Skip to main content

Memorial Fund Gift for Employee

Question:

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?

Answer:

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 past for non-employees. Have gifts been made to memorial funds for non-employee members of the church, or are employees the sole recipients of the contributions? If employees are the typical beneficiaries of gifts of this nature to the exclusion of other church members, this contribution will likely be viewed by the IRS as taxable compensation. 

While these considerations seem to suggest a restriction on gifts of this nature, there are instances when memorial fund contributions for employees will not be taxable. As noted above, there are multiple factors influencing taxability which must be applied to the facts and circumstances of each particular case. While we certainly do not want to discourage gifts of this nature, churches should be aware of these guidelines and make financial decisions accordingly. Memorial fund contributions made in good faith will generally be non-taxable.

It is interesting to note that in the case of the Hokie Fund, established at Virginia Tech University, memorial fund contributions to victims and their families were specifically excluded from tax, regardless of the employment status of the recipients (Public Law 110-141, §1).

Comments

  1. What an interesting question and one that I would have never considered. Very useful information on a topic we usually do not consider until it's too late!

    ReplyDelete

Post a Comment

Popular posts from this blog

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a

Review: Form 1099 Payments to 501(c)(3) Organizations

Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC.  The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries

Form 944 or 941 Filing for Churches

Question:   A new church filed for an employer identification number (EIN) recently. It received notification from the IRS about the EIN, stating that the church must file Form 944 by the following January deadline. The church has no non-ministerial staff members. Since income tax withholding is elective by ministers and none of the pastors has elected to request non-mandatory withholding is the church required to file Form 944 annually? Also, a quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Technique Guide  explains in further detail a minister's treatments for social security, Medicare tax, Fed