Tax-Free Gifts for Pastors: 3 Ideas to Show Appreciation
By Angie Joya
In the journey of church planters, milestones like incorporation, having the launch service, and member goals are significant. Paying the pastor a salary is also crucial. But how do you navigate this legally while minimizing tax impact?
Often, churches collect cash donations as a love offering for the pastor, thinking it's the best way to honor their hard work. However, this income is still taxable, according to the IRS.
Discover how to give your pastor a tax-free Christmas gift with these ideas.
Blessing the Pastor With the Blessing of God and Man
At StartCHURCH, we have the honor of collaborating with numerous churches, understanding the desire of leaders and board members to appreciate their pastors financially.
Despite good intentions, many must know the complex laws governing their ministries' finances.
Commonly, people view love offerings as non-taxable gifts meant to express gratitude. However, the IRS sees these offerings as taxable income, citing Internal Revenue Code (IRC) 61(a), which deems all income, including compensation and gifts, as taxable.
IRC section 102(c)(1) reinforces this: "Any amount transferred by or for an employer to, or for the benefit of, an employee" shall be treated as gross taxable income.
You still have to report any love offerings as compensation for the pastor. There may be penalties if the pastor or church does not report the love offering as taxable income in the year it is given. For example, the IRS may 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 better understand why it’s essential to report love offerings, here are three tax-free gifts your church can give your pastor.
Tax-Free Gift Ideas for Churches to Bless Their Pastors
To avoid these issues, here are three tax-free gift options for your pastor.
1. The section 74 award (gift)
The Internal Revenue Code allows churches to offer gifts to employees, including pastors, under specific guidelines outlined in sections 74 and 274(j)(B).
The gift must be tangible and meet specific criteria to qualify:
- The 'award program' must be documented, ensuring awards are given under conditions that prevent them from being mistaken as compensation. These awards should be tangible items, such as laptops, tablets, office furniture, etc. Excluded items are travel, vacations, meals, lodging, tickets to theater or sporting events, and financial assets like stocks or bonds. The award is granted at a meaningful presentation ceremony for length of service every five years starting at the end of the fifth year. Its value must be at most $1,600.00, provided the average employee award remains $400.00 or lower.
2. Education is essential
According to code section 127, churches can provide educational assistance for pastors to pursue a degree, covering expenses like books, equipment, fees, supplies, and tuition, up to $5,250.00 annually. Payments can be for but are not restricted to courses that are part of a degree program, including a graduate degree program.
To understand how your church can establish this program, read our blog post, "Your Church Can Send You to Seminary.”
3. Cover healthcare expenses
Section 105(b) permits the church to establish a written program reimbursing all out-of-pocket health expenses for pastors and staff. The church can either pay the bills directly or reimburse pastors/staff. This should be included in their compensation agreement as it's tax-free for the church regarding payroll taxes and for the individual in terms of Federal income tax and FICA/SECA.
The reimbursement plan can cover expenses not included for those with existing health insurance, adding significant value. 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 Following Step
This information is a valuable resource and a starting point for pastors and church leaders. Managing diverse payroll requirements may seem overwhelming, but with the proper knowledge and partners, you can confidently handle expense categorization and establish an effective church payroll system.
If you require assistance with your church's bookkeeping and accounting responsibilities, we recommend utilizing our specialized Bookkeeping Service tailored for pastors and church leaders. Our ministry-minded bookkeepers ensure your church's financial decisions remain compliant.
For more details about our bookkeeping service, please get in touch with our specialists at 770-638-3444 or click the button below to schedule a call today.