Patriot Software Advisor

Volunteer and Staff Gifts Tax Consequences

Staff gifts are common. Many churches and nonprofit organizations give their staff a gift for Christmas or Thanksgiving. However...before you write that check or buy that turkey there are some facts regarding the tax consequences of those gifts you should know.

Even giving a hard working volunteer a gift card or appreciation offering can cause a SIGNIFICANT "tax event" for the volunteer AND for the organization!

Minister, Volunteer, and Staff Gifts:

Ministers:

Staff Gifts Rules

At least once a year, churches usually give their Pastors an "appreciation" offering. That is fine...wonderful even...BUT you should be aware of the tax consequences of that "gift".

Appreciation, birthday, anniversary, and even Christmas gifts...that are processed and flow through the church to their employee are always taxable. Love offerings are also taxable. See this article on Love Offerings and Gifts.

Staff:

One of my clients told me they wanted to give a $25 gift card to each of their staff for Thanksgiving.

I responded that yes...they could "legally" give a gift card to their employees; however, the $25 would have to be added to their W-2 as it was taxable income.

They responded that they thought the staff gift cards would fall under the category of being a nontaxable de minimis fringe benefit.

NOTE: before you give your minister, staff, or volunteer that gift card, cash, or check ... contact your accountant, bookkeeper, or payroll provider for instructions on how to handle those payments/gifts!

I told them to research IRS section 132 (e)(1) of the tax code which defines a de minimis fringe benefit as “any property or service the value which is so small as to make accounting for it unreasonable or administratively impracticable.”

The IRS decided that cash can never be a de minimis fringe benefit since it is not unreasonable or administratively impracticable to account for its value. The same thing goes for cash equivalents such as gift certificates or gift cards.

Since the IRS concludes that de minimis fringe benefits in section 132 refer only to “property or services” and not cash, some examples of this type of fringe benefit would include coffee, doughnuts, soft drinks, flowers, fruit, turkey, or ham.

If you or your employee purchase gift cards for your church or nonprofit to give out to employees, volunteers, or even benevolence recipients...you MUST keep a list of ALL individuals that received a card OR the total amount could become taxable income to the purchaser! 

So if you’re looking for a holiday gift to give to your well deserving employees or volunteer staff...a turkey, ham, or fruit basket may be a better option if you are looking for a nontaxable gift to bless them with.

Understand I’m not saying you cannot give a cash gift to your employees for the holidays ... just know that it will have to be included in their taxable income.

The Church Accounting: How To Guide devotes a whole section of the book to payroll for churches. It covers payroll terminology and forms and then takes you through the steps necessary to set up a payroll, calculate and file the necessary taxes and forms, and even details how to handle the minister's payroll. It also includes sections on filling out IRS forms: 1099 and 1096.

If you have QuickBooks or are considering using it in the future, go ahead and purchase the QuickBooks for Churches and the How To Guide combo for a complete package on setting up and administering a payroll using QuickBooks.

QuickBooks for Churches & Church Accounting Combo Bundle

Examples of Minister, Volunteer, or Staff Gifts:

  • The church board approves a $500 bonus for each employee for Christmas. The $500 would be included on each employee's W-2.
  • A nonprofit organization gives each employee a Christmas ham. The ham would be considered a nontaxable de minims fringe benefit and would not need to be reported on the employees' W-2 forms.
  • A church gives each employee a $25 gift card from a local grocery store so their employees could pick out their own turkey or ham.  The gift card is a cash equivalent. Its value (despite being such a low token amount) is definitely measurable, so it must be reported as taxable compensation.
  • A church treats its employees to a well-deserved holiday dinner at a local restaurant.  The value of the dinner averages $25. The value of the meals is a nontaxable de minims fringe benefit. The IRS tax regulations gives "group meals or picnics for employees and their guests" as an example of nontaxable de minims fringe benefits.
  • A nonprofit gives each volunteer that worked so hard on their annual fundraiser a $25 gift certificate to the same restaurant the church took their employees to.  According to the IRS, the gift certificate would be taxable income to each volunteer. See more on even more serious tax consequences on giving cash or gift cards to volunteers below....

For more details on staff gift rules, please research IRS Letter Ruling 200437030.

Volunteers:

The definition of a volunteer, according to the Department of Labor (DOL), is...

an "individual that receives no compensation or is paid expenses, reasonable benefits, or a nominal fee to perform the services for which the individual volunteered."

AND...

according to the National Council of Nonprofits, "volunteers should not receive compensation for their services (receiving it can turn them into “employees” in the eyes of the law). Similarly, providing "in-kind" benefits can be the equivalent of compensation (which will turn the volunteer into an employee)."

SO...

those "appreciation" gift(s) to your volunteers could potentially turn your volunteers into employees with all of the taxability and especially the mandatory withholding and matching (FICA) the law demands!

The DOL (Department of Labor) uses the FLSA (Fair Labor Standards Act) to define who could be considered an employee or a volunteer. Section 553.106(f) of FLSA regulations gives us some guidelines that outline what kind of payments could possibly jeopardize a volunteer's status. Payment of expenses, benefits, or fees.

That reg states, "Individuals do not lose their volunteer status if they receive a nominal fee from a public agency. A nominal fee is not a substitute for compensation and must not be tied to productivity."

The problem is that it doesn't outline what a "nominal" fee is =(

But there are some articles that can help you make that determination such as:

Employee or Volunteer: What’s the Difference?

Appreciating Volunteers: How Much is Too Much?

Note: you CAN provide and pay for "training" (related to and appropriate for the job they are doing for your org) for your volunteers and it will not be considered taxable income OR change their status from volunteer to employee.

See more details on staff gifts and love offerings.

References:

Richard Hammer: Church and Clergy Tax Guide

Elaine Sommerville: Church Compensation: From Strategic Plan to Compliance

National Council of Nonprofits: Volunteers

IRS Pub 15A excerpt:

"Wages paid to employees of section 501(c)(3) organizations are subject to social security and Medicare taxes unless one of the following situations applies.

  • The organization pays an employee less than $100 in a calendar year.
  • The organization is a church or church-controlled organization opposed for religious reasons to the payment of social security and Medicare taxes and has filed Form 8274 to elect exemption from social security and Medicare taxes. The organization must have filed for exemption before the first date on which a quarterly employment tax return (Form 941) or annual employment tax return (Form 944) would otherwise be due."


Need training on how to use QBO or Aplos effectively for a church or better yet ...need an expert in either of those accounting software to do your monthly bookkeeping and/or payroll? See more on our accounting services!