A pastor approaches a church treasurer and requests that money be withheld from his paycheck for his tithe. How should a ministry handle this request?
There are two ways to look at this.
The first way involves directly reducing the pastor's taxable income. Although this may be considered a "great" tax planning move by some, it is possible this choice will run into trouble with the IRS. From a statutory perspective, the IRS would likely invoke the constructive receipt doctrine which states, in effect, that income you earn and are offered cannot be turned away simply for purposes of tax avoidance (IRS Publication 525).
Under these circumstances, the IRS would likely choose to add the income to the pastor's Form W-2 and tax it accordingly. The IRS would then permit him an itemized deduction; however, that may not turn out to be helpful if he chooses to take the standard deduction.
On the other hand, if the pastor is simply asking for it to be withheld so he doesn't need to write out a tithe check or make an online gift (not reducing his taxable income reported on Form W-2), then the church may cooperate with this request. A related blog post (similarly titled, but as Part 1) illustrates QuickBooks setup for this accommodation as a payroll item.