The $64,000 question for any employer is: “What goes into taxable income?” For the minister, we often think that the congregation can “give” him a love offering, gift cards, or personal use of a Church vehicle, etc, and it will not be considered taxable income. Maybe you are saying “Our pastor is self employed according to the social security administration, so the church wants to pay him extra to cover what would have been the church’s half of his social security. That’s not taxable income to him.” Unfortunately, it is. According to the IRS, all payments that are made to an employee because of his relationship with his employer are taxable unless the IRS has excluded them by statue.
What does that mean for the Church? It means that if a church member wants to “bless” his pastor or other minister on staff, and he gives a check to the church office to give to the minister, it is taxable income to the recipient. If another member wants to give a check to the minister who is retiring from the church, and he gives a check to the church office to give to the minister, it is taxable income to the recipient. The love offering or retirement gift was given because of the relationship between the member and the pastor of that church. It is a result of his employment at the church, and the IRS considers it to be income to the recipient.
What about non ministerial employees? Can this affect them too? Absolutely. If the church gives a monetary gift (love offering or gift cards) to an employee, it is income to that employee. Another issue that can arise involves benevolence assistance given to an employee. If one of your secretaries is going through difficulties and needs help paying her electric bill, payment of that bill by the church is taxable income to the secretary. In both cases, this income is subject to social security and medicare taxes too, so the church must ensure that the income and related taxes are included in that quarter’s 941. Most of us would classify this as simply a benevolence gift, but the IRS would contend that the payment is the result of the employer/employee relationship.
I have given this concept of “What goes into taxable income?” and all of the related issues considerable thought. I have to agree these relationships give rise from the donor’s desire to provide the financial benefit to employees of their church.
When you report this additional income, add all cash payments to box 1 of the W-2 for the minister. As noted earlier, when non-ministers receive extra monetary gifts or assistance, the value must be added to boxes 1, 3, and 5 on that employee’s W-2 and Social Security and Medicare taxes must be entered correctly in Boxes 2 and 4, respectively. For non cash benefits, the solution is a bit more complicated and requires a longer explanation. Please contact our office if we can help you answer any specific payroll reporting questions.