The examples above are of big issues that could have a major impact on a congregation. Some of these matters may be resolved in a few months—others may require years to work through. Congregations have even split because of big issues.
The good news is most congregations will never experience one of those big issues. Rather, it’s the small stuff with which churches struggle. While the small stuff usually doesn’t make the headlines, it creates an insidious drip ... drip ... drip, wearing away at the credibility of a church and causing staff friction.
What are examples of the small stuff that many churches find challenging? Here are three issues that often perplex churches:
Reimbursing reported, but not substantiated, expenses. It is common for church treasurers to receive reports of expenses that were not properly substantiated? Having logged more than 25 years as the treasurer of three different churches myself, I have seen more than my share of unsubstantiated expenses.
Where do unsubstantiated expenses often appear? Entertainment expenses are a common culprit where expense reports do not establish the amount, time, place, business purpose of the expense, plus the business relationship of the parties involved.
If a church reimburses church-related unsubstantiated expenses, has something improper occurred? It depends. What was the level of detail reported? The reimbursement of church-related expenses that are unsubstantiated creates taxable and reportable income to the recipient of the payment. So, did the church step up and do the right thing—report the compensation as taxable on Form W-2?
How does this scenario usually play itself out? Church staff sometimes submit unsubstantiated church-related expenses for reimbursement, expecting a tax-free payment. The church treasurer, knowing substantiation is needed to avoid reporting the payment as compensation, is caught in the middle.
Reimbursing expenses that are not business expenses. Submitting an expense report which includes expenses that are not business expenses is an issue which is a cousin to the unsubstantiated expense matter.
One common issue in this area is spousal travel. A church may desire that a pastor’s spouse accompany the pastor on all out-of-town trips—and appropriately so. But does church approval of spousal travel constitute business expense? No. It depends—on whether there is a bona fide business purpose for the spousal travel.
So, how does this play out? Church staff sometimes submit non-business expenses for reimbursement, expecting a tax-free payment. The church treasurer, knowing a bona fide business expense is needed to avoid reporting the payment as compensation, is caught in the middle. Sound familiar?
3. Failure to report all the taxable income for church staff. The reporting of all taxable compensation for church staff is one way a church complies with the law and sets an example of ethical behavior. Here are just a few ways the reporting of taxable compensation can fall through the cracks:
- Fringe benefits. Let’s say a church pays whole life insurance premiums for a staff member. This is a fully taxable event.
- Social security reimbursements. Ministers are not subject to FICA-type social security. Many churches desire to assist ministers with their self-employment social security taxes. Call it a social security reimbursement or an allowance—the terminology does not matter—the payments are fully taxable and reportable to the minister.
- Allowances. A church provides an auto allowance, an entertainment expense allowance, or some other type of allowance. The term “allowance” is simply a reference to non-accountable expense reimbursements which are fully taxable and reportable.
- Transfers of property. Churches often transfer property—it may be a used computer or some other church property—to a staff member at no cost. While these property transfers may be appropriate, they represent a form of taxable compensation.
- Love offerings. When a church pays its staff based on funds solicited using church resources and/or church leadership, these payments almost always represent taxable income to the recipient because of the church’s interest in compensating staff.
