Q: The church board wants to give a $100 Christmas gift to the pastoral staff. Is it acceptable to increase the amount so that each pastor receives $100 in net pay?
A: The terms “gross” and “net” are frequently used when discussing payroll. Gross pay is the total amount of the paycheck before taxes and other deductions are withheld. What remains is often called net or take-home pay.
When church leaders want to give a specific cash gift, or bonus, to a staff member, the employee will end up with an amount that is much lower due to the requirement to withhold payroll taxes. Depending on the method used to withhold taxes, the employee’s filing status and federal allowance listed on the employee’s Form W-4, the actual net, or take-home pay, could be 15% to 35% less.
If leadership wishes, it is acceptable to increase the cash gift or bonus in order to arrive at a specific after-tax amount. There are three important points to consider though:
- The additional amount added to the cash gift will result in additional taxable income to the employee.
- Because the additional amount increases the total expense to the church, it should not be made lightly.
- Depending on how you calculate the grossed-up amount, the total cash gift may differ for each employee.
There are two methods to calculating Federal taxes on a cash gift. The IRS categorizes a bonus as Supplemental Wages, and offers two methods for calculating the applicable taxes: the aggregate method or the percentage method.
- The aggregate method is based on the dollar amount and the employee’s W-4.
- The percentage method is calculated using a flat withholding rate of 22%. The percentage method is easier to calculate (and explain).
The cash gift is also subject to applicable state taxes, and Social Security and Medicare taxes. If you want to cover these taxes also, this will result in a higher gross-up amount. Most payroll software solutions or providers can perform these computations. There are also payroll modeling calculators on the Web that you can use as reference.
