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.
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.