Church Credit Cards

Most churches have one or more credit cards that pastors or other staff members use to pay for church-related expenses. For example, a pastor is given a credit card with a $5,000 limit, and uses it pay for fuel, business lunches, books, and supplies.

Credit cards can be a very convenient resource. But, it is important for church administrators and pastors to be familiar with the tax rules that apply to the use of credit cards because unfamiliarity with these rules can quickly result in a failure to correctly report taxable wages.

A church credit card is simply a means of reimbursing the cardholder for expenses he or she charges. The cardholder uses the card to charge expenses; the credit card company sends the church a monthly bill itemizing all charges; and the church pays the balance. Such an arrangement can be either "accountable" or "non-accountable." It is important for church administrators and staff members to understand the difference, since non-accountable reimbursements must be reported by the church as additional taxable income to the cardholder.

A credit card arrangement can be accountable, if the following requirements are met:

1) Business connection. The cardholder's expenses must have a business connection -- that is, they must represent expenses that could be deducted as business expenses on the cardholder's income tax return.

2) Adequate accounting. The cardholder must adequately account to the church for all expenses within a reasonable period of time (not more than 60 days after an expense is incurred).

3) Returning excess reimbursements. The cardholder must return any excess reimbursement or allowance within a reasonable period of time (not more than 120 days after an excess reimbursement is paid). An excess reimbursement or allowance is any amount a cardholder is paid that is more than the business-related expenses that were accounted for to the church.

4) Reimbursements not made out of salary reductions. For a church's reimbursement arrangement to be accountable, it must meet a reimbursement requirement. The reimbursement requirement means that an employer’s reimbursements of an employee’s business expenses come out of the employer’s funds and not by reducing the employee’s salary.

If a church adopts an accountable reimbursement arrangement, then none of the church’s reimbursements are added to an employee’s W-2 (or 1040), and there are no expenses for the employee to deduct. The employee, in effect, accounts to the employer rather than to the IRS.

Under an accountable reimbursement arrangement, employees must adequately account to their employer for any business expense that the employer reimburses (including the payment of credit card charges). In general, this means that employees must submit an expense account or other written statement to the employer showing the date, amount, location, and business connection of expenses (including those charged directly or indirectly to the employer through credit cards) broken down into categories such as transportation, meals and lodging while away from home overnight, entertainment expenses, and other business expenses. Receipts are required for any expense of more than $75.

An employee’s accounting or substantiation of business expenses must occur within a reasonable time. In general, this means that expenses are substantiated within 60 days of when they are incurred.

Business expense reimbursements paid by churches must be included on the employees’ W-2 forms, and are subject to income tax and FICA withholding when paid -- unless the reimbursements are paid under an accountable reimbursement plan. The withholding requirements will not apply to ministers, who are exempt from tax withholding (unless they have elected voluntary withholding).