Sue (not her real name) receives support from multiple sources: 1) gifts channeled through a 501(c) missions organization ("Agency"), 2) gifts channeled through her local church, and 3) gifts sent directly to her by family members and others. How are these gifts treated for tax purposes?
1. The amounts transferred from family members to Sue are non-taxable (to her), non-deductible (to family members) gifts. This is also true of other gifts received directly from individuals to whom she provides no services.
2. Support from her home church as its missionary are considered taxable compensation. Assuming that she is not an employee of the church (a safe assumption), the amounts are reportable on Schedule C as self-employment income. She likely has “business” expenses that she can use to reduce this taxable income. Schedule C net income is subject to both self-employment tax (Schedule SE) and income tax.
3. "Agency" is obligated (as the paying organization with regard to her other support) to issue Sue either a Form W-2 (employee) or a Form 1099 (non-employee). US missions agencies generally treat missionaries as employees (Form W-2) and withhold FICA tax (7.65% social security and Medicare tax) from non-clergy employees. Sue (or dad :^) ) will need to contact "Agency" to discern its practices.
With the benefits of the Foreign Earned Income Exclusion (Form 2555), it’s unlikely that she’ll owe any federal or State income tax. She will, however, owe self-employment tax if her net income on Schedule C is $400 or more.