Churches often make gifts to employees to show appreciation for their dedicated service. These payments may take several forms and have important implications to the ministry, staff members, and donors:
1. Gifts made by an individual directly to a church staff member with no involvement by the church.
When a giver makes a payment directly to a church staff member, this is a gift that is not tax-deductible to the giver and is taxable or nontaxable to the recipient—based on whether the donor’s intent was to compensate the recipient for services. A gift of this nature does not generally raise any tax issues for the church.
2. Gifts made by an individual to the church but earmarked by the donor for a particular staff member and the gifts are not intended for use by the church.
If contributions are earmarked by the donor for a particular individual and not intended for use by the church, they are not tax-deductible as charitable gifts. This level of gift earmarking by donors suggests that the church lacks the discretion to use the funds to carry out its functions and purposes. The use of terminology such as a “love gift for an individual” or a “desire to bless an individual” does not change the nondeductibility of such a gift.
3. Gifts to church staff members from ministry funds.
Often gifts are made from ministerial funds which are not required by contract or a typical employment plan. The gifts may be given in appreciation near a holiday, a birthday or an employee anniversary. The gifts may be given in relation to personal medical or financial crises.
Gifts to staff members from ministry funds are taxable and subject to payroll tax treatment and reporting unless they meet one of the following exceptions:
• De minimis gifts. These gifts are impracticable of specific valuation, and are generally less than $25 in value. IRS rulings have emphasized that the difficulty in valuing a de minimis gift is just as important as the small value. Cash, gift cards or other cash equivalents are not de minimis gifts, regardless of how small the value.
• Employee achievement awards. To avoid taxation, achievement awards must meet specific tax law requirements. The law generally requires a written, nondiscriminatory achievement award program, which provides awards either upon attaining longevity goals or safety standards and meets other requirements for gift type and amount limits.
4. Gifts to “bless” a particular staff member by raising a “love offering.”
If a church preauthorizes a love offering or other special offering, the gifts made may be deductible as charitable contributions. Adequate discretion and control over the donations are key factors in determining deductibility. The payment of the love offering or other special offering is reportable and taxable and subject to payroll tax treatment and reporting unless one of the exceptions noted above is met.
5. Gifts to an educational institution to pay tuition for a staff member’s dependent.
There is no charitable tax deduction for a gift to a church that is designated for the educational expenses of a staff member’s dependent. If the church uses the funds to pay the tuition of a staff member’s dependent, even if the funds are paid directly to the educational institution, the amount is taxable and subject to payroll tax treatment and reporting with respect to the staff member.
Used with permission from the ECFA Knowledge Center. ECFA.org