Church Benevolence Payments

Churches often designate certain funds to give to those in their community experiencing financial needs. The needs may arise from issues such as unemployment, disability, natural disasters, or illness. These funds can be given to those outside the local congregation, within the local congregation, and even to those employed by the local congregation.

Any time a church gives money to an individual person, precautions should be taken to ensure that the proper steps have been followed. Donations received by churches are tax-exempt, but only to the extent that the church uses its funds in ways that are consistent with its religious non-profit purposes. Benevolence payments are no exception. They must be made to individuals in a manner that is properly documented, and consistent with the church’s religious non-profit purposes.

Though a donor may designate that a gift is used for the church’s benevolence fund, it is not appropriate for a donor to stipulate the exact person to receive the funds. The IRS would likely consider such a designation to be the equivalent of the donor giving money directly to the needy person, which would not amount to a tax-deductible charitable donation.

As a best practice, a church should adopt a formal benevolence policy before making direct payments to needy individuals. The policy should include the following:

• A statement that donors should not designate specific recipients of benevolence fund donations;
• A statement that the church board (or its designated committee) will make determinations as to who shall receive benevolence payments;
• An explanation of the process by which individuals in need can apply for benevolence funds; and
• An explanation of who will make benevolence gift decisions (the church board or its designated committee), and how that group of people will go about deciding who receives the funds.

As stated above, benevolence funds may be made available to people in need both inside and outside of the congregation. However, special care should be taken if a member of the church board, or the benevolence committee, is considered a potential recipient of benevolence funds. Under such circumstances, a potential conflict of interest may arise if a person who makes decisions about benevolence expenditures ends up receiving funds. As with any other potential conflict of interest, the conflict is not necessarily fatal if handled properly. The church’s Conflict of Interest Policy should be followed, which would require that the interested party formerly abstain from taking part in the decision-making process regarding any funds that the party could potentially receive.

Special care should also be taken if a church employee is a potential recipient of benevolence funds. Normally, when a church gives funds to an employee beyond set compensation amounts, the excess payment is a compensation bonus, and therefore subject to income tax. In order to avoid having the funds be deemed as taxable income, the church should take care to document that the employee went through the appropriate benevolence application process, and was approved for funds based on financial need.

Contact Clergy Financial Resources to help you with the next steps.

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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.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com