Expense Reports - Are You Doing Them Correctly?

What you need to know about accountable vs. non-accountable plans

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:

• Advance cash or a check for the purchase.
• Issue a company credit card.
• Provide a monthly allowance for discretionary purchases.
• Ask employees or volunteers to use personal funds, with the promise of reimbursement.

The Internal Revenue Service places all reimbursement plans into two categories: Accountable and Non-Accountable.

Accountable Reimbursement Plan: Collect Those Receipts

An accountable reimbursement plan includes these three elements:

1. The purpose of the expense must be related to the organization.
2. An employee or volunteer must return any excess money above the purchase cost, within 120 days of the advancement.
3. The what, when, and where of an expense needs to be substantiated. Approved documents include:
   1. Canceled checks
   2. Cash register receipts
   3. Contracts
   4. Account statements
   5. Credit card sales receipts
   6. Invoices
   7. Petty-cash slips for small cash payments
   8. Per Diem allowances for expenses, such as mileage, lodging, and out-of-town meals (NOTE: federal and state allowances may vary).

Approved supporting documents should be submitted within 60 days of the purchase, and kept by the ministry for tax purposes.

Non-Accountable Reimbursement Plan: Add Amounts to Taxable Wages

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:

• A flat-fee allowance for any expenses in which the employee does not have to provide receipts, or return unused money.
• Mileage paid that exceeds the current standard mileage rate. The difference is treated as paid, and needs to be included in the employee’s taxable wages.

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.

Which Plan is Better?

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.

Put it in Writing

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.

The information in this article is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.