Clergy Taxable Income: Understanding Taxable Income and Gifts

Key insights into taxable income for ministers, including handling of bonuses, love gifts, and fringe benefits.

Last Reviewed: January 8, 2025

Church treasurers must accurately report the clergy taxable income paid to ministers on W-2 or 1099 forms. This ensures compliance with IRS regulations and minimizes errors that could lead to audits or penalties.

Key Taxable Income Categories for Ministers

Bonuses

Any “bonus” paid by a church to a minister is taxable income and must be included on the minister’s W-2 or 1099 form.

“Love Gifts”

Churches often pay ministers “love gifts” for occasions like Christmas or anniversaries. If the purpose of the gift is to compensate a minister for services rendered, it is taxable income and must be reported. This is true even if the payment is called a “love gift.”

Important: Since 1987, federal law specifies that the term “gift” does not include “any amount transferred by or for an employer to, or for the benefit of, an employee.” Traditional holiday gifts of low fair market value, like a turkey or fruitcake, are an exception and are nontaxable.

Retirement Gifts

Most retirement gifts presented to ministers by a church are taxable compensation and must be included on the minister’s W-2 or 1099. Federal law prohibits employers from making tax-free gifts to employees since 1987. Self-employed ministers may qualify for tax-free retirement gifts under strict conditions, such as demonstrating the gift was not intended as compensation.

Property Purchased Below Market Value

When a church sells property to a minister at less than fair market value, the difference must be reported as taxable income on the minister’s W-2 or 1099. For example, if a church sells a parsonage valued at $100,000 for $25,000, the $75,000 difference is taxable.

Social Security Assistance

Ministers pay self-employment taxes for social security. If a church provides financial assistance to cover this tax, the amount must be reported as taxable income on the minister’s W-2 or 1099 form.

Moving Expenses

Employer reimbursements of moving expenses are taxable unless they meet specific IRS criteria. Substantiated moving expenses reimbursed by the employer are not reported in box 1 of the W-2 but must be noted in box 13 using code “P.” Unsubstantiated reimbursements are taxable income.

Personal Use of a Church-Provided Car

If a church provides a car to its minister, the personal use of the vehicle is a taxable noncash fringe benefit. The church must calculate the taxable value and include it on the minister’s W-2 or 1099.

Below Market Interest Loans

Loans offered by a church to a minister below prevailing interest rates may generate taxable income. The church treasurer must report the foregone interest as compensation. However, loans under $10,000 may be exempt under certain conditions.

General Guidelines for Church Treasurers

  • Special occasion gifts from the church’s general fund are taxable income and must be reported.
  • Direct personal gifts from members, such as checks or cash given personally to a minister, are typically tax-free and not deductible for donors.
  • Special offerings collected through the church for a minister are generally taxable income, depending on the intent of the donors and the church’s involvement.

Accurate reporting of taxable income ensures compliance with IRS regulations and protects both churches and ministers from legal and financial risks.

FAQs

  • Are bonuses taxable for ministers?
    Yes, all bonuses are taxable and must be reported on W-2 or 1099 forms.
  • What qualifies as a tax-free gift to a minister?
    Personal gifts from members directly to a minister, without church involvement, are usually tax-free.
  • How should a church report social security assistance?
    Any assistance provided to cover self-employment taxes must be included as taxable income.
  • Are retirement gifts taxable?
    In most cases, retirement gifts from the church are taxable unless specific conditions for self-employed ministers are met.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold 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." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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