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Reporting "Gifts" to Missionaries on Form 1099-MISC

Question:

A church gives money directly to a missionary in honor of 25 years of service in the field. The church issued a 1099-MISC and reported it in Box 7 (non-employee compensation). The missionary's tax preparer tells him that the church incorrectly reported it in box 7 and that it should have reported it in Box 3 (other income) since it was a gift, trying to avoid him having to pay self-employment tax on the monies.

When, if ever, should monies paid to missionaries be reported in box 3 rather than box 7?

Answer:

The church has filed the form correctly. The instructions to Form 1099-MISC leave little room for negotiation in this matter.

The Minister Audit Technique Guide produced by the IRS states:"There are numerous court cases that ruled the organized authorization of funds to be paid to a retired minister at or near the time of retirement were gifts and not compensation for past services. Rev. Rul. 55-422, 1955-1 C.B. 14, discusses the fact pattern of those cases which would render the payments as gifts and not compensation." Unless the minister qualifies in this sense, the income is reportable in Box 7. If the above situation does apply, then it should not be reported on Form 1099-MISC at all (or on any other form).

According to the Form 1099-MISC instructions, Box 3 might be used to report missionary payments if the following applies:

"Prizes and awards received in recognition of past accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields are not reportable if:

The winners are chosen without action on their part,
The winners are not expected to perform future services, and
The payer transfers the prize or award to a charitable organization or governmental unit under a designation made by the recipient. See Rev. Proc. 87-54, 1987-2 C.B. 669."

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