Q&A: Can We Deduct Personal Expenses on a Church Card from an Employee’s Pay?

How do handle undocumented charges on the church credit card.

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, and we do trust our pastors, but we need to account for each transaction. Is it legal to deduct personal charges from their pay?

A church’s payment of an employee’s charges to a church credit card without adequate substantiation constitutes a nonaccountable reimbursement that must be reported by the church as taxable income on the employee’s W-2. A church’s payment of charges that are adequately accounted for by the employee represent an “accountable” reimbursement that is not taxable income. An accountable reimbursement, for most business expenses, is a reimbursement that meets the following four requirements:

  1. only ordinary and necessary business expenses are reimbursed;
  2. no reimbursement is allowed without an adequate accounting of expenses within a reasonable period of time (not more than 60 days after an expense in incurred);
  3. any excess reimbursement or allowance must be returned to the employer within a reasonable period of time (not more than 120 days after an excess reimbursement is paid); and
  4. an employer’s reimbursements must come out of the employer’s funds and not by reducing the employee’s salary.
  5. Under an accountable plan, an employee reports to the church rather than to the IRS. The reimbursements are not reported as income to the employee, and the employee does not claim any deductions.
  6. Can the church reduce an employee’s salary by the amount of its payment of nonaccountable charges to a church credit card? That depends on state law. In many states the ability of employers to unilaterally reduce an employee’s wages is strictly prohibited, with some exceptions. Churches should never reduce employee compensation to pay for nonaccountable expense reimbursements without legal counsel to insure compliance with state law. Obviously, the better way to handle nonaccountable charges to a church credit card (for either business or personal expenses) is to not reimburse them in the first place. The “best practice” is to limit employer reimbursements to those charges and expenses that meet the four requirements of an accountable plan summarized above.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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