ASK KEN: Gift Giving/Receiving Can Be Taxing

Yes, I had a very busy end of 2017, but after a three month "hiatus," ASK KEN is back!

I received these very good questions just before Christmas—too late for our December newsletter. Perhaps you will still find the answers helpful — and hopefully before some of you calculate 2017 W-2 statements for church staff!

I presented the disclaimer to the church leader who wrote (and to you) that I am not a lawyer, CPA, or tax preparer; I take a stab at replying correctly with my opinions. There may be some of you who provide financial advice for a living and can offer better answers, and I welcome that information. Email me at [email protected].

This church leader writes: “I’m seeking advice on best practices for how churches collect money for staff Christmas gifts. I’ve generated a list of questions, but any other guidance would be welcome!”

Question: Just to confirm, all gifts (cash or gift cards) given to pastors, young-adult coordinators, childcare workers, etc. are considered taxable, correct? I’m assuming these gifts would be added to the employee’s W-2. Noncash gifts, such as a holiday ham (under a $75 value) would not be considered taxable.

Answer: Yes, I’m confident this is correct. The IRS has a term for gifts like the Holiday Ham: "De Minimis Fringe Benefits.” Cash and gift cards are taxable for the pastor and could be reported in Box 14 on the W2. See https://www.irs.gov/government-entities/federal-state-local-governments/de-minimis-fringe-benefits for more information.

Question: From what I’ve seen in my research online, it seems like it’s best if the personnel committee or some other governing body sets a maximum amount to give to the pastor as well as any other staff members. It is my understanding this is so the compensation of a staff member does not exceed a “reasonable amount,” which could, in turn, cause a church to lose its tax-exempt status. Any advice on how to determine what a “reasonable amount” is?

Answer: I have never heard of a church losing its tax-exempt status for giving too large a gift to the pastor. I would be interested in seeing the source for this concern. As long as it is reported, I don’t believe the gift would be a problem. I would think it would have to be an extremely large gift to raise such a concern.

Question: In addition, I’ve read that that maximum amount should be communicated to the congregation and that any amounts received above the designated amount could be transferred to the church’s general fund. Is that really the best practice, or can the excess be saved in a designated account for a future gift?

Answer: If you receive money for the specific purpose of staff gifts, that entire amount should be divided among staff and distributed. It should not be put into general operating funds.

Question: Is it appropriate for a church to budget for staff gifts in its operating account budget as a line item rather than asking for offerings specifically for staff gifts? Would having a line item in the general operating account for staff gifts come into conflict with the line item for salaries? Would it be hard for an auditor to separate a reward for services given (salary) from the Christmas gift?

Answer: As long as all gifts are tracked separately and reported as income, I wouldn’t think this should create a problem for the auditor. If the amount was truly significant, the district superintendent might feel that the pastor’s gift was an intent to manipulate the salary line level, and that could be a problem.