From around the globe, people tune in on Fletch’s warm and sound advice. He’s a friend and “church doctor,” bringing an objective perspective, broad knowledge and vast experience. Your question will get a personal reply from Fletch.
Hey Fletch … I have been a fan of your work and website for several years. I have a question and would love your insight. As a board member, let me say that our church has a history of taking special offerings whenever there is a disaster. Our congregation loves to give to emergency causes (wildfires, hurricanes, earthquakes, famine) and tends to give generously. However, our general fund often drops significantly during those weeks. People give to disaster relief and then our core offering diminishes.
I have heard of some churches who build “disaster relief” into their budgets so that they can respond quickly when needs arise without draining regular income. Any thoughts on best practices around this?
DRF—Thank you for gracious words about XPastor. That is wonderful that your congregation gives so much to special needs. It sounds like your church has a huge heart for the hurting world … to the detriment of your general fund. It is truly a ‘steal from Peter to pay Paul’ issue!
There is no reason why you can’t have a line item in your General Fund—you can internally restrict it for disaster, compassion, mercies or benevolence. When a disaster hits, you would say to the congregation, “Our General Fund has money for disaster relief. As needed for the relief, gifts above our regular weekly offering will go toward this current need.” You may even want to salt the food by saying, “and we have already given $25,000 this week to get help on the way.”
The issue that I see is one of communication. If people are accustomed to giving to a special fund, they will feel like the rules have shifted. You are changing away from a donor restricted fund, one which the money can only be used for disaster relief. You are moving to an internally restricted fund, where the Board can use the money as they see fit for the current disaster, future local needs, etc.
You should communicate the new style of giving well in advance of the next disaster. Share the reason for the change, in print and in person, with the Governing Board, Finance Team, staff and key leaders. Once a month for six months, share a carefully worded statement with the congregation about the change. Ensure that any online giving reflects the wording that your church formally adopts, such as “Give at this link for disaster relief. This is a part of our General Fund and will be targeted for the current need. Unused funds will be used for other church ministry.”
I would also position this as one of great potential vision areas for the church. “We want to do so much and celebrate God’s generosity among us. By having these donations in the General Fund, we have governing board approved methods to strongly continue our ministry and disaster relief.”
Hey Fletch … Our church is barely keeping the payroll and bills paid and we enter the budget process in June. Our elders keep casting a vision that requires 10% or more of deficit budgeting. Historical data says we will not receive from donors the needed amount. They say we should budget by “faith.”As a member of the finance team, I have a problem with continually asking the members to approve a deficit budget. We also have -0- reserves. Can you share some biblical principles that I can share with the finance team and leaders to show it is not a “lack of faith” to present a balanced budget? If giving doesn’t increase, we are either going to have to cut a position or sell a parsonage.
DRF—I’m a fan of balanced budgets. A budget that has a built-in deficit is a disaster waiting to happen. Jesus says in Luke 14:28-30, “For which of you, wanting to build a tower, doesn’t sit down first and compute the cost to see if he has enough money to complete it? Otherwise, when he has laid a foundation and is not able to finish the tower, all who see it will begin to make fun of him. They will say, ‘This man began to build and was not able to finish!’” Net Bible® Your church budget should adequately cover your existing obligations.
You can add to your church budget a special contingency budget. This can be a faith based approach. You inform the congregation that with current giving, the church budget is balanced. Then lay out the contingency budget, “if we receive $50,000 more in the next six months, then we will do these projects.” It is not a good idea to put salaries in the contingency budget, but do include special projects or renovations. If the extra funds don’t come in, then those projects won’t happen.
