IRS Wants Cut of Volunteer Rewards

By Raul Rivera

During the week after the Easter service, Pastor Rick and his board of directors gathered to evaluate the success of their church’s Easter outreach efforts. The church started about 18 months ago with an average attendance of 85 people. They were pleased and surprised when the attendance on Easter Sunday nearly doubled. So many lives were changed that morning.

Pastor Rick and the board realized that much of the success of their Easter outreach was due to the efforts of the church's volunteers. The volunteers went above and beyond the call of duty to reach out to the community and invited many individuals to the church.

As a token of appreciation, Pastor Rick and the board decided it would be fitting to reward each volunteer with a small gift (a VISA® gift card). Yet, Pastor Rick and his board did not realize how such gifts to volunteers are perceived by the IRS.

The general tax rule on gifts

Many churches show gratitude to their volunteers, including board members, by giving small tokens of appreciation, which can range from gift cards to baskets or other gifts they deem appropriate. However, many churches do not check to see what the tax code says concerning these gifts of appreciation.

Internal Revenue Code section 61 says that all income from whatever sourced derived is subject to taxes, unless the tax code makes an exception. The law does make some provision under section 102(a) by stating that gifts do not have to be reported to the IRS. 

Ironically, though the tax code makes an exception, it also makes an exception to the exception. Section 102(c) stipulates that a gift given by the employer (church) cannot be considered a gift, unless the Code makes another exception. 

On one hand, the Code makes an exception to income; then it makes an exception to the exception. Furthermore, it makes an additional exception to the secondary exception. No wonder many churches miss this.

(Recommended reading: "Love Offerings--When They Are Taxable and When They Are Not")

When we meet with pastors and church leaders at our conferences, we are often asked about how their churches should handle gifts given to volunteers and staff members. With that being said, let us examine what this means to make sure you and your church get it right.

The rules on gifts given by the church

The moment the church decides to give a gift to one of its volunteers or employees, it must determine if the gift is taxable or if the gift falls under an exception. Below is an explanation of the rules that govern gifts.

Rule #1: All gifts of cash, gift certificates, or gift cards are always taxable.

Treasury Regulation 1.132-6(c) makes it clear that cash, or cash equivalents, are subject to federal income tax as well as Social Security tax. To complicate matters more, if the recipient is a non-ministerial employee of the church, the church is required to withhold federal income tax and FICA tax.

However, if the recipient is a volunteer, he/she must pay federal income tax and Social Security tax on his/her own. Moreover, if the church gives cash or a cash equivalent of $600.00 or more to a volunteer, the church must issue that person Form 1099-MISC as though that person was a contractor.

Examples of gifts which are considered cash, or cash equivalents, that must be reported are the following:

• Actual cash or check (no matter how small in amount);
• A gift card (no matter how small in amount);
• Redeemable gift certificates of any kind;
• Money or a gift certificate given so that the person may use it to purchase an item that is usually considered a tax-free gift. For example, in Technical Advice Memorandum (TAM) 200437030, the IRS ruled that the award of a $35.00 gift certificate, which could be redeemed at a grocery store to buy a ham or a turkey, was to be treated as taxable income because it had the equivalence of cash (see rule 3 below).

Rule #2: Some tangible gifts must be reported as taxable fringe benefits.

In essence, tangible gifts are things that you can touch. Below are some examples of tangible gifts that must be reported as taxable fringe benefits.

• “Season tickets” to sporting or theatrical events;
• The commuting use of an employer-provided automobile or other vehicle for more than one day per month. Many churches provide car allowances to their pastors and never report them. Under 26 CFR 1.132-6(e)(2), car allowances must be reported as taxable fringe benefits; 
• Membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility. Many churches provide memberships to fitness clubs and never report them because they do not think that the law considers it a taxable fringe benefit; 
• Employer-provided group-term life insurance on the life of the spouse or child of an employee; and
• Use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend. Many churches own retreat centers or other real estate that pastors and other church employees and volunteers use as getaways. The law requires that the dollar value for the use of these facilities be reported as a taxable fringe benefit.

Rule #3: Some tangible gifts DO NOT have to be reported as taxable fringe benefits. They are considered “de minimis fringes.”

The term “de minimis” (in essence) means minimal. If the gift given was so minimal in value that it would be unreasonable or administratively impractical to account for it, you will not have to include the value of such benefit as taxable income. Below are some examples. 

• A turkey, a ham, or a gift basket. (NEW IRS ADVICE ON TAXABILITY OF GIFT CARDS BY MARILEE BASARABA, FSLG SPECIALIST (PACIFIC));
• Occasional typing of personal letters by a secretary; 
• Occasional personal use of an employer's copying machine, provided that the employer exercises sufficient control and imposes significant restrictions on the personal use of the machine so that at least 85 percent of the use of the machine is for business purposes; 
• Occasional parties, group meals, or picnics for employees and their guests; 
• Traditional birthday or holiday gifts of property (not cash) with a low fair market value; 
• Occasional theater or sporting event tickets (not season tickets as mentioned above); 
• Coffee, doughnuts, and soft drinks; 
• Local telephone calls; and 
• Flowers, fruits, books, or similar property provided to employees under special circumstances (e.g., on account of illness, outstanding performance, or family crisis).

What seemed simple is not so simple

Today the laws that govern income and gifts are not so simple anymore. Many churches have no idea that their simple appreciation of dedicated volunteers could have a tax impact on them. Moreover, as we saw, when the church gives a gift to an employee, the church will most likely have some reporting requirements to consider.

Do not let your church fall through these seemingly harmless pitfalls. As Solomon wrote, “The little foxes are ruining the vineyards. Catch them, for the grapes are all in blossom.” That reminds me of the condition of many churches. All seems well, but they do not know that little foxes like these are everywhere.

At all of our Ultimate Church Structure Conferences, we discuss the “little foxes” that every church and ministry should know. I invite you to register today for one of our conferences nearest you! If you have questions, please give us a call at 877-494-4655!

Handpicked articles for you:

• “Tither Denied Deduction Because Church was not 501(c)(3)”
• “The First Thing Every Church New Hire Must Do”
• “The Pastor’s Discretionary Fund”

---