Where the tax rules on employee business expenditures are concerned, a church is generally treated like any other employer. Which is to say, the rules will be different depending on the sort of plan the expenses will be paid through: an accountable reimbursement plan or a non-accountable reimbursement plan. The difference between these two types of plans will determine whether the expenditures are considered employer costs of business (and, as the church is tax-exempt, then so will be the expenses) or whether the expenses will be considered the employee’s income (and, therefore, taxable).
An accountable plan is, essentially, an arrangement under which an employer will reimburse or advance business expenses incurred by an employee. When the expenses are considered part of an accountable plan, they are neither included in the employee’s gross income, nor required to be reported on their W-2. They are also considered to be exempt from income tax withholdings and FICA withholdings.
Certain legal requirements must be met in order for expenses to be considered as part of an accountable plan. The plan must involve a business connection. It must require that the employee document and substantiate any expenses incurred (by doing things like saving and submitting all receipts for expenses related to work they do for the church—for things like meals, travel, and entertainment). This substantiation must be detailed and rigorous. The specific business nature of each expenditure must be sufficiently identifiable from the receipts and other documentation provided—simple, broad-swath-style reporting under non-specific categories, such as “miscellaneous business expenses,” won’t pass muster.
If these criteria are not met, then the plan will be considered a non-accountable plan, and all taxes due will apply. A church should make sure to have a policy in place to require prompt repayment of any expense that is determined to be a personal expense rather than one appropriate to doing business.
When a church or nonprofit organization in Arizona needs advice about employee expenditures, Provident Law’s church and nonprofit attorneys are here to help. We recognize how essential these organizations are to society, and we provide broad transactional and general counsel services to keep them running smoothly. Contact us to learn more.