As for cash reserves, my friends Dan Busby & Michael Martin at the Evangelical Council for Financial Accountability say on this page: “Cash reserves are the cushion that ensures: Operating expenses are paid on-time instead of incurring late fees; The church is in compliance with mortgage covenants; Funds are available to replace worn-out HVAC; The church has the necessary funds ready to launch a new ministry.”You can download the ECFA free e-book, “Essentials of Church Cash Reserves.” Let me ask Dan Busby for his thoughts:
Response from Dan Busby, President of ECFA:
Thanks for the opportunity to provide input in relation to this request. What you have written in response to the email is RIGHT ON! Here are a few more thoughts:
10% of more in annual deficit budgeting with zero reserves is TOTALLY incompatible. If a church has excess reserves—say beyond six months of operating reserves, then perhaps a deficit budget might be appropriate to use some of the excess reserves but without proper reserves (let’s say at least three months of operating reserves, deficit budgeting indicates a lack of adequate responsibility by the governing board.
This church is on the verge of failing John Wesley’s test. He said, “Our responsibility is to give the world the right impression of God.” A church that is barely keeping payroll and bills paid, is flirting with sending a very bad message to people inside and outside the church, as well as taking Jesus Christ off center stage and placing financial mismanagement on center stage.
Restoring sanity to the financial planning for this church will require a conservative estimate of the next year’s revenue. When the governing board chooses, what I call, the “Big Number” for the next year’s budget, that number should probably be less than last year’s revenues. Otherwise, it is unlikely the church can build reserves. It goes without saying (except for this church) that reserves are only built when cash in exceeds cash out.
If you need more scripture references, here are a few: “The wise store up choice food and olive oil, but fools gulp theirs down.” Proverbs 21:20.“Go to the ant, you sluggard; consider the ways and be wise? It has no commander, no overseer or rules, yet it stores its provisions in summer and gathers its food at harvest.” Proverbs 6:6-8.
Response—We had a church meeting the other evening regarding the finances and paying off a $3,900 credit card balance (which should have never happened). As a member of the finance team, I cut to the chase and informed those present that there must be a new attitude toward spending or else we were looking at cutting staff or selling the parsonage. I think people left better informed about the serious situation we are in. I’m going to propose to the finance team next week that we impose a spending freeze for items other than salaries and normal operating expenses for 3 months and see if we can get $1,500-$2,000 in the checking account. I’m working on forecasting now for finishing out the year and budgeting for next. Keep our church in your prayers and the finance team as we consider planning and honoring God with our decisions.
Hey Fletch … I doubt you remember me but I was part of a group in 2011. I am currently an XP of Operations. I serve under two Co-Lead Pastors…two young guys who are great! I wanted to ask if you have any metrics/information on the percentage of an overall church budget that goes towards the entire Worship, Arts, Marketing, Media department? We are a church of 1000+ with an annual budget of $1.3 million. So, for example should the percentage be 5%, 10%, 15% or 20%?
DRF—Of course I remember you, beginning with the time that we met for coffee. Even lately, when I was doing some XPastor work, I saw your paper. It has helped thousands!
It can be challenging to answer your question because church budgets vary so much in what they include. My rule of thumb is to include the following budget areas: Communications, Welcome Team, Information Technology, Audio-Visual Technology Capital &Maintenance, and all Worship expenses. As I reviewed budgets from several churches, the number was 10% of General Fund expenses.
Hey Fletch … Our school is owned by our church. They are the umbrella. All online donations are being completed through the church. For example, if I want to donate to our school, I press the ‘donate now’ button on our website but get redirected to the church website in order to donate. How can I get around this? Folks who wish to donate to our school get confused when they get redirected to the church website and think their donation will be supporting the church and not the school. Please help.
DRF—You can put a “donate now” button on another website. The funds can still go through your church as designated funds for the school. I would suggest clear wording on the page saying that the donation is a restricted gift to the church and can only be used for the school.
The technical issue is the software piece. This is generally pretty workable, to have a “Donate Now” button on another site but there may be some complications. One way to get around this is to have a specially branded page on the church’s website, one that specifically helps people see that they are making a designated contribution to the school. When a donor makes a designated contribution, it can only be used for that purpose. It cannot be redirected, unless the page explicitly says “for the school and church use.”
Hey Fletch … A pastor here at the church allows his assistant to work overtime and then they don’t put it on the assistant’s timecard. I have warned both of them but what more can I do?
