If you use your personal car for a business, you can take a mileage deduction to save on your taxes. But what if you drive your own car for the ministry at your church? The church can provide you a car allowance or mileage reimbursement.
Let’s go over the differences between a car allowance and a mileage reimbursement.
How does a car allowance work?
A car allowance is what the church gives employees for the ministry use of their personal vehicle. A car allowance is a fixed amount each pay period. It’s meant to cover the costs of using your own car. A car allowance covers things like fuel, wear-and-tear, tires, and more.
Example: John works for ABC Church. He uses his personal car to visit members of his church. ABC Church gives him a $200 auto allowance each pay period. This amount doesn’t change each pay period, no matter how far the minister travels. A car allowance is taxable income reported in box 1 of the W-2 Form.
What is an employee vehicle allowance?
This is another way of describing a car allowance. It’s often the exact same thing with the same positives and negative aspects. If the church pays the minister’s car or lease payment, gas, insurance, and operating expenses, this would be classified as a vehicle allowance which would be taxable income.
What is mileage reimbursement?
A mileage reimbursement is when a church pays you back for your car costs per mile after you’ve filed an expense report. Mileage reimbursement varies based on how much you drive. That’s the major difference between it and a car allowance.
Most churches offer a mileage reimbursement at a cents-per-mile rate. Many churches refer to this as the standard mileage rate. A mileage reimbursement often requires employees to maintain a mileage log which is submitted on a regular expense report.
Example: Michelle works for First Church as their lead minister. She drives her personal car to many ministry locations per month. She tracks her ministry miles every month and includes it with her monthly expense report. Michelle is reimbursed based on how many miles she drove the previous month.
Are car allowances taxable income?
There is no federal mandate that requires churches to pay a mileage reimbursement or a car allowance.
A car allowance or mileage reimbursement can be taxable income for the employee based on the administrative steps of the church. Under the accountable plan, churches do not need to report the mileage reimbursement as taxable income. All non-accountable plans are taxable income.
What’s an accountable plan? It’s a plan where the reimbursement follows these requirements:
- Church has a written accountable plan
- Mileage reimbursement has a ministry connection
- Requires substantiation
- Employee must returns excess amounts in a reasonable time
Should my church offer a car allowance or mileage reimbursement?
PRO: The advantage of a car allowance is that it’s very simple to implement and maintain. You give each employee a flat amount of dollars each pay period for their expenses and aside from some simple bookkeeping, that’s about it.
CON: The major downside of a car allowance is that it’s difficult to have accurate spending. Does your employee really need $300 a month? What about the employee who drove far more miles this month? A fixed car allowance can lead to wasted spending or under funding.
PRO: A mileage reimbursement ensures you’re not wasting money. You’re reimbursing employees for the exact mileage they drive. This practice is often more efficient for churches.
CON: The downsides of a mileage reimbursement are that it requires additional administrative steps.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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