I recently received an email with this question:
Several years ago our church was having budget issues and cut salaries, including the organist. Apparently a member started giving the organist a monthly ‘gift’ to make up for the loss of pay. The church just became aware of this because the member didn’t give a check last month and the organist is looking for her monthly gift. The church knew nothing about it and that was between her and the member that the church was not involved. The church presumes the income is not being reported. Our question is can the church get in trouble for this? Our thought is no because it is a ‘gift’ and the church is not involved.
Let me dissect this:
- If the donor gave the money for the organist and the donor received tax deduction credit, then you have a problem.
- If the organist got the money in a church check and it was not reported on the W-2, then you have a problem.
- If the organist got the money in a church check and it was reported on the W-2, then you have a problem with #1.
- If the organist got the money directly from the donor and the donor never got tax credit and the money never went through the church’s finances, then you are fine (no problem).
- You still have time to change the tax deduction statement for the donor and the W-2 statement for 2014.
- You can restate the organist’s W-2 for the prior years (however far back that goes) and quite frankly, that should be done, It will be a headache and it may trigger an IRS audit (BTW, the IRS rarely does a church audit for tax deduction purposes anymore but they are heavily into payroll fraud and will do a payroll audit in a heartbeat).
- It will almost certainly cause the IRS to issue a penalty and interest statement for unpaid employer FICA.
- I would also re-issue the donor tax deduction statements for the prior years. If the IRS audits the donor, then the donor can choose to show the IRS the incorrect statements (which were sent out years before) or the newer/corrected statements.
- Someone needs to have a conversation with the financial assistant.
- AND (strongly encouraged), get the financial assistant some continuing ed.
- Everyone should have continuing ed since laws & taxes change.
- It’s required in some professions (lawyers, doctors, CPAs) and should be required in every profession
Whether or not it is a gift is inconsequential. It is income to the organist and thus should be taxed: Federal, State, and BOTH employee and employer FICA. What matters is whether the gift went through the church’s financial system for both the donor and organist.
As to your financial assistant: at the least she needs some continuing education and training; at the worst she should be terminated. Either way, this incident should be documented and placed in her personnel jacket.
The good news in this case is that evidently the money was not going through the church but going directly from the member to the organist, circumventing the church. But that is also the bad news – there is a church member going rogue and funding his or her own favorite thing.