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 annualChurch & Clergy Tax Guide.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published 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. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations

Comments

Displaying 1–3 of 3 comments

trina

October 07, 2012  4:53pm

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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Will

August 01, 2012  11:50am

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!

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Mark Adams

July 24, 2012  4:45pm

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.

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