Reimbursement of Job-Related Expenses

Church staff are often expected to make home visits, represent your church at conferences, entertain guests, and develop professionally through continuing education. It is important that you budget for and reimburse these items separately from compensation. Otherwise, your staff will have to pay taxes on the reimbursed amounts.

The key is to reimburse business expenses through an accountable plan. Under this arrangement, ministry-related expenses are not reported as taxable income on the employee’s Form W-2 or Form 1040. At the same time, the employee cannot claim these expenses as tax deductions.

Requirements for an accountable plan

  • Expenses must be incurred while performing services as an employee of the organization.
  • The employee must provide documentary evidence of the expense. This can be an auto diary recording work-related use of a personal car, receipts to verify expense amounts, plus a notation of the time, place, and professional purpose for each expense.
  • Expenses must be reported and substantiated within 60 days of when they occurred.
  • An accountable plan cannot be funded through salary reduction. The reimbursements must be over and above any salary paid to employee, from a spending category that is listed in your church budget.
  • Excess reimbursement not spent must be returned. Otherwise, it becomes taxable income.

Allowable reimbursable expenses

  • Business-related travel and automobile use
  • Hospitality
  • Conference attendance
  • Continuing education
  • Subscriptions/books/periodicals
  • Fees and dues for professional associations, such as the ABC Ministers Council
  • Work-related cellphone use

Your church must pass a resolution establishing an accountable plan

The IRS requires the church board to pass a formal resolution creating an accountable plan. The plan policy should be in writing and clearly specify which expenses the church will reimburse. State the documentation and reporting requirements. You may use the following sample wording:

RESOLVED, That, in addition to compensation paid to our (pastor/staff), we will reimburse (him/her/them) for automobile and other ministry-related expenses considered ordinary and necessary to carry out (his/her/their) responsibilities. Expenses must be substantiated as to the date, amount and purpose within 60 days after they are incurred, or they will not be reimbursed. Any excess reimbursements must be refunded to the church within 120 days after expenses are paid or incurred.