How does a church set up an expense reimbursement account for its pastor?
Option #1
The church pays the Pastor a salary and reimburses all his professional expenses separately (from the general operating budget). This keeps the Pastor’s salary and professional expenses totally separate. Note, the Pastor must account to the church with receipts/mileage logs for those expenses to be reimbursed. This is the best method to use.
1. The Pastor accounts to the treasurer/bookkeeper monthly with his expenses and gets reimbursed with a separate expense check out of the professional expense category in the budget.
Option #2
The church pays the Pastor a salary and the Pastor uses a salary reduction plan to make funds available for expense reimbursement. A portion of the Pastor’s salary becomes a separate line item in the general operating budget. This keeps the Pastor’s salary and professional expenses totally separate.
1. The Pastor accounts to the treasurer/bookkeeper monthly with his expenses and gets reimbursed with a separate expense check out of the professional expense category in the budget.
2. If the Pastor does not use the total amount of budgeted expenses by the end of the year, he loses it – the unused portion belongs to the church. IT DOES NOT BECOME SALARY.
If you do not follow the procedures as the IRS stipulates for reimbursement, and they audit your return, they will declare your reimbursement as nonaccountable professional expenses. They will add your reimbursed expenses to your income.