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July 19, 2012

Q&A: Is Benevolence for a Church Employee Taxable?

Important information to address this common tax question.

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Q: Can a church give a cash benevolence gift to an employee? And is it taxable income?

A: Yes and yes.

For better or worse, churches seem to attract needy employees. They may need their car repaired or have serious uninsured medical expenses. The Internal Revenue Code requires all benevolence payments provided to employees be taxed. The church must add the amount of the benevolent payments to the employee's Form W-2, and if nonclergy, withhold all payroll taxes like the payment was wages. It makes no difference if the payment is direct or indirect, like to the employee's doctor.

As a result, "love offerings," pastoral appreciation gifts, Christmas gifts, anniversary gifts, and birthday gifts that flow from the church to the church employee's are always taxable. Even retirement gifts are taxable to the recipient. No exceptions to this rule exist.

If the church pays a benevolence payment to a "control person," then the tax consequences get more complicated. If the IRS decides that the payment did not represent a true "need," then the payment may represent an excess benefit transaction, subjecting the control person and the board or committee to an excise tax that can range from 10 percent to 200 percent, plus requiring the control person to repay the benevolent payment. A control person is generally someone having substantial authority within the church.

It's clear that the senior minister, the treasurer, the business administrator, or executive minister is treated as a control party. The ministers on staff that have substantial authority over a significant part of the church are likely to be control parties. Volunteer board members, finance committee members, benevolence committee members, and personnel committee members may become control parties subject to the excise taxes.

Excerpted from the article "Benevolence: The Right Help Given the Right Way," by Frank Sommerville.

For more help on benevolence, check out our resource, Benevolence Fund Basics. For more help with payroll withholdings and excess benefit transactions, check out Richard Hammar's annual Church & Clergy Tax Guide.

Frank Sommerville is a shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P.C. in Houston and Dallas, Texas, and an Editorial Advisor for ManagingYourChurch.com. He received his Bachelor's degree in business from Texas Wesleyan University. He received his Masters in Professional Accounting with an emphasis on taxation from the University of Texas at Arlington. His law degree is from the University of Houston Law Center. He holds a license as a Certified Public Accountant. He is also Board Certified in Tax Law by the Texas Board of Legal Specialization. He is rated AV (highest possible) by Martindale-Hubbell Legal Directory.

Frank has presented seminars on nonprofit taxation since 1981. He regularly assists churches in preventing litigation, including those that originate with accusations of sexual misconduct. Due to his significant contributions to the church administration profession, he was inducted into the National Association for Church Business Administration Hall of Fame in 2003.

Related Tags: benefits, benevolence, church, employees, IRS, payroll, tax

Comments

If small gifts are given to a large section of the congregation including the pastor and board members does the pastor have to claim it on his W-2? I am specifically thinking of when the church gives out Father's Day gifts to all the fathers in the church.

Wow! "Churches seem to attract needy employees"??? Maybe if churches paid their employees a better wage--the need wouldn't be so great. But let's be real--every church I've been on staff with has stated things like "we'd like to give you more - but we can't"--I get that. the fact remains -- it's expensive to live today and stuff happens. I choose to remain in ministry despite the pay because I know what I'm called to do and trust in God's provision...but "neeedy" --c'mon dude!

Churches don't attract needy employees. They create them with low pay, no benefits,long hours and no home life balance allowed. The disparity between pastors' pay and benefits and lay employees is far from Christian. The pastors receive generous salaries, beautiful and large parsonages with all utilities paid, paid pensions benefits and health insurance, plus those cash gifts in a nice thank you card that are not reported to the IRS.

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