Are your “reimbursements” actually taxable income?

a tug of war over your moneyYou may be getting “reimbursements” for mileage, meals, and lodging from your employer. But your employer and the IRS may be counting the money as taxable income.

IRS Publication 15 states: “Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to the withholding and payment of income, social security, Medicare, and FUTA taxes.”

If it is being reported as income, you need to still count your mileage, meals, lodging, etc. as itemized deductions when you do your taxes.

If it is reported as income, you need to count your mileage, meals, lodging, as itemized deductions. Click To Tweet

The best option is to be sure you have a 100% Accountable Reimbursement Policy, but my denominational office doesn’t work that way, so my out-of-town mileage, lodging, and meals “reimbursements” (so-called “special travel”) are counted as taxable income (it’s on the white sheet the conference sends with my W-2 every year).

Many pastors in my denomination are confused about this and believe that they can only deduct the difference between their “reimbursements” and going tax rates (for mileage, lodging, meals and incidentals). But this is not the case. If it shows up as income on your W-2, you need to get a tax deduction for the full amount of every mile, every meal, and every hotel room!

So when you see an IRS quote like, “The deduction for unreimbursed business meals is generally subject to a 50% limitation,” you need to know whether or not the IRS and your employer count your “reimbursements” as a reimbursement or as taxable income.

P.S. Instead of pouring over my meal and lodging receipts at tax time, I’m now just claiming my lodging and meals with the GSA Per Diem tool: https://www.gsa.gov/portal/content/104877

Business Mileage and Hacking Your Commute

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tracking business mileageWhether you have a tax-free accountable reimbursement plan, a taxable ministry travel stipend, or no travel reimbursement whatsoever, you need to be tracking your business mileage.

Why?

Under a 100% accountable reimbursement plan, your church or denomination reimburses you for all of your “ordinary and necessary” ministry expenses, including business mileage, business meals or coffee with congregants, business materials such as books or software, subscriptions and licenses, memberships, vestments, event and workshop fees, continuing education, etc. This is the best way to get reimbursed. Under a proper plan, this money does not count as income and is not subject to tax (but you can’t claim your reimbursed business mileage as a tax deduction).

To get reimbursed for business mileage, you must first track your mileage! Click To Tweet

If you have a travel stipend, your church or denomination gives you an extra “travel” amount in your paycheck. This is supposed to cover your mileage. Many pastors with a travel stipend don’t track their mileage because they’re already getting paid for it. Because a travel stipend is considered taxable income, you should take a tax deduction for your business mileage and reduce the amount of tax you owe on the stipend.

But to receive a tax deduction for business mileage, you must track your mileage!

Likewise, if you aren’t receiving a stipend or a reimbursement, you’re just paying for ministry travel – gas and car maintenance – out of your own pocket. The IRS doesn’t think you should have to pay all of this business expense by yourself, so you can get a tax deduction for your business mileage. W00t!

To receive the tax deduction for business mileage, you must track your mileage! Click To Tweet

Is it really worth it?

It depends on how much you drive. But for 2016, the standard mileage rate is 54¢ per mile. (For 2015 taxes, the rate was 57.5¢ per mile, because the cost of gas was higher in 2015.)

If your accountable reimbursement plan pays the IRS standard mileage rate, you’re getting 54¢ for every business mile you drive. Assuming your car only gets 15 miles per gallon, they’d be paying you $8.10 per gallon of gas that you burn as you do your ministry (if you get 20 miles/gallon, 20 x .54=$10.80!). As you can see, that’s more than enough to pay for your gas. If you sock it all away, you could also use that money to pay for regular car maintenance, new tires, and even help save up for your next car when this one is kaput.

If you’re merely submitting your mileage for a tax deduction, calculate it at 54¢ per mile, but realize you have to hit the deductible floor first, so accountable reimbursement is usually the better deal.

What counts as business mileage?

Read more

Salary vs. Package

The compensation package is NOT the salary!

compensation packageOur church is in the market for a new Collegiate/Young Adult pastor. As we were working through the numbers on our budgetary finance committee, one of the members was aghast at how much we budgeted for this new pastor: “Is that how much pastors get paid?!”

The answer is, “No, that’s not how much pastors get paid.”

