Skip to main content

Annual Reminder: Are Gifts to Clergy Taxable or Nontaxable?

Question:

Are gifts given to a pastor from church members considered taxable income to him?

Answer:

To determine if the gifts are taxable to the pastor the following items must be considered. 

An important consideration in determining the taxability of gifts is whether they were given through the church or directly from individuals. From the perspective of the IRS, if the church takes corporate action as an employer in collecting and distributing the gifts, then the gifts are taxable to the pastor as an employee of the church (for example, an annual Christmas collection). Also, according a recent court case, if the church regularly solicits members to give through a structured program, this also indicates that the gifts are taxable to the pastor. In Felton v. Commissioner the court determined that a church's solicitation of members to use special blue envelopes to insert cash gifts which were handed directly to the pastor after each collection led to taxable income to the pastor.

A second consideration is whether the gifts are actually disguised salary. If the gifts were given in exchange for services or with the expectation of future services then they are fully taxable to the pastor. It is also important to consider how the pastor's salary compares to the amount he receives as "gifts." If the church provides the pastor with a less than fair market value salary and then encourages church members to give directly to the pastor to make up for it, the gifts are considered taxable.

Remember, unless the gifts are given through the church and taxable to the pastor they will not be deductible by the donors. Any gifts that are taxable to the pastor should be reported with his other earnings on Forms 941 and W-2. 

Whether given through the church or directly to your pastor we highly recommend showing your appreciation to your pastor through giving. Of course, individuals are always welcome to give directly to the pastor and his family on their own; these gifts are neither taxable income to the pastor nor deductible write-offs by the member.


Comments

Popular posts from this blog

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

Debits and Credits for Designated Gifts

Question: A church is setting up QuickBooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances? Answer: We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) observe the following steps. Even those churches that do report using GAAP can employ these methods but must make some adjustments when preparing their financial statements. What we will demonstrate relates to what most churches call "designated gifts" (CPAs call these  Temporarily Restricted  gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these  Permanently Restricted  gifts). Only earnings on the subsequ

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