Tax Implications of Pastoral Sabbaticals

“… on the seventh day God finished his work that he had done, and he rested on the seventh day from all his work that he had done. So God blessed the seventh day and made it holy, because on it God rested from all his work that he had done in creation” (Genesis 2:2-3).

This passage provides the genesis of the concept of sabbatical. God modeled it here, commanded it in Exodus 20:8-11, and codified it in Leviticus 25:1-7 by telling the Israelites that after six years of planting and harvesting they were to let the land rest. By extension, the people were too.

Sabbaticals can provide rest and renewal away from the day-to-day needs of the church, as well as being a model of God’s design for Sabbath rest. What pastor wouldn’t desire that — both for himself and for the congregation?

God also commands his people on another principle: taxation.

“Therefore one must be in subjection, not only to avoid God's wrath but also for the sake of conscience. For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed” (Romans 13:5-7).

Few pastors would classify taxation as “restful.” However, a church that provides a sabbatical without considering the tax implications to the pastor can cause these two biblical principles to collide in unexpected ways. 

Factors to Consider

The tax implications for pastor sabbaticals can vary depending on a variety of factors, including how the sabbatical is structured and funded, and whether the pastor is considered an employee or self-employed for tax purposes. Some general considerations include:

Employment status: If the pastor is considered an employee of the church or religious organization, any compensation received during the sabbatical — such as salary, housing allowance, or other benefits — is generally treated as taxable income and subject to withholding.

Sabbatical pay: If the church or organization provides the pastor with a sabbatical pay or stipend, it is typically considered taxable income subject to income tax and applicable self-employment tax.

Housing allowance: If the pastor receives a housing allowance during the sabbatical, it may be partially or fully excluded from taxable income, provided that the allowance is designated by the church or organization in advance and used for actual housing expenses.

Sabbatical grants or scholarships: If the sabbatical is funded by a grant or scholarship from a qualified organization, it may be partially or fully tax-free, provided that the funds are used for qualified expenses such as tuition, fees, books, and supplies.

Self-employment tax: If the pastor is considered self-employed for tax purposes, any income received during the sabbatical may be subject to self-employment tax (Social Security and Medicare taxes) in addition to income tax.

Deductions: Pastors may be able to deduct certain expenses related to the sabbatical such as travel, education, or research expenses (subject to eligibility requirements and limitations).

It's important to note that any expenses reimbursed by the church or organization under an accountable reimbursement plan in which the pastor substantiates the expenses and returns any excess reimbursement may be excluded from taxable income. However, proper documentation and accountability are crucial for such arrangements.

Pastors should keep accurate records of all sabbatical-related expenses and consult with a tax professional to ensure proper reporting and compliance with applicable tax laws and regulations.

The tax treatment of pastor sabbaticals can be complex, and the specific rules and regulations can vary depending on the specific circumstances and applicable tax laws. 

Talk with your Auxilio Partner Strategist about the best way for a church to fund a sabbatical and report sabbatical expenses. If you’re not yet an Auxilio client partner, contact us to learn how we can serve your church or faith-based nonprofit and reduce your administrative burden to free you up for ministry.