Be careful with allowances paid to employees

If the allowances you provide to your staff aren’t handled correctly, the amount they receive can become taxable income.  There are lots of things to say on this issue, but I will mention just a few.

Bryan Baughman has cautions at 2 Tips Related to Employee Allowances, posted at Faith-Based Accounting.

He points out that unless the amount of allowances is accounted for under an accountable plan, the amounts are taxable.  In one sentence, the amounts paid to staff have to be appropriately substantiated within certain time frames or the amounts become taxable income.  That could produce some unpleasant surprises with the taxman.

His second caution – don’t let staff keep the difference between a fixed allowance and the amount they account for.  That makes the full allowance taxable.

One more practical application I will point out– if you provide a vehicle allowance to your staff and they don’t provide a report of actual miles driven in their personal vehicle, the full allowance amount is taxable.  Some churches provide a set allowance and then don’t bother with the reporting.  That is a reasonable approach, just remember the allowance is fully taxable.

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