04 Oct 2011

How to Know What is Taxable Income for a Minister

Raul Rivera

Many churches pay certain allowances as a benefit to their minister, such as a car allowance, light bills, water bills, and much more. Moreover, churches all across America take up love offerings, honorariums, and many types of gifts for their pastors.

But the looming questions that many pastors have are, "Is this type of pay taxable?" and "Should this type of income reported?"

The truth of the matter is that under the law, if these allowances are not properly handled and reported then the minister can face heafty fines, penalties, and back taxes.

What every minister needs to understand about their income

When a church pays the minister allowances it does so thinking that it is allowed to pay for these items as tax free allowances. Under the law, these allowances are 100% taxable and must be reported in the minister's Form W-2 from the church as income. With the exception of the housing allowance, there is no other section in the IRS code that allows churches to pay the minister any type of allowance to cover personal expenses and it be tax free.

Discover How to Maximize Your Housing Allowance Benefit

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Below are some examples of allowances that churches pay to ministers.

  • Car allowance
  • Water bill
  • Cell phone
  • Heating bill
  • Home phone
  • Clothing bill
  • Insurance
  • Personal expense fund
  • Gasoline
  • Pastor's aide
  • Light bill
  • Gifts

Income tax regulations require that any and all money given to the pastor be reported as income unless certain requirements are met. Most churches are not aware that these regulations exist; much less, that failure to follow these regulations may result in heavy fines to the church, the board members, and the pastor.

(Recommended reading: "IRS Taxes Pastor for Salary He Never Received")

How many churches treat car allowances

Below is an example to help put things into perspective.

Church ABC pays Pastor Tom's car payments. At the end of the year the total payments were $6,500.00. Since the pastor is wholly dedicated to the ministry, he uses his car for both ministry and personal use. The church board of directors recognizes his dedication to the call of God on his life and knows that he is unselfish in using his car for church purposes. Out of love and admiration, they approve for the church to make all his car payments. The problem with this scenario is very big and the consequences are, too!

(Recommended reading: "3 Common Mistake Churches Make When Paying Pastors")

Since 2005, Treasury regulations have focused on these types of transactions. These regulations have been tightened each year. Section 4958 empowers the IRS to issue intermediate sanctions against the pastor and the board of directors for violations.

If the church makes Pastor Tom's car payments, the church is required to report those payments as income on Pastor Tom's W-2. This means that a tax free car stipend or allowance really does not exist. It is now labeled by the IRS as an excess benefit transaction.

Income tax regulations require that any and all money given to the pastor be reported as income unless certain requirements are met.

Under the code, the IRS will fine the pastor 200% of the car allowance plus penalties and interests on back taxes. Additionally, the board members involved in approving the allowance can be fined up to $20,000.00.

This article is not written to scare you, rather it is a trumpet call to the Church. We need to know that the times have changed, the laws are real and so are the consequences. I write so that you may be empowered with the knowledege to make the necessary changes. 

A tax free way!

Section 62(a)(2)(a) allows the church to help the pastor with his car expenses, if the church adopts an accountable reimbursement policy that requires reimbursements to be substantiated as a necessary business expense. The reality of a tax free car allowance is only to the degree that the reimbursements are for church business only. Any other amount paid by the church to the pastor for his car is taxable income and must be reported on his W-2. That is the current law.

Let me give you an example:

The Board of Directors of ABC Church adopts a resolution to implement a section 62(a)(2)(a) reimbursement policy. The pastor uses his car to visit church members in hospitals, their homes, and nursing homes. He also uses his car to travel to church related conferences and seminars. Every month, he submits a mileage log of all his business miles. The church policy states that it will honor IRS business mileage deductions for 2016 at $0.54 cents per mile. In the month of October, Pastor Tom submits a mileage log declaring 657 business miles. The church treasurer approves the mileage log and writes a check to Pastor Tom in the amount of $354.78.

Under the law, this is considered an accountable reimbursement plan that makes the $366.61 paid to the pastor tax free. Had the church board of directors not approved the accountable reimbursement plan, the amount paid to the pastor as a car allowance would have been taxable and would have constituted an excess benefit transaction, even though the church paid it to him thinking it was tax free.

Do you need an accountable reimbursement policy?

If your church has not yet implemented an accountable reimburement policy, then give our office a call at 877-494-4655 and we will be happy to email one to you. In addition, I invite you to join us at one of our conferences near you where we will show you how to properly implement an accountable reimbursement policy.

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About the Author

Church Planter. Speaker. Author. CEO. Raul Rivera has had ample experience in the church planting world. His current venture, StartCHURCH, has helped 1000's of churches to start right. Raul has compiled an array of manuals and software tools that help churches stay compliant with the IRS. He also hosts over 35 national conferences per year, training pastors on how to launch their churches. Raul is married to his wife Genel, and they and their five children live in Atlanta, GA.