Taxation of gifts is an important concern for churches. Ministers and other church workers often receive gifts, especially around the holiday season. These gifts may consist of a small amount of cash in a Christmas card or a larger sum collected via donation during or before a church service. In other cases, ministries provide benevolent gifts to church employees in times of need. Regardless of the type of gift involved, churches must determine whether the gift is taxable income to the church worker or not.
Classifying Ministry Gifts
Gift cards or cash with a relatively small value that an individual donor gives directly to a minister is generally non-taxable. However, the following characteristics make it more likely for a gift to a minister to be taxable income and thus subject to income tax withholding:
- The money comes from the church’s general fund or is in the nature of a Christmas bonus
- The gift is funded by member donations and flows through church accounts
- The gift is given to a church worker whom the church treats as an independent contractor
- The gift is much more than a token amount
As a result, if your church is giving a “love offering,” pastoral appreciation gift, or Christmas gift to your pastor that is from the congregation as a whole and goes beyond a token amount, it generally is taxable income. There are no major exceptions to this general rule.
Classifying Gifts of Benevolence
Benevolent gifts, or those gifts that a ministry chooses to bestow upon an employee to help with particular needs, generally are taxable income to the employee. Typically, benevolence gifts are designed to help individuals meet needs or obtain resources that they otherwise have no way of obtaining or meeting on their own. The Internal Revenue Service (IRS) considers two factors in determining whether there will be taxation of gifts or if a gift is benevolent:
- The type of need, which usually involves health care, food, clothing, housing, or transportation
- The level of need
In most cases, benevolent gifts to staff members are taxable income, no matter whether the ministry pays the gift directly to a service provider or the employee with the need so that they can pay the bill. Therefore, the gift should be included on the staff member’s W-2 form as taxable income at the end of the year.
Churches should avoid giving benevolent gifts to church employees who have significant authority, such as senior pastors. If a ministry gives these gifts to employees who have a substantial say in where the ministry’s money goes, the IRS may impose additional penalties on the gift, whether it is benevolent or not.
One major potential problem with benevolent gifts to church employees is maintaining 501(c)(3) tax-exempt status. The Internal Revenue Code prohibits inurement or using church assets or income to benefit individuals who have a close relationship with the church. Instances of inurement can threaten a church’s tax-exempt status.
Churches and other ministries should strongly consider devising a formal benevolence or hardship program as a preventative measure. This program should have specific guidelines for the individuals and circumstances that qualify for benevolence gifts. By adhering to uniform program standards, limiting gifts to church employees who do not affect the distribution of church funds, and treating gifts to employees as taxable income, churches may be able to avoid these problems.
Call Us Today with Question About Taxation of Gifts
The attorneys and staff at Provident Law have years of experience in advising churches and other religious organizations about taxation of gifts and other federal and state laws that affect their operations. We can evaluate your situation, present your options, and help you make the right decisions for you. Call us today at (480) 388-3343 and learn more about how we can help.