Q: I need help with a question regarding money requested for our Deaf Church Pastor for car repairs. The Deaf Church Committee voted to reimburse him for the car repairs but since this is not an actual church expense, it seems it should be considered a gift, and therefore taxable income. Their position is that it is a reimbursement and therefore not taxable. Help?
What Determines the Taxability of Clergy Reimbursements?
The answer largely depends on whether your church has adopted an accountable reimbursement plan. According to the IRS guidelines for reimbursement plans, these plans allow clergy to receive funds for business-related expenses without them being treated as taxable income. Here’s an explanation based on the Church & Clergy Tax Guide:
How Do Accountable Reimbursement Plans Work?
Under an accountable reimbursement plan, church reimbursements for employee business expenses are not reported as compensation on the employee’s Form W-2 or Form 1040. They are also not considered when computing automatic excess benefits. Adopting an accountable plan is a crucial element for handling clergy and employee expenses correctly.
To qualify as an accountable plan, the following four criteria must be met:
- Business Connection: Expenses must have a direct connection to performing services as a church employee.
- Adequate Accounting: Employees must account for expenses within a reasonable timeframe (not more than 60 days).
- Returning Excess Reimbursements: Employees must return any excess reimbursement within a reasonable timeframe (not more than 120 days).
- Reimbursements Not Made From Salary Reductions: Reimbursements must come from church funds, not by reducing the employee’s salary.
Are Reimbursements Without an Accountable Plan Taxable?
In the absence of an accountable plan, reimbursements are typically considered taxable income. They must be reported on the employee’s Form W-2 and are subject to federal income tax withholding, Social Security, and Medicare taxes.
For example, if your Deaf Church Pastor’s car repair expenses are reimbursed without an accountable plan in place, this amount is treated as taxable income, regardless of whether the church committee considers it a reimbursement or a gift.
How Should Churches Handle Clergy Expenses?
To avoid confusion and ensure tax compliance, churches should implement an accountable reimbursement plan that adheres to IRS guidelines. This allows reimbursements to be excluded from taxable income while providing a clear structure for expense reporting.
FAQ Section
1. What is an accountable reimbursement plan?
An accountable reimbursement plan is an arrangement where employers reimburse employees for business-related expenses, provided specific IRS requirements are met.
2. Are gifts to clergy taxable?
Gifts to clergy are generally taxable unless they are classified as tax-exempt under specific circumstances, such as benevolence or charity.
3. Can car repair expenses qualify as business expenses?
Yes, if the car is used for business purposes related to clergy duties, such as traveling to multiple congregations or events.
4. What happens if a reimbursement plan isn’t accountable?
Reimbursements are treated as taxable income and must be reported on the clergy’s tax filings.
Conclusion
Properly categorizing and managing clergy reimbursements, including car repairs, is essential for tax compliance. Churches are encouraged to adopt accountable reimbursement plans to avoid tax implications and ensure clarity in financial transactions.