A local church congregation intends to raise designated gifts in support of a member embarking on a short-term mission trip of less than one year. The funds will cover the member’s expenses, including personal living expenses. How should these funds be administered? What are the Internal Revenue Service reporting requirements?
Since the member will be supported above and beyond his or her direct travel, lodging, and meal costs, he or she is not classified as a volunteer. True volunteers receive no support for their personal living expenses. However, they may be reimbursed for actual travel costs without being required to recognize the reimbursements as taxable income. Reimbursements in excess of actual costs are taxable to a volunteer (IRS Publication 526).
We believe that there are two alternatives for the church to administer the support.
Local Church Gives Member 100% of Funds Collected With No Accountability
The full amount of the support is classified as non-employee compensation reportable on Form 1099-MISC, Box 7. It must not be reported as Box 3, Other Income, since the income is classified as compensation for services performed by the individual as a representative of the local church.
The member is then responsible to report the earnings on Form 1040, Schedule C, claiming allowable expenses. IRS Publication 463 describes the ordinary and necessary expenses that may be deducted against the income earned. A good understanding of rules regarding per diem allowances will likely prove very helpful. Meals are only 50% deductible. The net earnings are subject to both income and self-employment taxes.
Local Church Reimburses Member for Direct Travel, Lodging, and Meal Costs (meeting IRS documentation requirements) and Gives Remaining Funds as Support
Only the excess support provided above documented expenses is classified as non-employee compensation reportable on Form 1099-MISC, Box 7. The church is responsible to collect and retain documentation as explained in IRS Publication 463. Again, a good understanding of rules regarding per diem allowances will likely prove very helpful. This second alternative will almost certainly result in a lower tax bill for the member since unreimbursed meals are only 50% deductible.
The member is then responsible to report the earnings on Form 1040, Schedule C, but will only have allowable expenses to the extent he or she was not reimbursed by the church. The net earnings are subject to both income and self-employment taxes.
No Form 1099-MISC is required of the church if the reportable amount is less than $600 per year, but the excess compensation remains taxable to the member.