When a church covers ministry related expense using an allowance or a non-accountable reimbursement, all those payments must be included with taxable salary on an employee’s W-2 and reported as taxable income. A non-accountable plan is a policy where the church pays a fixed amount each pay period and does not meet all the requirements for an accountable plan below.
A well-structured accountable reimbursement plan for ministry related expenses allows the church to correctly recognize the reimbursement as non-taxable income. An accountable reimbursement plan must follow the guidelines below.
- To cover employee’s expenses incurred in doing their jobs, the church should adopt a written Accountable Reimbursement Plan.
- The policy should specify that the IRS mileage rate for ministry related miles should be used.
- The policy must follow IRS requirements to qualify as an accountable reimbursement plan.
- The expense must have a ministry purpose. (Personal or commuting miles are NOT to be included.)
- There must be written substantiation (monthly accounting of ministry expenses reported to the church).
- The return of amounts in excess of substantiated expenses must be required. (Within 120 days after the expenses are incurred)
- Salary Reduction or similar adjustments to compensation may NOT be used to fund the reimbursement of ministry related expenses.
- Budgeted expense funds not used for accountable expense reimbursement are retained by the church.
- Expense payments that comply with all the above requirements are NOT reported as taxable income.
- In a printed budget, expenses should be listed in a different budget section from staff compensation and benefits.
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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