Employee business expenses in the religious organization context are usually treated the same as employee business expenses in any other business context. The IRS treats the way these expenses are taxed in different ways depending on the means by which they are paid: whether through an accountable or a non-accountable plan. These different types of plans serve to differentiate whether the payment made for a given set of expenses is considered to be part of an employee’s income.
In order fora plan regarding reimbursing or advancing business expenses for an employee to qualify as an accountable plan, it must meet the following three criteria:
- It must actually involve a connection to the church’s business;
- The employee must be able to substantiate any expenses incurred; and
- The employee is required to return any excess amounts paid to them.
In order to substantiate the expenses incurred, an employee must be required by the church to provide it with enough information about each expense to identify its specific business nature. Combining totals into broad categories—such as non-specific “travel” and “miscellaneous”—is not considered acceptable. Nor should an employee wait any longer than a reasonable amount of time before submitting the itemized expenses. In practice this means they should be sent in as soon as possible.
When these criteria are met, the accountable plan’s reimbursed expenses are then excluded from the employee’s gross income, are considered exempt from the wages (and withholding) of FICA and income tax amounts, and need not be reported on the employee’s IRS Form W-2.
When a church, ministry, or other nonprofit organization in Arizona needs advice about tax exemption, 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.