In difficult economic times, Churches must make tough decisions about what bills they can afford. Sometimes Ministers refuse their salary in order help the Church. If you refuse to take your full salary for the year, do you still need to report it as taxable income?
The answer, like all good tax questions, is “it depends.”
On the one hand, IRS has consistently ruled that if money is made available to you, you must report it as income. For example, a minister who receives a check for a funeral and then immediately donates it to charity must report the check as income. It doesn’t matter that the money went to charity, what matters is that the minister had control over the funds.
On the other hand, the 1942 tax court case Giannini v. Commissioner ruled the opposite. In this case, a company president informed his company that he would accept no further compensation and told them to “do something worthwhile” with the funds. The tax court ruled that the refused funds were not taxable.
What is the difference between these two situations? It seems to be control. In Giannini v. Commissioner, the company president had no control over what his employer did with the refused funds. In the example of the minister who took the check and then donated it, the minister accepted the funds and had control over them, albeit briefly.
If you are refusing salary, we recommend clearly documenting the refusal, ensuring none of the refused funds are received by you or your accounts, and having no control or suggestion over what the church does with the funds. This should help reduce the chances that IRS will want to tax the refused salary.
Looking to cut costs? Clergy Financial Resources offers Church Payroll programs as low as $55 a month. Visit our website at https://www.clergytaxnet.com/services/church-payroll/ for more information.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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