03 Dec 2019

3 Ways to Give Your Pastor a Tax-Free Gift

Angie Joya

In the life of church planters, there exist certain milestones: getting incorporated, having the launch service, reaching a goal of a certain number of members, and also being able to pay the pastor a salary. 

However, like with most things, how do you even know where to start? What is allowed? What can a church do legally, and what is the best way to do it so that the tax impact is minimal? 

Oftentimes, in an effort to honor the pastor’s hard work, churches do what they think is best: allow cash donations to be collected in a basket, and without it being counted, they present this love offering to the pastor. 

Sound familiar? This act is all too common, but unfortunately, the income is still considered taxable according to the IRS. 

Here’s how you can give your pastor a tax-free gift this Christmas season. 

Blessing the pastor with the blessing of God and man

At StartCHURCH, we work with hundreds of churches, and we know that it is in the hearts of leaders and board members to bless their pastors, and this often takes place in the form of financial compensation. Though their hearts are in the right place, what many board members and leaders don’t know is how to navigate the complicated and confusing laws surrounding the financial side of their ministries.

Most people believe that a love offering is a non-taxable gift given to an individual to express appreciation. However, although it is a gift of appreciation, the IRS considers love offerings as another form of taxable income.

Internal Revenue Code (IRC) 61(a) defines taxable income as “all income from whatever source derived, including compensation for services.” While the members of the church and the pastor receiving it view this amount as a gift, the IRS will view the same love offering as taxable income because of what section 102 says shortly after excluding “gifts” from taxable income.

IRC section 102(c)(1) says that "any amount transferred by or for an employer to, or for the benefit of, an employee" shall be treated as gross taxable income.

This means you still have to report any love offerings as compensation for the pastor. If the pastor or church does not report the love offering as taxable income in the year it is given, then there may be penalties. For example, the IRS may choose to audit the church if the church does not report the love offering on the pastor’s Form W-2. The IRS may also charge a penalty tax to the pastor if the pastor fails to report the love offering as taxable income.

Now that we have a better understanding of why it’s important to report love offerings, here are three tax-free gifts your church can give to your pastor.

Three tax-free gifts churches can give their pastors

While any sort of cash giving is considered taxable, there are other creative options to bless your pastor that will not increase his or her tax liability. Below are three practical ways in which you can bless your pastor.

1. The section 74 award (gift)

The Internal Revenue Code provides that the church can give a gift to an employee, including the pastor, so long as it meets the requirements of a qualified employee achievement award set forth in sections 74 and 274(j)(B). The church is allowed to give a gift that is tangible to the employee so long as the following criteria are met. 

  1. The “award program” is put in writing, and awards are given under conditions and circumstances that do not create a significant likelihood of it being disguised as compensation.
  2. The award is tangible property. What exactly is tangible property? Items such as laptops, tablets and other devices, and office chairs and desks are tangible property able to be rewarded to the pastor. It cannot include travel, vacations, meals, lodging, tickets to theater or sporting events, and stocks, bonds, or the like. 
  3. The award is for length of service and is given as part of a meaningful presentation or ceremony once every five years, beginning at the end of his or her fifth year of service. 
  4. The award cannot surpass $1,600.00 in value so long as the average of all awards to all employees is $400.00 or less.

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2. Education is fundamental

Under code section 127, the church can give educational assistance to help the pastor earn a degree. Payments can be for but are not restricted to courses that are part of a degree program, including a graduate degree program. Under the law, the program can pay for the cost of books, equipment, fees, supplies, and tuition. The church can pay a maximum of $5,250.00 per year in non-taxable educational assistance.

Read our blog, “Your Church Can Send You to Seminary” to learn more about how your church can create an educational assistance program.

3. Pay for medical bills

Section 105(b) allows the church to create a written program to reimburse all out-of-pocket health expense costs of the pastor and other staff. The church can either pay the bill directly or pay it as a reimbursement to the pastor or staff member. This can and ought to be a part of his or her compensation agreement because it is tax-free to both the church in terms of payroll taxes and to the pastor (or other staff) in terms of Federal income tax and FICA/SECA. 

Should the pastor or another staff member already have health insurance, the medical reimbursement plan can be of significant value because it can pay for the costs that are not covered by insurance. These can be:

  • Deductibles, or
  • Medical costs not covered by any health insurance (such as LASIK eye surgery, dental work, lab fees, medical supplies, humidifier, eyeglasses, over the counter medication, and more).

The next step

This information is a great asset and a starting point for pastors and church leaders. Navigating and making sure your church is keeping up with different payroll requirements can seem daunting. However, with the right information and the right partners, you can feel confident in categorizing expenses and even establishing a church payroll system that is done right. 

If you are in need of a team to help you with your church’s bookkeeping and accounting responsibilities, then we recommend utilizing our bookkeeping service. Our bookkeeping service was designed to meet the needs of pastors and church leaders just like you. Plus, our bookkeepers are ministry-minded and will help make sure that your church’s financial decisions are in compliance. 

Give our specialists a call today at 877-494-4655 to learn more about our bookkeeping service. Or, click on the button below to schedule a call. 

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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