We previously asked church leaders about the following situation:
Your Youth Minister wants to hold a car wash to raise funds to help with costs for this summers mission trip. He expects that only volunteer youth and sponsors going on the trip participate, but knows that some wont help.
Some churches, believing that fairness is a key component of how they respond to a given issue are inclined to say that A is the correct answer. They also believe that this arrangement will motivate parents and youth to volunteer at the car wash. Sadly, the reasons are not sufficient to overcome the tax issues created by such an arrangement.
The IRS is on the lookout for anyone who receives compensation and doesnt pay taxes on it. In the situation where the profits are allocated in proportion to the labor expended by the volunteers, the IRS considers that allocation compensation. As a result, the participants suddenly become employees of the church, with all the attendant payroll taxes and workers compensation. Whoa, the Youth Pastors ability to motivate people to participate just got harder.
But which would be sadder, his or her ability to motivate participants or the tangle of Wage and Hour, Overtime, Withholding, Workers Comp or other laws that suddenly come into play for the church? Lets take a moment and examine some possible scenarios. Lets say the car wash was a tremendous success and after expenses for soap and supplies it resulted in a profit of $252. And lets say that in addition to the Youth Minister, eight people out of the 12 going on the trip helped. So, the dedicated eight who spent six hours on a Saturday earned $5.25 for each hour they worked to help offset their costs for the trip. At this writing, the federal minimum wage is $7.25 (It could be even higher in your state.). That means your churchs new employees didnt get paid at least the minimum wage, which could be a major problem.
Also, what if one of the participants was injured during the car wash and had to go to the emergency room? Since under the law he or she is considered as an employee, are they covered under the churchs workmans compensation policy? Starting to sound complicated isnt it?
Lastly, under answer A the proceeds from the car wash become unrelated business income. Whenever a church receives at least $1,000 in annual income from unrelated business sources it must file form 990-T with the IRS. Churches should understand that what is defined as unrelated business income is based on a variety of interrelated factors. In short, its complicated. Our advice to you is to seek the counsel of a qualified non-profit certified public accountant or tax attorney. If its been determined that you need to file a form 990-T understand that according to the IRS website that it, along with any taxes owned are due annually by the 15th day of the 5th month after the end of your tax year.
I think we can agree that going down the path outlined in answer A means dealing with a jungle of legal requirements. Since we are about helping the church still raise money for the mission trip, the other answers that we included offer viable options depending on the circumstances at your church.
In most cases answer B will best serve the church and the trip participants. Why do we say,
In most cases, you ask? Has anyone checked to see if there are there any references to fund raising activities in your By-laws, Employee Handbook, or Policies and Procedures manual?
Some church governing boards have approved and put into writing restrictions or procedures for special fund raising activities. They may require a review and/or approval process. Or they may indicate that proceeds need to go to the churchs general operating fund. Perhaps they allow the proceeds to go towards the expenses of the ministry department but not to the participants going on the mission trip. Only you can answer these what-ifs by dusting off those documents that only seem to get read by insomniacs.
Putting in the time and effort to research and arrive at the best answer for your church keeps your church and its mission moving forward the way God intended! If you would like help in not settling on answers that only
sound or feel right, please call or email us. We have access to resources that can save you time and money.
Please Note: This information is provided with the understanding that Church Administrative Professionals is not rendering professional advice or service.