"Volunteer" Pastor Receives a Gift from His Congregation

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Question:

A church led by a "volunteer" pastor wishes to give him a monetary gift for Christmas. Will the church need to issue a Form 1099-MISC? Is the answer different depending on the amount?

Answer:

The payment will be considered as compensation for services rendered--the church is acting corporately in compensating a minister who serves it. However, there are some options.

First, the amount can be designated (prior to payment) as housing allowance. This removes the federal income tax consequence to the extent of his actual housing expenses (and the fair rental value of his home).

Second, while the compensation is subject to the 15.3 percent self-employment (SE) tax, to the extent the minister has unreimbursed ministry expenses, he can reduce his SE income. If his net self-employment income is less than $400, he will owe no SE tax.

With so little income, it is unlikely that the IRS would classify him as a Form W-2 employee. Therefore, if the non-housing allowance portion of the payment is $600 or more, Form 1099-MISC should be issued. The minister is responsible to report the income correctly regardless of the church's obligation to issue a statement of earnings.