22 Jun Taxable Sabbatical Expenses
Question … Our elders developed a sabbatical policy that provides our pastors with benefits that includes normal salary and benefits. There is additional pay for activities like meeting with mentors, studying, developing relationships with peers, exploring industry best practices, and resting-rejuvenation. Because these activities almost always involve travel, can’t the church simply pay the travel expenses and record them as ordinary business expenses? Must we treat the extra pay as compensation that will subject the pastor to self-employment taxes of 15.3%?
Answer—Let me start with a quote from CPA Elaine L. Sommerville. She wrote an article for ChurchLaw&Tax entitled The Pastor’s Sabbatical and Tax Implications: How duration, expenses, and compensation need to be handled. Elaine noted:
For a church to pay sabbatical expenses tax-free, the trip expenses must rise to the level of a business expense as allowed by IRC Section 162 and Section 274. The IRC requires the predominant or primary purpose for travel to be the conduct of a business activity … Where the predominant purpose for the trip is personal in nature, integrating a small amount of a business activity does not translate the entire trip into a business trip.
The bottom line is that the travel and expenses need to be acceptable business expenses. The primary purpose of the travel needs to be for business reasons. The pastor can’t work for 2 days and chill for 4 days on the trip. Taking along family members further clouds the issue. When family goes along, the trip is often a vacation with some work thrown in.
Thus the 10-day trip to Israel with your spouse is generally a taxable event. However, taking a two-month course at an educational institution in Israel might not be taxable.
Unfortunately, resting and rejuvenation are not IRS acceptable business expenses, nor is spiritual development. The IRS views those things as being possible while staying home.
So, the expenses can be non-taxable if business guidelines are carefully followed. Since a sabbatical often mixes business and rejuvenation, a goodly part of it may be taxable income. Since you are essentially giving a bonus for these sabbatical items, you can gross up the amount to cover the extra taxes that the pastor must pay.
Original content by the XPastor. 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.