DRF—How do you spell ‘hot water’? Let me get startedby saying that Churches can be exempt from the enterprise coverage of the Fair Labor Standards Act. However, there are some finely tuned rules that invoke individual employee coverage where the employee engages in inter-state commerce (such as emails, phone calls, purchases, travel arrangements). A best practice is for all non-ministerial staff who are below the FLSA wage levels to be considered “non-exempt from FLSA.” That means that wage and hour laws need to be observed. Your state may have regulations that come into play as well.
Another issue is that you have warned the pastor of the problem. The bigger question is, “Why is the pastor not responding to you and your fiduciary responsibility to uphold the church’s policy and federal regulations?” The assistant is lying on the timecard and the supervisor is knowingly signing it. A biblical word for that is “deceit.” Instruct the pastor on these issues and evaluate their response.
You will need to have the assistant compile and sign honest timecards for the entire period of unpaid overtime. The ethical response is to pay the assistant for all the prior overtime hours, including any time and a half or double time that is required by state or federal law. Unwittingly, your church has stolen from the employee. Get an attorney to draft a release statement that the employee will sign. Pray that the employee, a friend or family member, doesn’t ask the State to do a payroll audit. Those audits look at the timecards of all employees. Irregularities can incur fines and penalties to the church.
This is a significant issue and you would do well to inform your governing board of potential church liability.
Hey Fletch … Someone who is a supposed tax expert emailed me the following letter in response to a question: “If you buy everything you need or want in the name of the church, everything is deductible. As an employee of a corporation, you have no “income.” The church corporation receives the church donations and you are in charge of their dispersion. You own nothing but have the use of everything. You can be the caretaker and draw a salary for it, but as the caretaker the church can supply your food and other needs.” What do you think about what he is saying? Is there any truth in it?
DRF—In looking at his website, he seems to take a position outside of the mainstream. For example, it would be challenging to justify food for your family as a ‘church expenses.’ For a church owned car, the IRS requires that personal mileage be counted as taxable income. I’m not a CPA, but these issues surfaced quickly. If you want to follow his advice, I’d suggest talking to a tax professional so that you will know the consequences with the IRS. Ensure that your actions are in line with your values and that, if needed, you will be willing to go to pay back taxes and penalties, or go prison for tax evasion.
Hey Fletch … My question is regarding retirement and employer contributions. We’ve had a one size fits all approach but now our staff has grown in numbers and levels of responsibility and we need to revisit it asap. I’m wanting to know how others categorize which staff gets what for retirement.
DRF—That question may be out of my pay grade (pun intended). Let me copy Dixie Beard at GuideStone on this as she is an expert at GuideStone Financial Resources. I might give the correct answer … or she may have to set me straight. To my knowledge, you can still separate your employees into classes—such as pastors, administrative personnel, facility workers, preschool teachers, etc. Each class can have a separate retirement structure.
Dixie Beard—You were on the right track, David. If the church is offering a 403(b) non-ERISA retirement plan, the church has flexibility. The church can provide different levels of employer contributions for various classifications of employees. For example, the church can provide a 10% employer contribution for the ministerial employees, 5% for the administrative employees and 3% for all other employees. Or, the church can state they want to provide employer contributions for only the Senior Pastor. It is up to the church as to how it wants to establish the employer contributions.
Hey Fletch … There was a column on January 14, 2018 that all of a church’s W2s vanished. Some insurance policies have coverage for this and the church may have a legal obligation to monitor the credit of those employees that had their personal information stolen. In California, if it was stolen electronically, cyber hack or a lost computer, there is a protocol for how this needs to be handled. If it is paper copies, there may be a liability as well for the church. I’d recommend that the church at least put their insurance company on notice and have a pro guide them through it. There could be coverage and an experienced adjuster could be of assistance.
DRF—As a capable leader of an insurance agency, you have made an excellent point. Thanks for giving more ideas for the church to consider. I immediately forwarded your thoughts to the church that had the problem.
