing, of all job openings.
- Keep a file of the various advertisements it has placed to recruit applicants.
- Utilize a standardized applicant screening and interviewing process, making sure that managers are properly trained in the conducting of effective and legal interviews.
- Utilize a standard application form which informs applicants of the terms and conditions of employment. (Particularly the right to consider their religious affiliation.)
- The application should avoid unlawful pre-employment inquiries. (Age, race, sex,. etc)
KEY: The application should be reviewed by the church’s legal counsel prior to being used in the hiring process.
The second trap, or thing to avoid, deals with payroll. Churches face risk in a variety of areas. Facilities, congregational unity, financial, security, and our next topic, personnel are just a few areas of danger.
In business terms, churches are in the “service industry” and as a result, typically, 50% of church budgets are dedicated to salaries and benefits. Personnel risk is significant. Operating in the personnel arena without a formal plan makes it even riskier.
Unfortunately, some churches do exactly that. Here is what has happened to some of those who chose not to manage personnel risk:
- Churches have been sued (and lost) after automobile accidents in which it was discovered the church assigned driver had a prior DWI.
- Churches have been sued after discovery of prior child abuse convictions of some of their employees.
- Churches have been victimized by embezzlers with prior convictions.
- Churches have been sued for unlawful terminations.
- Churches have been sued for sexual harassment.
In the next few posts, we will discuss things that should be done in order to avoid situations like these unfortunate churches. It’s important to point out that they were unfortunate primarily because they were careless.
That’s right! Even though churches normally do not have to file a tax return (most nonprofits have to file an informational return annually – IRS form 990), there is certain information that you must collect and provide to the IRS. And I’m not talking about payroll tax information – 941 and W-2 forms.
If you pay at least $600 in a calendar year for the services of non-employees (and they are not corporations), you must get them to complete form W-9 (provides tax reporting information to you) and you must issue them an IRS form 1099-MISC.
And if the church operates a preschool or private school that is not separately incorporated, you must file IRS form 5578. This is a statement about racial non-discrimination.
And if your church has “unrelated business income” of over $1,000 before deducting related expenses, you must file and IRS form 990-T. Again, I’m not talking about net income of over $1,000; I’m talking about gross receipts of that amount. And you could possibly have to pay income tax! But that’s the subject of a whole new blog entry!
For more information, go to the IRS website – www.irs.gov. Or even better, contact us at www.pskcpa.com.
–Dan Williams, CPA, Church and Ministry partner at PSK LLP.
I have a friend who has reminded me to be thankful for annoying things such as the red light I am stopped at, because I am privileged enough to live in a country that has roads, and orderly ones at that. This same attitude can be applied to taxes—thankfulness for them and for the ability to pay them.
I wanted to start with this thought, because none of us like taxes. But we can be thankful for them, and also take care to report them properly. As additional incentive for excellence in this area, did you know that if payroll taxes are not withheld and paid to the IRS, the Church’s Board of Directors and employees may be personally liable? Some thoughts on ensuring your Church is addressing taxes appropriately:
Who performs the Church’s payroll? Even If the Church is fortunate enough to use an outside payroll service provider, it is still important that the Business Administrator ensure that the following are occurring:
- For all non-minister employees, the Church correctly withheld and paid the employees’ share of FICA taxes.
- IRS form 941 was filed for each quarter of the calendar year.
- The totals from the four quarterly 941 forms agreed with the totals on IRS form W-3, which is prepared at year end and filed with the IRS along with employee W-2s by February 28 each year.
- Timely deposits of payroll taxes are made to the IRS. Required deposits vary. Generally, deposits may be made quarterly if total quarterly payroll taxes are $2,500 or less. Otherwise, deposits must be made monthly, or even more frequently for very large organizations.
- W-2 forms are provided to all employees (including ministers) by January 31.
How about your Church? Do you know for certain that payroll taxes are calculated, withheld, and remitted to the IRS correctly and in a timely manner?
–Justin Baldwin, CPA is a Senior Auditor specializing in church accounting with PSK LLP.
Does your church have 25 or fewer full time employees? If so, the government wants to give you some money. The recently passed health care bill included a tax credit for small businesses that provide health insurance for their employees. Although churches do not typically file income tax returns, they are still eligible for the tax credit.
You are correct, there is a catch! There are three primary factors that would qualify your church:
- The church must pay for a portion of its employees’ health insurance
- The church must have less than 25 full-time employees
- The average wage of a full-time church employee must be below $50,000
If your church meets the criteria above, the church could be reimbursed up to 25% of the health insurance costs that were paid by the church.
As of now, the credit is good for 2010 to 2013 and then the maximum rate increases to 35% (good news). This could be money in your church's pocket! Let PSK assist you in determining if your church qualifies for the health care tax credit.
Some churches give pastors (or other employees) monthly expense allowances in their paycheck. The allowances provide a way to advance cash to employees so that they can purchase items needed for the church or to carry out their role within the church. There are two important things to keep in mind if your church does this.
1. The church needs to be aware that the expenses must be substantiated under an accountable plan, the same way a reimbursement would. Among other things, proper substantiation includes a receipt as well as a documented business purpose. Otherwise, the allowance is taxable income.
2. Further, some churches will allow the employee to keep the portion of the allowance that wasn't used and call it a "bonus". Taking this action would not only cause the "bonus" to be taxable income, but would also cause the entire allowance to be taxable (even the portion that was properly substantiated). This is not recommended and can cause church employees heartache come tax time.
Expense allowances are one of many ways to allow pastors to purchase items for the church. Purchase orders, expense reimbursements and credit cards are a few others. Each have their own advantages and pitfalls. Which methods work well for your church?