Because ministers are not allowed to deduct church-related business expenses from their local church employment as self-employed workers, they often pay unnecessary income taxes. Sometimes ministers face the impression they are overpaid because churches include such business expenses as part of the their pay package.
The Internal Revenue Service has established an acceptable way for churches to reimburse its employees for ministry-related business expenses as tax-free reimbursements. In accordance with IRS regulations 1.162-17 and 1.274-5T(f), a church can establish an accountable reimbursement plan, through which it can reimburse such expenses as
Conventions, conferences, seminars, and other workshop fees or costs. The continuing education event must further the minister's learning experience without qualifying him for a new position.
Church-related business travel. The IRS allows churches to reimburse employees the IRS standard mileage rate plus parking fees and tolls for business miles driven for church-related purposes. The IRS does not allow a church to reimburse its minister for commuting miles from home to the church, regardless of the number of daily trips. Also, the church can reimburse for meals if the required travel takes the minister away from the church field during meal times.
Costs associated with church-related business overnight trips.
Subscriptions, books, tapes, CDs, DVDs, internet service, equipment, and other similar tools. Churches may reimburse for sermon resources and other educational material expenses if the tools have a church-related business connection. Likewise, churches may provide church-related business equipment - such as computers and copiers - as reimbursable expenses. Under current IRS rulings, cell phone reimbursement requires a detailed, itemized billing of personal and business use. A church may only reimburse the employee for the business portion of the bill.
Hospitality expenses the church requires to entertain others. Minister's may receive reimbursement for the entire cost of a meal for prospects or church members if the meal had a church-related purpose.
The IRS requires a few other simple rules to ensure tax-free reimbursement.
1. A written receipt - The minster must provide an itemized receipt within 60 days of incurring any expense over $75. Otherwise, the reimbursement becomes taxable income. The receipt should include the date, amount, church-related business purpose, the location, and, if a hospitality expense, the names of the individuals who were hosted.
2. Budgeted funds for the accountable reimbursement plan - These funds may not come from a minister's salary or by reducing a salary to free up money for the funds. Budget such just like any other church expense. Group accountable reimbursement plan expenses together as one budget line item, not as separate expense categories.
The accountable reimbursement plan is a "use it or lose it" approach. If the minister does not use the entire budget line item designated for reimbursement, he cannot receive the overage. Remember: an accountable reimbursement plan is a church expense, not personal income to the minister.
3. The church must approve the accountable reimbursement plan, but this does not require a vote from the entire church body. The IRS will accept legal documents that empower the finance committee or executive staff to make the determination of budgeted funds.
The committee or staff overseeing the accountable reimbursement plan has the right to determine if a receipt presented for reimbursement is acceptable. The reimbursement must have a church-related business connection.
4. Do not report any expenses reimbursed properly under an accountable reimbursement plan as taxable income on the ministers W-2 form.
By adopting and funding an accountable reimbursement plan, your church will better steward the financial blessings God has given. The reimbursement plan also presents a better picture of the true cost of providing the particular ministry position. Finally, the accountable reimbursement plan helps honor Gods servants who are faithfully serving in the Lords work.