Q:  Christmas is coming, and we want to give gifts to our pastor and staff.  Are these gifts taxable to them?

It is great that your church wants to do this.  But caution is needed.  At least two significant issues are triggered when churches give gifts to ministers and staff.

The first is the potential income tax consequences.  The second is the concern about reasonable compensation.

The potential income tax consequence is that any payments to or on behalf of an employee are NOT gifts.  The only reason you are paying the amounts is because they are EMPLOYEES of the church and therefore, the payments are compensation.  The exception to this is a small de minimis item – example a small poinciana plant on the desk is okay; a ham for Christmas dinner is not okay.

The concern of reasonable compensation is a matter of excess benefit transaction.  Excess benefit transactions occur when a person with presumed influence receives a benefit (total income and benefits) valued above reasonable compensation for the position.  The penalties for an excess benefit transaction are severe, both for the recipient and the church.