Church boards have an important responsibility to steward ministry resources well while providing fair and appropriate compensation for their employees. How compensation, employee benefits, and ministry-related expenses are structured can affect both the church and its employees.
Rather than focusing only on salary, churches should periodically review the entire compensation package, including employee benefits and the reimbursement of legitimate ministry expenses. Proper planning can help churches use their resources wisely while ensuring employees are not unnecessarily paying ministry expenses from their personal income.
Employee Benefits
In addition to salary, churches may provide valuable benefits such as health and dental coverage, life and disability insurance, and retirement plan contributions.
Federal tax treatment varies by the type of benefit and how it is structured. Some employer-provided benefits may be excluded from an employee’s taxable income when applicable IRS requirements are met, while others may be fully or partially taxable.
Churches should work with qualified tax and benefits professionals to structure and report employee benefits appropriately.
For current federal guidance, see IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Business and Ministry Expenses
Church employees often incur legitimate expenses while carrying out their ministry responsibilities.
These might include:
- Business mileage and travel
- Conferences and continuing education
- Professional books and resources
- Ministry-related supplies
- Professional memberships and dues
- Other ordinary and necessary ministry expenses
When these are expenses of the church’s ministry, asking an employee to pay them personally can effectively reduce the value of the employee’s compensation.
A better approach is for the church to establish an accountable reimbursement plan through which appropriate business expenses can be reimbursed.
What Is an Accountable Reimbursement Plan?
Under IRS rules, reimbursements made through a properly structured accountable plan generally are not treated as taxable wages to the employee.
To qualify as an accountable plan, the arrangement must generally require that:
- Expenses have a business connection. The expenses must be incurred by the employee while performing services for the employer.
- Expenses are adequately substantiated. The employee must provide appropriate documentation of the expense within a reasonable period of time.
- Excess reimbursements are returned. Any amount advanced to the employee that exceeds substantiated expenses must be returned within a reasonable period of time.
The IRS provides guidelines for what it generally considers a reasonable period. For example, an advance made within 30 days of an expense, substantiation provided within 60 days after an expense, and excess reimbursements returned within 120 days are generally considered reasonable.
For current requirements, see IRS Publication 15, Employer’s Tax Guide, and IRS Publication 463, Travel, Gift, and Car Expenses.
Why an Accountable Plan Matters
When reimbursements meet IRS accountable-plan requirements, they generally are not included in the employee’s wages and are not subject to federal income, Social Security, Medicare, or federal unemployment taxes.
By contrast, payments made through a nonaccountable arrangement generally must be treated as taxable wages.
Churches should also avoid simply reducing an employee’s salary and relabeling that amount as an expense reimbursement. Under IRS rules, accountable-plan reimbursements must be for legitimate business expenses and cannot simply replace compensation that otherwise would have been paid as wages.
What Can a Church Do?
A church can begin by reviewing the ministry-related expenses its employees routinely incur and determining which expenses should appropriately be paid or reimbursed by the church.
Consider these steps:
- Identify legitimate ministry expenses. Talk with employees about the expenses they regularly incur while carrying out their responsibilities.
- Establish an accountable reimbursement plan. Adopt a written policy describing which expenses will be reimbursed and the church’s procedures for substantiation and reimbursement.
- Separate salary from ministry expenses. Compensation and business expense reimbursements should be clearly distinguished in the church’s budget and accounting records.
- Require appropriate documentation. Employees should submit receipts, mileage records, or other documentation required under the church’s accountable plan.
- Review the arrangement periodically. Ministry responsibilities, expenses, compensation, and IRS requirements can change. Periodic review helps ensure the plan continues to serve both the church and its employees well.
Good Stewardship Benefits Everyone
Thoughtfully structuring compensation and reimbursing legitimate ministry expenses can help churches make better use of the resources entrusted to them while caring well for the people who serve their ministry.
An accountable reimbursement plan isn’t simply a tax strategy. It is a practical way to distinguish an employee’s compensation from the expenses the employee incurs on behalf of the church.
IRS Resources
For current federal tax guidance, visit:
IRS Publication 15 – Employer’s Tax Guide
Guidance for employers, including accountable and nonaccountable reimbursement plans.
IRS Publication 15-B – Employer’s Tax Guide to Fringe Benefits
Guidance regarding the tax treatment of employer-provided benefits.
IRS Publication 463 – Travel, Gift, and Car Expenses
Guidance regarding business travel, mileage, substantiation, and accountable plans.
Servant Solutions provides this information for educational purposes and does not provide tax or legal advice. Churches and individuals should consult qualified tax and legal professionals regarding their specific circumstances.