Q: Our associate pastors will not turn in their credit card receipts for business expenses. Our senior pastor would like to deduct any undocumented church credit card charges from the offending employees’ pay. I’m not sure this is legal. Of course, they know that they are never to use the card for personal expenses. We do not doubt some charges are legitimate church expenses. We trust our pastors, but we need to account for each transaction. Is it legal to deduct undocumented charges from their pay?
When a church pays an employee’s charges on a church credit card without adequate substantiation, it makes a nonaccountable reimbursement arrangement. This means the church must then report the amount as taxable income on the employee’s W-2.
When an employee adequately accounts for charges, the payment qualifies as an “accountable” reimbursement. An accountable reimbursement does not count as taxable income.
For most business expenses, a reimbursement qualifies as accountable if it meets all four of the following requirements:
- The reimbursement covers only ordinary and necessary business expenses.
- The employee adequately accounts for the expenses within a reasonable time (not more than 60 days after incurring the expense).
- The employee returns any excess reimbursement or allowance to the employer within a reasonable time (not more than 120 days after receiving the excess amount).
- The employer pays reimbursements directly from employer funds, without reducing the employee’s salary.
Accountable Plan Reporting
Under an accountable plan, the employee reports expenses directly to the church, not to the IRS.
In this case, the church does not report reimbursements as income, and the employee does not claim any deductions.
Refer to State Law
Can a church reduce an employee’s salary by the amount of nonaccountable charges it pays?
That depends on state law.
In many states, laws strictly prohibit employers from unilaterally reducing an employee’s wages, except in limited circumstances.
Churches should never reduce employee compensation to cover nonaccountable expense reimbursements without first consulting legal counsel.
Best Practices for Handling Reimbursements
The better approach is to deny reimbursement for nonaccountable charges made on an employee’s personal credit card. For repeated undocumented expenses made to an employee’s church-issued credit card, the church should revoke the card.
The best practice is to reimburse only those charges and expenses that meet the four requirements of an accountable plan, whether the charges and expenses are made to a church credit card or a personal one. If the church reimburses undocumented expenses, those amounts should be treated as taxable income to the employee.
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