Over the years I have come across churches who provide their pastor(s) with monthly payments for continuing education, car use, and professional expenses. The way it works is that the church pays these amounts to their pastor and the amount paid is added to the pastor’s w-2 as taxable income. Then, the pastor deducts the actual expenses on form Schedule A when they file their income taxes.
Let me stop here for a moment and repeat. The church pays these amounts to their pastor and the amount paid is added to the pastor’s w-2 as taxable income. While I come across churches from time to time who do not include these payments in the w-2 when I perform our Financial Controls & Procedures Audit, it is the law that they do so. Not reporting these additional payments as income could result in serious problems for both the pastor and the church.
For those of you who are adding these additional payments to your pastor’s w-2, what is the big deal? In December, Congress passed the Tax Cuts and Jobs Act which went into effect in January 2018. Un reimbursed work-related expenses that were generally deductible on an employee’s individual tax return as a miscellaneous itemized deduction on Schedule A are eliminated beginning 2018. This includes:
- Travel and mileage costs
- Meals and entertainment
- Tools and supplies
- Required uniforms not suitable for ordinary wear
- Dues and subscriptions
The solution to this issue for your pastor is to adopt an Accountable Reimbursement Plan. This allows the church to reimburse the pastor for legitimate business expenses that comply with IRS rules without including them in taxable income.
Your accountable plan is a forma arrangement to advance, reimburse or provide allowances for business expenses. Commonly this is accomplished through the use of expense reports and submission of employee receipts for reimbursement. To qualify as “accountable,” your plan must meet the following criteria:
Payments must be for “ordinary and necessary” business expenses.
Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
If you fail to meet these conditions, the IRS will treat your plan as non-accountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
The other alternative is a Per Diem plan that requires you follow the IRS tables for reimbursement for lodging, meals and incidentals. This is less favorable as it requires referencing the IRS table by city and month for each expense, which may vary from actual expense.
To avoid surprises for your pastor at the end of the year, it will be important to have a reimbursement policy in place and reimburse throughout the year. If you have questions, contact Keith (626) 657-0146).