What You Call A Gift, the IRS May Call Income
All of the volunteers had worked extremely hard to make this Vacation Bible School the best in their Church’s history. The attendance was overflow crowds each night that resulted in a large visitor turnout the following Sunday. The Pastor and the Board decided to give every volunteer a small token of their appreciation – a $50.00 Wal-Mart gift card.
However, what some call appreciation, may in fact be a curse. The Church had not taken the initiative to check the Internal Revenue Service Tax Code. Their gifts were taxable.
What the Law Stipulates
The Internal Revenue Service stipulates (Code Section 61) that all income, regardless of its source, is subject to taxes unless the tax code makes an exception. However, there is an exception in Code Section 102(a) which states that gifts do not have to be reported to the IRS, but there is a catch.
The Code makes an exception, and then makes an exception to the exception. Unfortunately, Subsection (c) of 102 stipulates that a gift given by the employer (Church) cannot be considered a gift unless the Code makes another exception. The IRS has so many exceptions to the exceptions that it becomes almost impossible to safely navigate them.
This is standard IRS operating procedure. The Code makes an exception to income, only to make an exception to the exception. If that is not bad enough, it makes an additional exception to the secondary exception. This is why so many Churches get into trouble with the IRS. They are not trained to understand the thousands of pages of the IRS Code. All it takes is one little oversight, and your House of Worship could be in trouble.
Let’s Break It Down
Regardless of it is to a volunteer or an employee, if a gift is given from the Church, it must determine if said gift is or is not taxable income.
The Treasury Department has determined that all cash, gift cards, gift certificates, etc. are always taxable. Not only are they subject to Income Tax, but are also subject to Social Security. If the beneficiary of the gift (regardless of the amount) is an employee of the Church, the Church must withhold Income and FICA Tax.
It the gift is to a volunteer, he or she is responsible to report and pay all Income and Social Security taxes that are required. If the gift hits the $600 threshold, the Church must issue a 1099 and report the income to the Government on Form 1096.
Any cash, checks, gift cards or redeemable gift certificates, regardless of size, are considered as cash and therefore are deemed as taxable income when given by the Church.
Non-cash tangible gifts from the Church may also be taxable. This would include, but is not limited to, Country Club or Gym Memberships. It may also refer to Employer-provided group-term life insurance on the employee or his or her family, and use of Church-owned vehicles and property. The list is almost endless.
The good news is that there are some gifts that are considered as non-taxable fringe benefits. These could include things such as flowers, fruit baskets, hams or turkeys, group meals, etc. However, the law is so complicated that if a Church copier is used more than 15 percent on non-church business, those using it for personal reasons are subject to tax.
Several years ago, the Church could bless people and the people nor the Church, reported it. Those days are over. The IRS regulations are so complicated that it has created a myriad of pitfalls that many Churches fall into and never know it until it is too late.
Every Church Needs Us
It requires legal and accounting experts to successfully navigate the complicated laws of the Internal Revenue Code. We do not expect accountants to preach and do Church ministry, so why do Pastors and Board Members feel they can be attorneys and CPAs?
At our Church Management and Tax Conferences we explain the difficulties encountered with the IRS Code and offer Churches options to protect them against any pitfalls those codes may generate. Visit www.cmtc.org or call us at 800-344-0076 to register for a conference nearest you. It will be the best decision you will make.