05 Apr Non-accountable Reimbursement Plan
If the church or religious organization reimburses or advances the employee for business expenses, but the arrangement does not satisfy the three requirements of an accountable plan, the amounts paid to the employees are considered wages subject to FICA taxes and income tax withholding, if applicable, and are reportable on Form W-2. This is also known as a Non-Accountable Reimbursement Plan. (Amounts paid to employee ministers are treated as wages reportable on Form W-2, but are not subject to FICA taxes or income tax withholding.)
For example, if a church or religious organization pays its secretary a $200 per month allowance to reimburse monthly business expenses the secretary incurs while conducting church or religious organization business, and the secretary is not required to substantiate the expenses or return any excess, then the entire $200 must be reported on Form W-2 as wages subject to FICA taxes and income tax withholding.
In the same situation involving a minister, the allowance must be reported on the minister’s Form W-2, but no FICA or income tax withholding is required. For further information see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
One common business expense reimbursement is for automobile mileage. If a church or religious organization pays a mileage allowance at a rate that is less than or equal to the federal standard rate, the amount of the expense is deemed substantiated. (Each year, the federal government establishes a standard mileage reimbursement rate.)
There are no income or employment tax consequences to the reimbursed individual provided that the employee substantiates the time, place, and business purposes of the automobile mileage for which reimbursement is sought. Of course, reimbursement for automobile mileage incurred for personal purposes is includible in the individual’s income.
If a church or religious organization reimburses automobile mileage at a rate exceeding the standard mileage rate, the excess is treated as paid under a nonaccountable plan. This means that the excess is includible in the individual’s income and is subject to the withholding and payment of income and employment taxes, if applicable.
In addition, any mileage reimbursement that is paid without requiring the individual to substantiate the time, place, and business purposes of each trip is included in the individual’s income, regardless of the rate of reimbursement. No income is attributed to an employee or a volunteer who uses an automobile owned by the church or religious organization to perform church-related work.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.