Sometimes pastors or other ministry staff receive monetary gifts from church donors. The gift could be a small amount of cash in a Christmas card or an organized collection taken during a worship service. It’s important to consider the tax implications of these heartfelt gestures for both the recipient and the giver.
It is not safe to assume that occasional gifts to pastors or other church employees are tax-free. Depending on the process used to collect and distribute the funds, these gifts may need to be reported to the Internal Revenue Service (IRS) as a part of the recipient’s taxable income.
Classifying gifts to ministry workers as taxable or non-taxable income can be difficult. In general, the more the church helps to organize the gift and the bigger the gift, the more likely it is to be taxable. Here are a few examples:
• A donor gives a gift card, cash, or personal check to the ministry worker. If the gift comes directly from an individual donor and is of small value—such as a gift card or cash in a Christmas card— it is generally nontaxable to the ministry worker. However, depending on the giver’s intent and the amount of the gift, it could be considered compensation for services and therefore taxable. For example, a couple pays a pastor for officiating a wedding. Regardless of taxability to the ministry worker, the giver likely cannot report the gift as a tax deduction in these circumstances.
• The ministry writes a check from the its general fund. If the gift comes from the church’s general fund it is probably taxable for the worker. One example is a Christmas bonus. The ministry likely should identify the gift as part of the worker’s taxable compensation and withhold appropriate taxes.
• The ministry distributes member contributions through its accounts. A gift that is funded by member contributions, but flows through church accounts, is probably taxable. The ministry may need to identify the gift as part of the worker’s taxable compensation and withhold appropriate taxes.
• The ministry gives a gift to an independent contractor. A gift given to a worker the ministry treats as an independent contractor may need to be included in the amount reported on the individual’s 1099 form—especially if the payments are related to the contractor’s duties. For more information on independent contractors and taxes, read: How Can Our Ministry Identify An Independent Contractor For Tax Purposes?
The ministry may choose to bless an employee to help him or her meet certain needs. The IRS considers two factors when deciding whether a gift qualifies as benevolence: 1) the type of need—usually health care, housing, food, clothing, or transportation expenses, and 2) the level of need. Benevolent gifts given by the ministry directly to a staff member are typically taxable. It doesn’t matter if the ministry pays the service provider directly or gives the funds to the employee to make the bill payment. At year’s end, the dollar amount of the gift should be included as taxable income on the employee’s W-2.
According to the IRS, the federal gift tax generally applies when a person gifts property (including money) without receiving something of at least equal value in return. The donor is generally responsible for paying the federal gift tax. However, the recipient may, via special arrangement, agree to pay the tax on the gift.
Although the general rule is that any gift is a taxable gift, there are exceptions. The IRS has set the following exceptions that may apply when an individual donor gives a gift to a ministry worker:
1. Annual Exclusion. Gifts totaling less than the annual exclusion for the calendar year are not taxed. For 2018, the donation amount per recipient was $15,000. This means that a donor may give gifts valued up to the annual gift tax exclusion or less, and the transfer is not taxable.
2. Educational Exclusion. Gifts of tuition are not taxable if the payments are made directly to an educational institution. This exclusion only applies for tuition payments and no other educational expenses.
3. Medical Expenses. Gift payments for someone else’s medical expenses are not taxable if made directly to a health care institution.
4. Spousal Gifts. Gifts made to one’s spouse are exempt from gift taxes as long as the spouse is a U.S. citizen.
5. Charitable organizations. Gifts of a person’s entire interest in property to a church or other charitable organization for the organization’s use are typically not taxable.
Be sure to consult with an attorney or tax professional regarding gifts to ministry workers for specific guidance on applicable law in your jurisdiction. For additional information on this subject and related areas, see the following resources:
• What Should Ministry Leaders Know About Donations That Are Directed By The Donor To Go To A Specific Individual Or Program?
• Refunds of Charitable Contributions by Church Law & Tax
• Proper Care of Donor-Restricted Gifts by the Evangelical Council for Financial Accountability
For more information on the federal gift tax, see the IRS resources below:
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