Minister Expense Reimbursement - Is your plan IRS-compliant?
Before assuming that your reimbursement plan is 'fine' the way it is, STS Consulting would like you to consider what the IRS has deemed 'best practices' for reimbursing your minister's business expenses.
The BEST Way to Reimburse Ministry-related Business Expenses
While working in the ministry, many business-related expenses can be incurred. Although these are a necessary and unavoidable part of the ministry, it is possible that a minister's tax status can work to his or her advantage and to the Church's advantage, as well, as long as a suitable and appropriate plan is established by the Church's Board.
Accountable expense reimbursement plans are the best way for churches to handle ministry-related business expenses. Accountable plans are employee reimbursement arrangements for legitimate business expenses. In an accountable plan, employees report their business expenses to the Church instead of the IRS. If the plan is set up correctly, reimbursed expenses are not treated as taxable income, nor does the employee claim anything reimbursed as a deduction on their Form W-2 or Form 1040. An accountable plan creates significant tax savings for the employee and avoids penalties connected to nonaccountable plans or even incorrectly run accountable plans.
What is required for a plan to be deemed accountable?
To be an accountable plan, four requirements must be met:
1.) There must be established employer’s funds used for employer reimbursement to the employee (i.e. funds do not come from the reduction of the employee’s salary)
2.) Only business expenses are reimbursed from the employer’s funds
3.) Reimbursements are not made unless there is adequate substantiation of business expenses within a reasonable time period (i.e. no more than 60 days after an expense is incurred)
4.) All excess reimbursements or allowances must be returned to the employer within a reasonable time period (no more than 120 days after excess reimbursement is paid)
Establishing an accountable reimbursement arrangement
Accountable reimbursement arrangements must be established by the board or Church in an appropriate resolution. In adopting this resolution, certain rules need special attention:
1.) Adequate substantiation is the primary condition for the reimbursement of any expense. Adequate substantiation includes:
> Written evidence for all expenses.
> Written evidence and receipts for expenses of $75 or more.
> Written evidence for both above must substantiate amount, date, place, and business nature. (i.e. the same degree of substantiation as would be required for a deduction on a tax return). This evidence is also necessary to substantiate miles driven for business purposes.
2) Excess reimbursements (i.e. those in excess of allowable/pre-established amounts) should and must be returned to the church within a reasonable time. Expenses will be deemed substantiated within a reasonable time if substantiation occurs within 60 days. Reasonable return time for excess reimbursements is 120 days (i.e. returned to the employer within 120 days from the day reimbursement was paid).
What about nonbusiness expenses?
Nonbusiness expenses which are reimbursed by the church, must be included in taxable wages for income tax reporting purposes on the minister’s Form W-2 and Form 1040. These reimbursements, also, require an accounting and are not deductible by the minister.
What happens if the above criteria are not met?
If the aforementioned requirements are not met and a minister or church is audited, the reimbursement policy will not be counted as an accountable plan.
What things disqualify a plan as accountable?
> Improper supporting documentation/substantiation (missing amount, date, place, business nature)
> Not meeting the ‘reasonable time’ requirement
> Salary reduction as a means to reimburse the minister for business expenses
> Salary restructuring for tax purposes (including more tax-free components in the salary without changing total salary)
If a church or a minister is audited and any of the above disqualifications apply, the reimbursements will be considered income and both the minister and church board would owe penalties, at the minimum.
For further assistance in establishing an Accountable Reimbursement Plan, contact STS Consulting