IRS Publication 525 directly addresses what it calls holiday gifts. "If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you easily can exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved."
At Christmas time, generous lay people often seek opportunities to give to those who have ministered to them during the year. Great idea! Gifts between individuals are neither taxable to the recipient, nor deductible to the donor.
The challenge comes when the entire congregation as the minister's employer (Publication 517) decides to take a collection and give him a Christmas bonus. This is viewed as an action by the minister's employer to compensate its employee--it's taxable.
I suppose that a church's lay leaders could remind its members: "Now we're getting close to Christmas. Don't forget to add our minister to your Christmas list. You can catch him in his office or here's his home address." But as soon as the congregation acts in concert as his employer the gifts are taxable to him and deductible as charitable gifts by the donors.
A few additional comments from my 1/22/09 post:The rules I’ve stated above apply when an employer (the church congregation acting as a corporate body) takes a collection and gives it to its employee (the pastor). As a 501(c)(3) organization, a church is a qualified charitable organization. Gifts to it are tax-deductible. Compensation paid to an employee is taxable.
When I’m asked about this subject, all I need to hear is "the church solicits..." and I know we are addressing compensation issues, not gift issues. Making checks out to cash accomplishes nothing to defeat both the letter and spirit of the law.