Church books look like a small nonprofit's books with three extra wrinkles. Most of the income is donations, and many of those arrive with strings attached. Donors expect a year-end statement they can use on their own tax return. And the pastor is paid under rules that apply to almost no other worker in the country. Get those three things right and the rest is ordinary bookkeeping: reconcile the accounts, categorize the spending, and put a clear report in front of the board every month.
Churches are automatically tax-exempt and, unlike most nonprofits, are generally not required to file an annual Form 990. That does not reduce the recordkeeping burden. A church still has to file payroll returns, issue W-2s and 1099s, substantiate every contribution it acknowledges, and be able to show that designated gifts were spent the way donors intended. Here is how to set the books up so all of that is routine.
Fund accounting: the general fund versus designated gifts
A gift to the building fund, the missions trip, or the benevolence fund is not general income. The donor restricted it, and the church is obligated to use it for that purpose. The way to honor that in the books is fund accounting: the general fund carries the regular tithes and offerings and pays the ordinary bills, and each designated purpose gets its own fund whose balance is tracked separately. You do not need a separate bank account for each fund. One checking account can hold all the money as long as the books show how much of it belongs to each fund at any moment.
Each month, every fund's balance should equal its beginning balance plus gifts received minus money spent for that purpose. A designated fund should never go negative. If it does, the general fund has been used to cover a restricted project, and the board needs to know. The opposite problem is just as common: a building fund that quietly grows while the general fund cannot cover payroll, because the bookkeeper is not showing the board how much of the bank balance is spoken for.
Keep two kinds of restrictions apart. Donor-restricted gifts can only be redirected with the donor's permission. Board-designated funds, where the leadership itself set money aside, can be undone by the board whenever it chooses. When you promote a special project, consider adding language to the appeal that lets the church use any excess for its general ministry. That one sentence saves a lot of awkward phone calls when a roof fund comes in over budget.
Recording giving and issuing contribution statements
Record every gift by donor, date, amount, fund, and method. Cash and checks should be counted by two unrelated people who both sign the count sheet before the deposit is made, and the person who counts should not be the person who enters the gifts or reconciles the bank. Online giving platforms usually deposit the net amount after processing fees. Record the full gift to the donor and the fee as an expense, so the donor's statement shows what they actually gave and the church's books show what the platform costs.
Donors need a written acknowledgment from the church for any single gift of $250 or more before they can deduct it. Most churches issue one annual statement per household listing every gift for the year, with a sentence stating that no goods or services were provided in exchange, or describing what was. If a donor did receive something, such as a ticket to a fundraising dinner, the statement should say so and give a good-faith estimate of its value. Get the statements out in January so people have them before they file. For non-cash gifts, describe the item and let the donor determine the value; the church should not put a dollar figure on it.
Be careful with gifts earmarked for a specific person. A check written to the church with a note saying it is for the pastor's family or a particular member in need is generally not a deductible contribution, because the church does not control how it is used. Run benevolence through a fund the leadership controls, with written criteria for who qualifies, and record each disbursement with the reason it was approved.
Paying the pastor: dual status and the housing allowance
Ministers have what the IRS calls dual status. For income tax they are employees and receive a W-2. For Social Security and Medicare they are treated as self-employed and pay self-employment tax on their own return, including on the housing allowance. That means the church does not withhold Social Security and Medicare from a minister's pay and does not pay the employer share for them. Doing so is one of the most common errors in church payroll. The church is not required to withhold federal income tax from a minister either, but it can if the minister requests it in writing, and many ministers ask for extra withholding to cover the self-employment tax they will owe.
The housing allowance is the largest tax benefit available to clergy, and it only works if the paperwork is done in advance. The board must designate a specific amount as housing allowance, in writing, before it is paid. A line in the official minutes is enough. The minister can then exclude from income tax the smallest of three figures: the amount designated, the actual amount spent on housing including utilities and furnishings, or the fair rental value of the home furnished plus utilities. The allowance does not appear in box 1 of the W-2. Report it in box 14 or in a separate letter, and keep the designation on file.
Everyone else on the payroll is treated normally. The administrator, custodian, nursery workers, and musicians on staff are regular employees with regular withholding, and the church files quarterly payroll returns and year-end W-2s like any other employer. Churches are exempt from federal unemployment tax, and most states exempt them from state unemployment tax as well, but check your state. Resist the urge to treat regular musicians or childcare workers as contractors to avoid payroll. If the church sets their schedule and directs their work, they are employees. Genuine guest speakers and one-time contractors should fill out a W-9 before they are paid, and anyone paid $2,000 or more in 2026 needs a 1099-NEC; the threshold was $600 in prior years.
The monthly close, the board report, and getting help
Once a month, reconcile the checking account, the savings account, every giving platform, and any church credit card to their statements. Post all giving by fund. Then produce two reports for the board: a statement of income and expenses compared to the budget, and a fund balance report showing how much of the cash belongs to each designated fund. A treasurer who sees that the general fund has two weeks of expenses on hand while the building fund holds four months of cash can lead a very different conversation than one who only sees the bank balance.
Keep the controls simple but real. Separate counting from recording, require two signatures above a set dollar amount, have someone other than the bookkeeper review the bank statements, and keep the treasurer and the bookkeeper as two different people when the congregation is large enough to allow it. These are not accusations. They protect the volunteers who handle the money as much as they protect the church.
If the books have fallen behind, as they often do when a volunteer treasurer steps down, EVO Bookkeeping can catch them up. Catch-up is $199 for each month behind, completed within 2 days and guaranteed in writing. Ongoing bookkeeping is $199/month flat, with accounts reconciled, transactions categorized, and your income statement and Balance Sheet delivered by day 2 of the following month, plus 1099 prep at year end. There are no contracts and you can cancel anytime. You can get an instant quote on our homepage.