A church staff member recently passed away. His wife remains a current employee. If a memorial fund is established for the family of the deceased employee, can the church (her employer) make a non-taxable contribution to the memorial fund, even though it benefits a current employee and her family?
Multiple factors must be taken into consideration to determine the taxability of a disbursement of this nature.
First, the "gift" cannot be disguised compensation, (e.g. previously undisbursed vacation pay for the deceased employee). Even if it is designated by the church as a gift, the disbursement may be taxable as compensation if the IRS deems it to be pay that he was owed for previous services. Additionally, the contribution cannot be made in anticipation of future services by the wife; if this is judged to be simply advanced compensation, it will be taxable.
Also, the church should consider whether contributions of this nature have been a common practice in the p…