Q: What types of fringe benefits should be included as taxable income on the Form W-2?
A: Fringe benefits offered by employers can be taxable or non-taxable. Here is a list of 10 common fringe benefits offered by churches that will result in taxable income to the employee. These should be reported on the Form W-2 as wages.
Personal Use of Company Automobile
Personal use of a company-owned automobile is taxable income and includes commuting to and from work. The IRS provides four different methods to value this benefit: a general valuation rule and three special valuation rules (cents-per-mile, commuting or lease value). You can use the general valuation rule or one of the special rules if you meet the required criteria.
Group-Term Life Insurance
Employer-paid premiums for group-term life insurance whose benefit is greater than $50,000 is taxable income for the amount that exceeds $50,000. Employer-paid life insurance policies are excludable from income as long as the amount of coverage does not exceed $50,000.
Special Occasion Cash and Gift Cards
Cash gifts to employees, whether for Christmas, birthdays or pastor appreciation, are taxable income and should be included on the W-2. Gift cards are considered cash equivalents and should always be included in income. There is no minimum value or de minimis rule for cash or gift cards.
Retirement Gifts
Retirement gifts are taxable compensation for services rendered and are included in taxable income.
Benevolence Payments to Employees
Many churches have a benevolence program to help members of the congregation or community. However, any benevolence payments made to employees will be considered taxable income. This also includes payments made on behalf of the employee, like making a payment directly to a utility company or landlord.
Cell Phones for Spouses and Family
Church provided cell phones for employees will not result in taxable income if the cell phone has a substantial business need. According to the IRS, a substantial business need includes the following:
- An employer needs to contact the employee at all times for work-related emergencies.
- An employee must be available to speak with clients when away from the office.
However, if the church provides a cell phone for a non-employee spouse or family member, it will result in taxable income if it doesn’t meet the substantial business need criteria. The church can add the value to the employee’s W-2 or send an IRS Form 1099-misc to the family member.
Tours to Israel or other Holy Lands
Many churches may send their pastor or staff member on a trip to Israel. While beneficial for ministry, the IRS generally does not consider the cost of these trips as valid business expenses. Whether the church pays for the pastor’s trip, or takes an offering to help subsidize the trip the value of the trip will result in taxable income for the church employee.
Spouse and Dependent Travel
When non-employee spouses travel with church employees, the amounts paid or incurred for the spouse is considered personal expenses. If the church pays for those expenses, the amounts are taxable to the employee unless the spouse has a bona fide business purpose. If the spouse has a bona fide business purpose, the employee must substantiate those expenses under an accountable arrangement.
Sabbatical Expense Allowance
Some churches have authorized a sabbatical policy for its pastor and will provide an expense allowance during the sabbatical. The sabbatical expense allowance will be taxable to the pastor unless there is a valid business justification associated with the expense and substantiated under an accountable arrangement.
Unaccountable Allowances or Expense Accounts
Monthly allowances or stipends could result in taxable income for the employee. These would include a stipend or allowance for ministry resources, cell phone expenses, automobile expenses, or health expenses. If these expenses are not properly accounted for under an accountable arrangement, it will result in taxable income.
