Nonprofits commonly ask employees and volunteers to purchase goods and services on behalf of the organization, such as sandwiches for a staff function, or supplies for a camping retreat. Organizations handle these types of transactions in a variety of ways:
The Internal Revenue Service places all reimbursement plans into two categories: Accountable and Non-Accountable.
An accountable reimbursement plan includes these three elements:
Approved supporting documents should be submitted within 60 days of the purchase, and kept by the ministry for tax purposes.
A plan is considered non-accountable if an expense does not meet all three criteria of an accountable reimbursement plan. Examples of a non-accountable arrangement include:
In most cases, amounts paid to employees under a non-accountable plan are considered wages subject to FICA, Medicare taxes, and income tax withholdings. For pastors, amounts may be treated as wages, but may not be subject to withholding.
An accountable reimbursement arrangement generally is considered the best way to handle ministry expenses. This method can save money, streamline ministry operations, and benefit both the organization and individual. Documented expenses are tracked more easily, and the employee or volunteer recoups 100 percent of money spent. Amounts reimbursed as part of an accountable plan are not income to the employee and are not reported on an employee’s W-2 form. When organizations use a non-accountable plan, they subject pastors, employees, and volunteers to potential additional taxable income. Expenses not substantiated with a record of the time, place, and business purpose count as taxable wages for the employee or volunteer, and must be reported by the individual.
Although the IRS does not require a ministry to put its accountable plan in writing, implementing a formal policy can help all employees understand and follow procedures. Detailed information on other aspects of expense reporting, including example reporting charts, can be found in this IRS publication.