The holiday season is great time to show appreciation to the employees who serve the church faithfully throughout the year. While flowers, gift cards, and other tokens of appreciation may not cost a lot of money, the gift may actually result in taxable income for some of the recipients. Therefore, it is very important to properly handle these types of gifts and include them in income when necessary.
Even though we may call these gifts (as opposed to wages), Section 102(c) of the tax code defines the term differently. The tax code states that an exclusion for gifts shall not include “any amount transferred by or for an employer to, or for the benefit of, an employee.” Therefore, as a general rule, gifts and payments to an employee must be valued and included in an employee’s gross income unless specifically excluded by law.
The IRS has several publications that describe how to properly report gifts and benefits provided to employees, which are listed at the end of this article. The following is a list of common gifts provided to employees and the proper way to report them, if necessary.
De Minimis Gifts and Fringe Benefits
The IRS allows occasional gifts to employees of de minimis tangible personal property to be excluded from income. The term “de minimis” means any property or service with a value so small as to make accounting for it unreasonable or administratively impracticable.
U.S. Department of the Treasury regulations (26 CFR 1.132-6) provide examples of de minimis fringe benefits and gifts that are excludable from an employee’s gross income, which include:
- Occasional cocktail parties, group meals, or picnics for employees and their guests.
- Traditional birthday or holiday gifts of property (not cash) with a low fair market value.
- Occasional theater or sporting event tickets.
- Coffee, doughnuts, and soft drinks.
- Flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., on account of illness, outstanding performance, or family crisis).
This would include a gift of a turkey or fruitcake during the holidays. The IRS doesn’t put a value on what is considered de minimis, but it would seem reasonable, that while a turkey is excludable from income, an expensive watch would not be excludable.
Cash for Special Occasions
Cash gifts to employees, whether for Christmas, birthdays, or pastor appreciation, are taxable income and should be included on the employee’s W-2.
Gift Cards
Gift cards are considered cash equivalents and should always be included in income. Unfortunately, there is no minimum value or de minimis rule for cash or gift cards, so a $10 gift card is still considered taxable income for employees. It doesn’t matter how the church acquired the gift cards. Even if they were donated to the church, once they are given to employees, they should be treated as taxable income.
Consequences
It is very important to properly handle these fringe benefits and include them as income, when necessary. If these are not accumulated properly, the employee is subject to back taxes plus penalties and interest on the unreported income. Failing to file the required forms can also expose the church to penalties and fees.
