Six Types of Reimbursements Your Church Needs to Know
By Raul Rivera
Many churches reimburse their pastors and call it a stipend or allowance to cover the costs of travel and other expenses that ministers incur while doing the work of the church. The average pastor under this type of plan receives around $250.00 per month, and under the law this is likely illegal because of a lack of accountability, thus making the stipend or allowance reportable, taxable income.
Reimbursement of medical bills
Section 105(b) of the Internal Revenue Code allows the church to reimburse an employee's medical expenses as well as those for his/her spouse and dependents. When the new healthcare law was passed, it created a provision that allows tax-free reimbursement of the medical expenses of an employee's child through the age of 26. The Compliance Kit Software Suite will create this for you.
How to do it
In order to properly document the church paying for the expenses of an employee's medical bills, it is a necessary to document the following:
1. The board of directors/elders must pass a resolution stating that the church may pay the health insurance premiums of full-time ordained, commissioned, or licensed ministers and their dependents, as well as other staff who are considered employees of the church for tax purposes. The Policy and Procedures Software Suite will create this for you.
Continuing education reimbursement
Under section 127, the church may pay for an employee's undergraduate and graduate educational expenses. The education is not required to be job related either. Payments under this program may be made directly to the educational institution or may be reimbursed directly to the employee. The payments that the church makes are tax free to the employee. Section 127(a)(2) allows the church to pay up to $5,250 per year.
How to do it
In order to properly document the church paying for the continuing education of employees, it is a necessary to document the following:
The board of directors/elders must pass a resolution stating that the church may pay the health insurance expenses of full-time ordained, commissioned, or licensed ministers and their dependents, as well as other staff who are considered employees of the church for tax purposes. The Policies and Procedures Software Suite will create this for you.
Reimbursement for use of cell phone
Back in the days when VCR's and 8-track tapes were a blessing, cell phones were rare and expensive. They were so expensive that the Motorola DynaTec phone cost a whopping $3,500. Naturally, wealthy executives who could not only afford the cost of purchasing one, but also the phone bill, which could run in the thousands of dollars per month, were the only individuals who used cell phones. Because the value that a wealthy executive would receive from using the company cell phone for both business and personal use was big, Congress passed a law that made the issuance of an employer-provided cell phone to an employee a taxable fringe benefit to the employee; and only to the degree that the employee kept meticulous records on the minutes that were used for business were those minutes allowed to be excluded from taxable income. If the employee did not keep adequate records, then 100% of the phone and the monthly phone bills were counted as taxable income. When that law was passed no one in the church world took notice because pastors back then did not have cell phones. But oh, how the times have changed! Now, every pastor and church employee has a cell phone. While that is great, there is one thing that is not: most churches did not get the memo that Congress passed a law against the way that churches pay the bill.
A little more than 20 years after the law made church provided cell phones a taxable fringe benefit to the pastor, Congress reversed itself and passed the Small Business Jobs Act of 2010. As a result of that law, the IRS published Notice 2011-72, which states that if the church provides the pastor or employee a cell phone "primarily for non-compensatory business reasons," then the value of that cell phone is considered an "excludible fringe benefit." Additionally, effective retroactively to January 1st, 2010, when a church pays for the pastor's cell phone it is no longer taxable to the pastor.
How to do it
In order to properly document the church paying for the pastor's cell phone, it is necessary to document the following:
1. If the person is employed by the church, the board of directors/elders must pass a resolution in the employment contract that requires the pastor to carry a cell phone, provided by the church and for the convenience of the employer, as a condition of employment. The Compliance Kit Software Suite will create this for you.
2. If the person is not employed by the church, then the statement should be modified to state that as a condition of serving in his/her capacity as the pastor, he/she is required to carry a cell phone provided by the church. The Compliance Kit Software Suite will create this for you.
Adoption Assistance reimbursement
In Tax Topic 607, the IRS gives guidance on adoption assistance programs. Under this program the church can directly pay for the expenses related to the adoption of a child. Church employees may receive adoption assistance of up to $13,360.00. Benefits received by the church under this program are tax-free.
How to do it
1. At a properly called board/elder's meeting, the church must adopt a resolution to allow eligible church employees to receive adoption assistance of up to $13,360.00 paid or reimbursed by the church. The Policies and Procedures Software Suite will create this for you.
Travel expense reimbursement (This one is tricky)
Reimbursements received by an employee who travels on business outside of the area of his/her tax home are tax-free so long as they are properly documented.
Travel expenses that can be reimbursed include the following:
1. Costs to travel to and from the church office destination (This does not refer to business miles on your car).
2. Transportation costs while at the business destination
3. Lodging, meals, and incidental expenses
4. Cleaning, laundry, and other miscellaneous expenses
In order for travel expenses to be reimbursable, section 162(a)(2) states that the travel must be " temporary and be substantially longer than an ordinary day's work, requiring an overnight stay or substantial sleep or rest."
Example 1: Pastor X travels from Dallas, TX to New Orleans, LA to attend a conference. He spends two nights there attending workshops and evening sessions. All of his meals, lodging, cleaning, and laundry (if any) are fully reimbursable.
Example 2: Pastor X travels from Dallas, TX to Fort Worth, TX to visit a member of the church who had surgery. He left the church office at 9:00 a.m. and traveled 35 miles each way. While there, he bought lunch at the hospital cafeteria. He arrived at home at 4:30 p.m. Under this scenario, his miles are fully reimbursable, but his Meal IS NOT. In order for his meal to be reimbursable, he had to be out substantially longer than an ordinary day's work, requiring an overnight stay or substantial sleep or rest. It may not seem fair, but that is the rule.
How to do it
At a properly called board/elder's meeting, the church must adopt a resolution to allow employees to receive travel expense reimbursements. The resolution must comply with section 162(a).
Moving expense reimbursement
There are times when pastors and other ministers and employees move from one city to another to accept work. Often times, pastors move from one state to another after accepting a position as senior pastor of a church. Section 82 and Section 217 provide that an employer may reimburse the moving expenses of an employee if they meet the following requirements.
1. Individual must be an employee
2. Employee must actually incur or pay the expenses
3. Expenses are closely related to starting work at the new job location (generally, moving expenses qualify that are incurred within one year from the date the employee first reported to work at the new location)
4. Expenses must meet the time and distance tests, as follows:
Time Test: The employee must work at least 39 weeks full-time in the first year after arriving in the new location.
Distance test: The new job is at least 50 miles farther from the former home than the old job location was from the former home.
How to do it
At a properly called board/elder's meeting, the church must adopt a resolution to allow employees to receive moving expense reimbursements. The resolution must comply with the time and distance requirements.
We are here to help
Reimbursements are just one of many little areas that keep churches from legal compliance. Often, it is because the leadership just does not know what to do. In fact, many pastors will read this and think to themselves, "I wish I would have known this earlier!" or "Why didn't someone tell me about this before?"
That is why StartCHURCH exists! Our vision and mission is to help every church planter, pastor, and ministry leader have up-to-date information to help them protect what God has given them to lead. You do not have to be in the dark any longer. StartCHURCH can partner with you and give you confidence that you are moving forward in strong legal compliance.
If you have any legal questions concerning reimbursements or if we can be of service to you in any way, please feel free to call us at 770-638-3444. We would be honored to serve you.