The numbers we were looking at weren’t just the salary, they were the total compensation package. This number includes health insurance (“Couldn’t we just not give them health insurance?”), travel budget, continuing education, retirement (“Why should we pay for them to retire?”)…

Your pastor is likely an employee, not an independent contractor. And as an employer, the church has to pay the entire compensation package for the pastor. Church members may see the pastor’s pay as a line-item in the budget and think that the pastor is getting rich off the backs of the members: “I don’t make that much money at my job!” Yes. Well, neither does the pastor. In fact, a pastor may be making only $50,000 out of a $75,000 employment package:

$50,000 salary
$12,000 health and disability insurance (or more with kids)
$5,000 mileage and travel reimbursements
$3,000 continuing education, seminars
$5,000 403(b) match for retirement

Add to this the amount it takes to interview, hire, and move a pastor, and you’re looking at substantial total compensation package.

This can make it very awkward for a pastor going into salary negotiation. Instead of dealing with a Manager or HR professional who understands salary vs. benefits, you may be dealing with church members who are new to the concept, hearing about this for the first time. Or you may be dealing with people who want to “keep the pastor humble.” There may even be people on the church board who have a bone to pick and would love to force the pastor out any way possible.

It can feel downright defensive to have to justify a health benefit and a disability insurance benefit and mileage and a 403(b) match. And this defensive, justifying posture can really derail the entire negotiation!

This is why I believe it’s important to have a standing committee that is educated on these matters. It should be a small subcommittee of the church board. The members should be tasked with reading and bench-marking to become familiar with the overall cost and structure of a competitive compensation package in your area and your denomination. This subcommittee would then make recommendations to the budgetary committee or church board. Ideally, this committee would be bumping the salary every year just to keep up with inflation.

As a pastor, it’s relatively easy to put a standing committee like this in place. And it’s relatively easy to give them resources and benchmarks to look at.

Taking this extra step as much as a year in advance of asking for a pay raise will drastically increase your chances of receiving one!

What are you doing to make sure you have the right structure in place to pay you and all future church employees a fair compensation package?

Do you need to negotiate a better salary? Or better benefits package? You may need a coach to help you. Schedule a free, no obligation 30-minute strategy session to see if Clergy Financial Coaching is right for you!

Integrity Check: Reporting ALL of Your Income

tax dodgerAre you a tax dodger?

As a pastor, you may have multiple sources of income. Most of your income will likely be reported on a W-2 from your church or denominational office. If you’ve published some books, you’ll get W-2s from your publishers. You might even get a 1099-MISC for a bigger speaking engagement.

But for many things you do as a pastor, you will not receive any tax forms reporting that income. Funerals, weddings, pulpit supply, guest speaking, book or CD sales, bonuses or gifts from the church… All are taxable, even if you don’t get the number printed on some legal-looking form. It may even be a cash payment.

But ALL income derived from your job is taxable (even housing allowance is taxable for Social Security and Medicare). You MUST report ALL of your income.

This is an integrity issue.

It would be easy for me to be lazy and “forget about” the $500 pastor’s appreciation gift the church gave me last year. I’m paid by denominational offices, so the bonus wouldn’t show up on a W-2 and it’s under $600, so they wouldn’t have to give me a 1099-MISC… I could just leave it off of my tax forms. If I had no integrity.

You may not like to pay taxes. You may somehow even think that Jesus’ command to “render unto Caesar that which is Caesar’s” doesn’t apply to you. As long as you don’t get caught. Who’s going to know?

But it’s not worth the rotting of your soul to save a few dollars on taxes. Deception is deception. Even if it’s the US Government you’re deceiving.

Jesus said it this way: “What does it profit a man if he gains the world and loses his soul?” A modern translation might as well say, “What does it profit a pastor to save a few hundred dollars on taxes when the deception rots his integrity?”

Make sure you go over all of your income from last year and report it. If you didn’t keep good records, you may need to go through your calendar and your bank statements to jog your memory. Don’t be a tax dodger. Don’t let the easy slide steal your integrity.

Travel Reimbursement and Taxes

I’m traveling on business this week. And I’m getting a travel reimbursement for it. But my denomination won’t do an accountable reimbursement policy. So I have to do a little extra work to be sure I’m not hit with a higher tax.

If your church doesn’t have a 100% accountable reimbursement policy, your travel reimbursement, stipends, mileage, lodging, and per diem count as taxable income.

You’ll need to get your travel reimbursement and hang on to your receipts to itemize deductions at tax time.

The best route is to establish a 100% accountable reimbursement policy so you don’t have to worry about all of the hassle with itemized deductions or worry about losing all of that money before you hit your deductible floor.

But if you just can’t get an accountable reimbursement policy put in place, you’ll need to save those receipts and use them twice.

Get your biggest tax deduction ever!

Download Jay's step-by-step guide
to setting up a simple mileage and receipt tracking system you'll actually use!

If you need to get your personal finances in order, contact me for a free 30-minute consultation to see if I might be able to help.

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