Only 32% of Americans surveyed report trusting churches and organized religion. This lack of trust may spring from many factors, but one that stands out is how churches use the funds they receive from their congregants.
While your church may not be required to file a 990 with the IRS, properly tracking and reporting your income can help you build trust with your congregants and the rest of your community.
Churches collect funds from several sources, not just offering and tithing. Because of this, church accounting is very similar to that of other nonprofits. You’ll need a bookkeeper, accountant, and accounting software to ensure you meet IRS requirements and build trust with your parishioners.
In this article, we’ll share church accounting best practices and financial documents the IRS will require you to file.
What is Accounting for Churches?
Church accounting involves organizing, recording, and planning all finances for your church. Churches are classified as nonprofits, meaning your accounting must focus on accountability instead of making a profit. Income for your church will include the following:
- Offerings and tithing
- Pledges
- Fundraising campaigns and events
- Capital campaigns
- Grants
- Investments
How does accounting help churches?
The best way to organize the above-mentioned funds is with fund accounting. Fund accounting helps churches sort income by how it’s collected and used. It also allows donors to restrict their gifts to specific projects.
Fund accounting is a way for churches to be financially responsible and transparent. It’s not appropriate and is often illegal to use restricted funds for the wrong purpose.
Donorbox helps your church accept and manage designated donations. You can let donors restrict their funds using a dropdown on your church donation form on Donorbox, the way Church of the Sacred Heart did here. This makes the intention behind each donation incredibly clear, which makes church accounting as easy as possible.
You can also integrate Donorbox with leading accounting software like QuickBooks to sync donation data in both systems and utilize it for your fund accounting needs.
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5 Church Accounting Best Practices
Since churches are classified as nonprofits by the IRS, many accounting practices are similar, but there are a few differences between the two.
1. Churches should use fund accounting
Fund accounting helps churches show accountability because bookkeepers can break down revenue and expenses into separate funds.
Bookkeepers can start with smaller ledgers for different revenue sources, and accountants can combine them into a greater chart of accounts later.
Fund accounting helps churches follow FASB (Financial Accounting Standards Board) and IRS requirements, create annual budgets for their annual donor reports, and develop fundraising plans.
2. Delegate accounting responsibilities
An important rule for church accounting is to delegate accounting responsibilities.
Smaller churches can use a volunteer or part-time employee with fund accounting experience as a bookkeeper. Bookkeepers oversee your church’s payroll, donation, and expense tracking.
You’ll also need an accountant to create financial reports and file taxes. Smaller churches won’t need an accountant on staff, so you can hire a freelance accountant or contact a local business to create these reports quarterly or annually.
If you are a larger church with significant staff and budgets, hiring an accountant for a staff position may be a better option.
3. Purchase reliable accounting software
Fund accounting requires bookkeepers to create different funds for separate revenue and expenses. This type of bookkeeping is too complicated to use an Excel file, so your church must purchase reliable accounting software to keep track.
Churches can choose from many affordable online options, including QuickBooks, Aplos, Accufund, and more. If you’re using Donorbox for church fundraising, managing your finances is a breeze with Donorbox’s powerful integration with QuickBooks.
There are two different and simple ways you can connect Donorbox with QuickBooks. The below guides will help you get started quickly –
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4. Understand and follow GAAP principles and IRS requirements
The IRS does not require churches to file tax returns, but you may want to anyway. Church members and the general public are looking for churches to be more transparent about how they use their funds.
Financial statements ensure you’re using donations correctly and limit the chance of auditing. Transparent financial reports also help build trust with your donors and the community.
The IRS has strict accounting requirements for nonprofits and churches. To help organizations meet these requirements, the Financial Accounting Standards Board (FASB) developed GAAP principles.
GAAP (Generally Accepted Accounting Principles) principles include:
- Principle of Regularity
- Principle of Consistency
- Principle of Sincerity
- Principle of Permanence of Methods
- Principle of Non-Compensation
- Principle of Prudence
- Principle of Continuity
- Principle of Periodicity
Churches must also create four financial statements focusing on the church’s revenue, expenses, and net asset change. These statements include the following:
- Statement of Financial Position
- Statement of Activities
- Statement of Cash Flow
- Statement of Functional Expenses
5. Reconcile accounts monthly
Churches must also reconcile each account at the end of the month. You can do this by comparing donor activity to your financial documents.
Reconciling your accounts helps catch accounting mistakes and potential fraud. Reconciliation is another reason you’ll want to separate financial duties. You don’t want the same person writing the checks to be reconciling your accounts.
The Mandatory Financial Documents for Church Accounting
The IRS does not require churches to file as many financial documents as other nonprofits, but there are still a few you must understand and file.
1. Form 1099
Churches that use freelancers for accounting, repair, cleaning, entertainment, or other purposes must file Form 1099. Any time your church pays a freelancer $600 or more, you must file this with the IRS and send a copy to the freelancer.
2. Form W-2
Churches with employees must also send their staff W-2s yearly at the end of the fiscal year. Small churches may not think of this, but your organization’s preacher will need this financial statement.
3. Form 990
If your church decides to file annually with the IRS to limit the chances of auditing and build trust with their members, you must file Form 990.
990s help ensure your books are in order, and the more transparent you are with your finances the more donors will trust your church.
Final Thoughts
Churches are held to higher standards in the media and with their donors. Transparency with your organization’s financial reports is necessary to ensure donor trust and limit IRS audits.
Bookkeeping and accounting practices like fund accounting, monthly account reconciliation, and filing reports and statements with the IRS will help your church remain transparent. If you’ve found it challenging to keep track of your church’s revenue and expenses, research online financial software like QuickBooks or AccuFund to help.
Donorbox integrates with QuickBooks to help you manage your accounting while raising more for your church! Check out our range of effective and simple-to-use features on our website. Learn more about our integrations (you can connect with 2000+ applications and more!).
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Frequently Asked Questions [FAQs]
1. Are churches required to follow the accounting guidelines from the IRS?
The IRS does not require churches to file annual taxes. But churches must file 1099s and W-2s for staff and freelance professionals.
Churches may also want to file Form 990 every year to limit the chance of an audit.
2. Should you outsource accounting or hire an in-house accountant?
Larger churches with various funding sources should have an accountant on staff. An accountant will help inform your church’s board of all financial changes and requirements. You’ll also appreciate the help during tax time.
Smaller churches can get away with hiring a freelance accountant or working with a local company to file required tax forms and develop financial reports. They will also need a separate bookkeeper to keep track of funds throughout the year.
3. Is fund accounting the same as church accounting?
Churches are nonprofits and must use fund accounting to track revenue and expenses. Fund accounting helps churches separate revenue and expenses based on how they came in and how they’re used. In short, the accounting method churches should use is fund accounting.
Disclaimer: By sharing this information we do not intend to provide legal, tax, or accounting advice, or to address specific situations. The above article intends to provide generalized financial and legal information designed to educate a broad segment of the public. Please consult with your legal or tax advisor to supplement and verify what you learn here.
Kristine Ensor
