Many churches want to show appreciation for the services pastors and pastoral staff perform. And often this is done by giving money or other gifts. While these are kind gestures, it is important to know that depending on how the gifts are given and who the gifts are from there can be various tax and reporting implications for the individual, the church and the pastor.
Gifts given to pastors are in most instances treated as taxable. This means that if the church gives the pastor and their family a trip, the pastor should pay taxes for the amount of the trip. As a 501c3 tax exempt organization, a church is not supposed to use income or assets to benefit insiders (which includes pastors, church staff and board members). This is known as the inurement prohibition. So, giving tax-free gifts to the pastor should be avoided to maintain a church’s non-profit status. This is true whether the church gives cash, a check, or a computer, car or other substantial non-monetary gift. Since these gifts are considered taxable income, the church needs to make sure to include the gift in the pastor’s W-2 or issue the pastor a 1099 for reporting purposes. The church does not need to report the gifts as income if money is given directly from members to the pastor, but the gift to the pastor is treated as taxable.
There are however some instances where a personal gift from an individual to a pastor is not considered taxable. For example, if the gift is unrelated to the services provided by the pastor. This is usually the case if the gift giver and the pastor have a relationship outside of just that of member and pastor (such as a longtime childhood friend or family member). In this case, the person giving the gift cannot treat the gift as tax deductible, like they would for their tithe, offering or other donations to the church.
It is important for churches to be mindful when giving gifts to pastors to not risk their tax-exempt status, and for pastors to know how to properly treat gifts given by their churches and members so that they don’t end up with unexpected tax consequences at the end of the year.
Jennifer Gray Woods is the lawyer for the Lake Union Conference as well as the Public Affairs and Religious Liberty director.
