A church’s reimbursements of employee business expenses under an accountable plan are not reported as compensation on the employee’s Form W-2 or 1040, and they are not taken into account in computing automatic excess benefits, as explained in Chapter 4, section A.3. The adverse tax consequences associated with both unreimbursed and nonaccountable reimbursed expenses can be eliminated if a church adopts an accountable expense reimbursement arrangement. This is one of the most important components of the compensation packages of ministers and lay church employees. If a church adopts an accountable reimbursement arrangement, none of the church’s reimbursements needs to appear on an employee’s Form W-2 (or 1040), and there are no expenses for the employee to deduct. The employee, in effect, accounts to his or her employer rather than to the IRS. This is the ideal way for churches to handle the business expenses of ministers and any other church worker. To be an accountable plan, your employer’s reimbursement or allowance arrangement must comply with all four of the following four rules:
Business connection. Your expenses must have a business connection–that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
Adequate accounting. You must adequately account to your employer for these expenses within a reasonable period of time (not more than 60 days after an expense is incurred).
Returning excess reimbursements. You must return any excess reimbursement or allowance within a reasonable period of time (not more than 120 days after an excess reimbursement is paid). An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses you adequately accounted for to your employer.
Reimbursements not made out of salary reductions. The income tax regulations caution that in order for an employer’s reimbursement arrangement to be accountable, it must meet a reimbursement requirement in addition to the three requirements summarized above. The reimbursement requirement means that an employer’s reimbursements of an employee’s business expenses come out of the employer’s funds and not by reducing the employee’s salary.
Q&A: Should This Pastor’s Car Repair Reimbursement be Taxed?
I need help with a question regarding money requested for our Deaf Church Pastor for
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?
The answer largely depends on whether your church already has adopted an accountable reimbursement plan. Church & Clergy Tax Guide explains how an accountable reimbursement plan works:
Go deeper on accountable reimbursement plans and the tax treatment of income for clergy and church employees, including examples, key points, and references to IRS rulings, in the Church & Clergy Tax Guide.
