Church Employee Achievement Awards

[RJM]

My church has 2 employees with 20 year anniversaries this month. There was a secret collection from the congregation members (checks payable to the church) to be given as a cash gift to each employee, and the church has historically added these contributions for employee achievements to members' deductible contributions.

I suspect these contributons should not be deductible to members, and should be considered personal gifts from members to the employees, which happen to be funneled through the church bank account. Does this seem correct? Does the church instead need to classify these payments to the employees as payroll, and then is it OK to record the gifts as deductible member contributions? There is no employee achievement award program in place. Thanks for any help! -Bob

[veritas]

I think

My church has 2 employees with 20 year anniversaries this month. There was a secret collection from the congregation members (checks payable to the church) to be given as a cash gift to each employee, and the church has historically added these contributions for employee achievements to members' deductible contributions.

I suspect these contributons should not be deductible to members, and should be considered personal gifts from members to the employees, which happen to be funneled through the church bank account. Does this seem correct? Does the church instead need to classify these payments to the employees as payroll, and then is it OK to record the gifts as deductible member contributions? There is no employee achievement award program in place. Thanks for any help! -Bob

the money is compensation to the church employees.

[JohnH]

That's the way our church has handled occasional "love offerings" or "special appreciation" for staff members. We report it as additional compensation and the church members get a receipt for the gift as a part of their regular contribution statements. It's much easier than trying to explain to 100+ people why they can't take the tax deduction. As a former church treasurer, I think I can make a pretty good case that the recipients will likely receive more on an after-tax basis using this approach than they would receive if the church members know they won't get a tax deduction for the gift. (Sad but true).

You also have a potential issue of whether a contribution designated for an individual is deductible in the first place. Our approach has been to ask church members to contribute to a fund which will be distributed among the affected staff members according to a formula, rather than designating a contribution to be given to a single individual.

[Burke]

I think you have the right answer, John. It is definitely addl compensation to the affected employees no matter what, but self-directed contributions to individuals would not be deductible by the contributors. Treating them as addl taxable compensation doesn't do it in and of itself, although there is no choice in the way it is paid to employees.

[ChEAr$]

I think you have the right answer, John. It is definitely addl compensation to the affected employees no matter what, but self-directed contributions to individuals would not be deductible by the contributors. Treating them as addl taxable compensation doesn't do it in and of itself, although there is no choice in the way it is paid to employees.

Agree. Taxable compensation to employees and no charitable contribution to the donors.

[RJM]

Thanks

Thanks for the insights. I will advise them on how to do this, but will get some code or regs support as well. They will not like this, and may want to shoot the messenger ! -Bob

[ChEAr$]

Thanks for the insights. I will advise them on how to do this, but will get some code or regs support as well. They will not like this, and may want to shoot the messenger ! -Bob

Be sure to ... Duck!

[Burke]

You also have a potential issue of whether a contribution designated for an individual is deductible in the first place. Our approach has been to ask church members to contribute to a fund which will be distributed among the affected staff members according to a formula, rather than designating a contribution to be given to a single individual.

See second part of John's post above.
This may be a way to get past the thorny issue of a designated contribution. If the church
has a history of paying bonuses to employees on a regular basis for years-of-service, and the individual contributors have no say in who gets what, or if the funds simply go into the general fund to replenish the bonuses paid out, especially if the designated bonus amounts are not exactly the same amounts as contributed, but based on another formula, I could make an argument for the deductibility of such contributions.

[RJM]

Reviewed case law

After reviewing case law summaries in this area, the payments to the church employees with a church check is certainly taxable wages. The Richard Hammar "Church & Clergy Tax Guide" also states that the "special occasion gifts" are definitely deductible by congregation members, even though the offerings are for designated events such as anniversaries like the current case. The Hammar guide takes a lot of its advice from the IRS audit guide for churches, but I did not double-check with the audit guide. Still, I feel comfortable telling the office the gifts are taxable wages, and they are also reportable as member deductible contributions. -Bob

[MAMalody]

After reviewing case law summaries in this area, the payments to the church employees with a church check is certainly taxable wages. The Richard Hammar "Church & Clergy Tax Guide" also states that the "special occasion gifts" are definitely deductible by congregation members, even though the offerings are for designated events such as anniversaries like the current case. The Hammar guide takes a lot of its advice from the IRS audit guide for churches, but I did not double-check with the audit guide. Still, I feel comfortable telling the office the gifts are taxable wages, and they are also reportable as member deductible contributions. -Bob

RJM has it right. I actually ran this scenario by a tax attorney specializing in clergy taxes a while back, and this is what he said. Since the checks were made out to the church, they would be deductible by the giver and taxable to the recipient as wages.