July 19, 2012
Q&A: Is Benevolence for a Church Employee Taxable?
Important information to address this common tax question.
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.