It is a tradition in many churches to give the ministerial staff a Christmas gift, or bonus at the end of the year. The IRS has some rules regarding the taxability of these gifts and it serves the church, the minister, and the members of the church to adhere to these rules so as to not run afoul of the IRS.
Many times, these Christmas gifts are considered by the church and the minister to be gifts, not compensation, and they are not included in the minister’s W-2 at the end of the year. It is a basic tenet of our tax law that a “gift” cannot be given to an employee, but is disguised compensation. The exception to this is that the employer may give a gift to an employee if the value is $25 or less and is not cash or a gift card. Thus, an employee may receive a small gift from the employer as long as the value is under the IRS limitation. This permits the employer to give employees items such as a ham, turkey, cheese tray, or other similar item. A certificate that may be redeemed at a local store for a specified item is also acceptable. For example, the certificate could be good for a frozen turkey at a local supermarket up to $25.
If the church gives the minister a cash bonus in any amount, or a tangible gift valued in excess of $25, it should be included in the minister’s compensation for the year. The church may not evade this rule by making the gift to the minister’s spouse as it is considered to be constructively received by minister. The situation is the same if the church takes up a “love offering” and gives it to the minister. This still amounts to taxable compensation for the minister.
However, gifts of any amount or nature may be given to the minister by individual members of the congregation. So, if a member of the congregation wants to give the minister a $50 restaurant gift card, the card is not taxable to the minister. However, the member does not get a charitable contribution deduction for this gift. The key element here is that the gift must be given directly to the minister by the individual and not handled through the church. If it goes through the church, it is taxable compensation.
Some churches utilize what has been referred to as a “money tree” concept to express tangible appreciation to the minister. In this situation, the church sets up a Christmas tree somewhere in the church building. Members are encouraged to place a gift to the minister in an envelope and attach it to the tree. If a check is placed in the envelope, it should be made out to the minister and not to the church. Once again, this is not taxable compensation to the minister, but there is no charitable contribution deduction for the minister.
It should be noted that this money tree concept cannot be overused. At an extreme, a church could pay its minister no salary, but have a weekly money tree. This is not permissible, as the IRS would rule that the money tree was disguised compensation and the minister liable for taxes on the income. If the minister could not prove the amount received, the IRS would impute an amount, which the minister would have difficulty refuting.
Ministers are often respected by the congregation. At the same time, they are hardworking and underpaid. Year-end gifts are the congregation’s way of expressing appreciation for all the ministers do. Don’t make their road any bumpier by exposing them to unwanted IRS scrutiny.