Imagine for a moment, your church had a pastor on staff for many years and the pastor passes away and leave behind him a widow. The church desires to be benevolent in their care for her. Is there a limit to Benevolence? If this situation hits home, know that many have sat asking the same question. One church asked the questions this way:
If we give regular payments to our late Pastor's wife, can we consider it benevolence? Is there a limit to the benevolence I can send without having to do a 1099? I have read that benevolence does not have to be reported via 1099.
Here’s how our founder, Bill OConnell CPA, answers that question:
I have spent some time researching your benevolence question. The guiding principles include a couple of tax concepts.
First, the tax rules around gifts/benevolence that you mention. The focus here is the individual’s current relationship to the organization and/or the circumstances that bring about the [continuing] payments. But there is another…
The tax-exempt status of the church also comes into play.
Benevolence and gifts indeed contemplate a one-time (or limited number of) asset transfer(s) to an individual. Without this limitation, churches would be gifting money to their clergy and not paying taxable salaries, so they never paid any taxes. In short, your payments to the former pastor’s widow do not qualify as tax-free gifts or benevolence. More on the consequences of that treatment is below.
Further, making payments to the widow as housing has been litigated by the IRS and the churches involved lost the case defending that treatment.
The IRS will view these payments through the lens of your church as a tax-exempt charitable organization. Seen this way, your donors are granted tax deductions for their contributions because of the charitable purpose of the charity/church. The charity/church is given tax exempt status of that income because it prosecutes the publicly published purpose that is on file with the IRS.
Redirection of tax-exempt donations for the personal benefit of an individual (other than employees and contractors working in the charitable purpose of the organization), are deemed to be a violation of the “covenant” with the government. In short, tax-exempt funds are never to be used for the personal inurement or benefit of any individual. In Richard Hammar’s view, this practice can jeopardize the tax-exempt status of the church/charity.
So, despite the honorable intent of the payments, the church leaders put the tax-exempt status of the church at risk by making the payments in the way you are contemplating.
Wisdom’s recommendation is as follows:
Disclose the payments to your donors, so they understand that they are supporting an individual not in the employ of the church.
Make the payments as taxable income by either using a 1099 NEC – or as taxable wages through the payroll. It will not put her at risk in later years should her returns be audited, and she is assessed unpaid taxes.
If you find yourself asking questions like this, check out our Wisdom Advising service or reach out via our contact us page!