Q: We are having a problem with our associate pastors not turning in their church credit card receipts. 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 personal 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. 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, whether for business or personal expenses.
The best practice is to reimburse only those charges and expenses that meet the four requirements of an accountable plan.
