Ministers and churches often find it difficult to determine or agree upon what is or is not reportable income for the minister. However, it is the treasurer’s job to make this determination since he or she is responsible for reporting such on the minister’s IRS Form W-2. For employees, the determination is generally much easier. Therefore, the following discussion on what is or is not reportable income focuses solely on the minister.
Simply put, it is unlawful for a minister (or anyone else) to try to “hide” income by calling it something else. The following are clearly income to a minister:
- Additional salary payments to assist in payment of health insurance costs
- love offerings (Christmas or Pastor’s Appreciation offerings from the church)
- gifts that are run through the church for tax credit
- trips given to the pastor as a gift (i.e. Holy land trips)
- Social Security paid by the church for the minister
- business expense reimbursement under a non-accountable plan
- personal use of church-provided automobile, and
- honoraria given for weddings and funerals
While this is not an exhaustive list, it provides a good framework for the employer/church to determine what items should be included on the minister’s W-2 form. Suffice it to say the IRS will scrutinize the minister’s income very carefully should he or she be audited. Good records are essential for preventing penalties and interest on unpaid taxes from unreported income.
A simple rule of thumb is if a person has reason to believe that they can claim their gift as a charitable deduction, it is taxable to the recipient. In times past, a person who gave the minister a $20 bill on the way out of church was said to have given the minister a “gift,” creating no charitable contribution deduction for the giver and no tax liability for the recipient. However, the IRS has recently taken the position that such a “gift” is actually additional compensation for the minister – and therefore taxable to him, although the donor probably does not get a charitable deduction since it was not recorded and made through the church. On the other hand, had the person written a check to the Anytown Church of God for $20 and designated such as “pastor love offering,” the donor has a reasonable expectation that the “gift” is a charitable contribution and can claim a deduction for such. In addition, the “gift” becomes a taxable item to the minister.
The treasurer is responsible for making sure that such gifts, along with other reportable items, are included on the minister’s W-2 form. It is most likely that the minister will receive compensation for some services rendered, such as an honorarium for preaching a wedding or funeral, which the treasurer may know nothing about. In those situations where the minister does not report such to the treasurer, the treasurer has no legal obligation to include those amounts on the minister’s W-2 form. However, those amounts are still taxable compensation for income tax purposes and for Social Security tax purposes and must be reported directly by the minister.