U.S. tax law provides that congregations and other organizations that employ ordained ministers or other religious professionals may consider the items below as usual business expenses. Such expenses are not included in the compensation paid to individuals; they are part of the necessary expenses of the organization and are not reported for income tax purposes.
Some employer/congregations have included reimbursement for expenses necessary to the overall physical, mental, and spiritual wellbeing of staff in this category of church expenses. We recommend that such items be addressed through a Section 125 flexible benefit plan or a health reimbursement arrangement.
By tradition, some religious organizations have made fixed sum monthly payments to their minister or other staff for a "travel allowance" and have not requested an accounting for how the money was spent. U.S. tax law does not permit professional expense funds to be paid to employees as unreported or tax-free income.
Expense moneys paid other than through an Accountable Reimbursement Policy should be reported to the IRS as "other income" on Form W-2, and then may be claimed by the taxpayer as itemized deductions on Schedule A or Schedule C of the 1040 tax return.
It is strongly recommended that the congregation establish an Accountable Reimbursement Policy. Under such a policy, staff is reimbursed within 30 to 60 days for expenses advanced on behalf of the congregation, with reasonable documentation where appropriate. IRS regulations specify that receipts should be provided for expenses over $75. One way of segregating business expenses is for the staff member to charge them to a credit card used solely for this purpose. The church then pays the credit card statement as it would any other monthly expense, although the credit card statement in and of itself may not be sufficient documentation.
Any excess funds that have been advanced to a professional or employee for a trip or special purpose must be reimbursed back to the congregation within 60 days or should be declared as additional income.
It is important to avoid confusion with other checks received by staff, such as for cash salary or a clergy housing allowance. Reimbursement of professional expenses should not be included in checks for those items.
About tax law and advice. While this information is believed to be accurate, the staff of the Office of Church Staff Finances are not qualified tax consultants. We urge congregations and professionals to consult tax specialists or accountants.
We also recommend that churches obtain references such as the Church and Clergy Tax Guide, (800) 222-1840. This is the most comprehensive guide to the subject for non-experts. The same author also publishes Church Laws & Tax Report, a bimonthly journal reporting on legal and tax developments affecting ministers and churches.
As tax laws in Canada may differ from those in the U.S., Unitarian congregations in Canada should contact the Canadian Unitarian Council for information about professional expenses there.
For more information contact ocsf @ uua.org.
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Last updated on Thursday, December 4, 2014.
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