January 22, 2011

Reimbursement of Minister's Expenses While on Sabbatical

Question:

A church's minister is taking a trip while on sabbatical. The trip is a combination of sabbatical activities and vacation. The church has funds to pay for these expenses.

When the church reimburses the minister for sabbatical expenses, what are the tax implications? Are reimbursements reported to the IRS as ministerial income? Are taxes required to be withheld? Does the church have to decide the taxable status for each individual expense? What liability exposure might the treasurer of the church incur for errors?

Answer:

Employee business expenses reimbursed through an accountable plan are not taxable to the employee. They are not reportable on Form W-2, nor subject to withholding. Accountable plan rules do require the employer to receive and maintain documentation as to the business purpose, date and amount of reimbursements. Failure to comply with these rules may result in the filing of an erroneous Form W-2 – something that the preparer (the church treasurer) can be held responsible for by the IRS. IRS Publications 463 and 15 provide additional information.

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