Q: Our senior pastor is pursuing an advanced degree through a seminary located in another state. Our church board would like to pay his tuition expense, since we believe that our church will directly benefit from this additional education. Are we required to report the amounts we pay as taxable income to the pastor, or are these payments nontaxable?
A: Note the following points:
1. Under section 127 of the tax code, your pastor can exclude up to $5,250 of educational assistance benefits paid by the church each year under an educational assistance program. This means that the church should not include the benefits with the pastor's wages and other compensation shown in box 1 of Form W-2.
2. An educational assistance program in the context of church employers (1) is a separate written plan of an employer for the exclusive benefit of its employees to give them educational assistance; (2) cannot have eligibility requirements that discriminate in favor of officers or highly compensated employees or their dependents; (3) must not provide eligible employees with a choice between educational assistance and cash; and (4) must provide for reasonable notification of the availability and the terms of the program to eligible employees.
3. Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for meals, lodging, transportation, or supplies.
4. If the church pays more than $5,250 of the pastor's educational expenses during the year, he must pay tax on the amount over $5,250. The church should include in the pastor's wages (Form W-2, box 1) the amount that he should include in income.
5. If the benefits over $5,250 qualify as a working condition fringe benefit, the church does not have to include them in the pastor's wages. In general, education qualifies as a working condition fringe benefit if the pastor could have deducted the education expenses as an employee business expense if he paid the expenses himself. In general, education expenses are deductible as an employee business expense if the education (1) maintains or improves a skill required in a trade or business currently engaged in by the taxpayer, or (2) meets the express requirements of the taxpayer's employer, applicable law, or regulations imposed as a condition of continued employment. However, education expenses are generally not deductible if they relate to certain minimum educational requirements or to education or training that enables a taxpayer to begin working in a new trade or business.
6. This exclusion applies to both income tax and Social Security tax.
7. The term "employee" includes self-employed persons for purposes of this exclusion.
Maintaining Fiduciary Duties
Church board members have a fiduciary duty to use reasonable care in the discharge of their duties, and they may be personally liable for damages resulting from their failure to do so.
Lawsuits against nonprofit directors for breach of their "duty of care" are still rare. There are a number of ways that church board members can reduce the risk of liability for breaching the fiduciary duty of due care, including the following:
- Attending all of the meetings of the board and of any committees on which they serve.
- Thoroughly reviewing all interim and annual financial statements and reports, and seeking clarification of any irregularities or inconsistencies.
- Affirmatively investigating and rectifying any other problems or improprieties.
- Thoroughly reviewing the corporate charter, constitution, and bylaws.
- Dissenting from any board action with which they have any misgivings, and insisting that their objection be recorded in the minutes of the meeting.
- Resigning from the board if and when they are unable to fulfill these duties.
As one court has observed, "the law has no place for dummy directors."
These articles first appeared in Church Law & Tax Report, a bimonthly newsletter for everyone involved in church administration. For subscription information and for additional resources on this and related subjects, visit our store at ChurchLawAndTaxStore.com.
This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
Copyright © 2009 by the author or Christianity Today/Your Church magazine.
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