Taxable Income

Many churches do not understand that most benefits constitute taxable income. If a benefit is taxable and is not reported as taxable compensation by the church or the recipient in the year it is provided, the IRS may be able to assess intermediate sanctions in the form of substantial excise tax against the “disqualified persons” (generally, an officer, director, or relative of such a person) regardless of the amount of the benefit.

For this reason, ministers should be familiar with the components of taxable income to insure that they are correctly reporting their tax liability. Some examples of items that often constitute taxable income but are often overlooked include:

Bonuses
Christmas and other special-occasion gifts
Retirement gifts
Self-employment tax paid by a church
Taxable fringe benefits
Personal use of a church-provided car
Below-market interest loans
Discretionary funds
Nonaccountable business expense reimbursements
Employer reimbursements of a spouse’s travel expenses
Forgiveness of debt
Severance pay
Trips to the Holy Land
Sabbatical pay
Love offerings

Additional reading

Many of the items above are linked for further explanation about taxable benefits. For more information and examples of taxable benefits, see these two resources:

2020 Church & Clergy Tax Guide (chapter 4)
Church Compensation: From Strategic Plan to Compliance (chapter 9)

Go to the next article, “Public Accommodation Laws,” or return to “15 Things Richard Hammar Wants Pastors to Know,” to choose an article of interest or that fits a particular need.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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