Hey Fletch … I just began as the pastor of a rural midwestern church with 150 in worship. We do not have a tax exempt status. We pay tax on what we purchase, but we haven’t paid tax on our income. Maybe that’s not related to being 501(c)3, but I don’t know. I’ve not had to look into this before. Many thanks.
DRF—Congratulations on your new role. That is exciting! Don’t get to worried too fast. You may be fine. Here are selections from the IRS in Tax Guide for Churches & Religious Organizations: “Churches that meet the requirements of IRC Section 501(c)(3) are automatically considered tax exempt and are not required to obtain recognition of tax-exempt status. Many churches seek recognition of tax-exempt status from the IRS because this recognition assures contributors that the church is recognized as exempt.”
The IRS explains the requirements: “To qualify for tax-exempt status, the organization must: be organized and operated exclusively for religious purposes; net earnings may not inure to the benefit of any private individual; no substantial part of its activity may be attempting to influence legislation; the organization may not intervene in political campaigns; and the purposes and activities may not be illegal or violate fundamental public policy.”
I’m not a CPA or Attorney—perhaps you have one in your congregation. Get professional advice to confirm your church’s position.
Hey Fletch … A guy just told me that he has a lifetime salary from his church. What are your thoughts about that kind of retirement plan?
DRF—In a GuideStone presentation at the XP-Seminar, one year we learned about Rabbi Trusts. They are valid unless the church goes bankrupt. I never thought that I would hear about it again. According to news reports, the Rev. Robert Schuller learned a hard lesson when the Crystal Cathedral filed for bankruptcy and apparently he lost his retirement.
Though different from a Rabbi Trust, a pastor that receives a “lifetime salary” could be headed for future trouble. I would be wary and would consult an attorney and financial advisor about the concept. My preference is to provide cash for a church sponsored retirement plan for all staff.
Hey Fletch … I’m working my way through the Finance 1 course on XPastor. There was a spreadsheet in class 5 on “offerings received” with an accompanying analysis of current week versus the income budget. More broadly, I’m looking for resources to help our finance reporting so anything you may be able to share with me would be greatly appreciated!
DRF—My favorite reporting mechanism is a 52 row spreadsheet, one line for each week. Here are the titles for the columns: Weekly Donations, Weekly Budgeted Donations, Weekly Delta. You can add more columns if you want to see year-to-date actual and budget deltas. I sent you the full sample file, enjoy! Remember: keep the data in your financial reports manageable. Don’t drown in a sea of meaningless data.
Hey Fletch … Someone suggested that we record some songs during our worship service and create a CD from them. Any thoughts on this?
DRF—Off the top of my head, I can think of three issues. First, you will have to pay royalties if you perform a published song (see a lawyer). If the song was created in-house, you will want to have an IP agreement in place, if you want the composer to be paid. Second, there are plenty of technical challenges. These can be contained in a studio, but your worship space may have mixing and recording issues. Have you thought about noise from the crowd? Third, to sell a CD requires a market that wants to buy it. What will be your unique edge that will encourage someone to pay $9.99 or $14.99 for your music?
Hey Fletch … I’m looking over this PDF that you taught at Dallas Seminary on Church Finance 101. Could you send me the full copy of this topic?
DRF—For several years, I gave that lecture on “Basics of Church Finance.” The 36 slides in the PDF constitute the entire lecture. I enjoyed giving the talk because the audience was so unaware of the issues. They came alive when they learned the upsides of good accounting and then unglued when paying for Social Security was explained to them.
Church Finances is an enormous area. To help understand it, XPastor created 10 classes in Church Finances, Part 1 and another 10 classes in Church Finances Part 2. Issues range from cash to invoices, from expense reporting to audits, from insurance to legal issues.
Hey David … A shipping firm claimed they left the W-2s for all of our employees at the church’s front door. No signature was required and they left the package at 9:00 pm. Financial data, social security numbers, addresses … all vanished.
DRF—I haven’t heard of that one before! I’m so glad that you looked into identity theft protection for all of those affected. All I can suggest is that you go electronic next time. Perhaps use a service that empowers the employees to download their W2. A Finance Office worker could print out a W2 for anyone without internet access.