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

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

Yes and yes. Yes, a church can give a benevolence gifts to an exmployee. And, yes, it is taxable. 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 its employees 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. A control person is generally someone having substantial authority within the church.

If the IRS decides that the payment to a control person 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.

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

This Q&A is adapted from "Benevolence: The Right Help Given the Right Way," an article that originally appeared on the website of Weycer, Kaplan, Pulaski & Zuber, P.C. Used with permission.