Q. "Can we give our retiring pastor a monetary thank-you gift?"
Answer:
Yes, but keep in mind monetary gifts to employees are subject to special rules. Two main issues must be addressed: (1) whether the gift will create excessive compensation, and (2) whether the gifts given by individual(s) will be tax-deductible. It's wise to engage a compensation expert with nonprofit experience and consult a nonprofit attorney. A single misstep can cost three to four times the amount of the gift in tax penalties and legal fees.
First, determine if the organization has adequately compensated the recipient. Gather data and compare the employees' compensation with the expected, reasonable amount for their tenure. For larger gifts (>5% percent of total compensation), use a compensation expert to gather this data.
Second, the board or finance committee must evaluate the data. If the minister has been undercompensated, they determine the maximum thank-you gift they will authorize. If the minister has been adequately compensated (or overcompensated), the organization may not give additional compensation, including a thank-you gift.
Third, notify members your raising money for the gift being sure to communicate that donations aren't guaranteed to go toward the gift. Excess funds received must be used for other organizational purposes. To be tax deductible, donors must give without directing the use of the funds to benefit any individual.
A qualified nonprofit attorney needs to assure the organization documents the above requirements so the thank-you gift will not cause the employee to pay penalties. (Up to 225% of the amount considered compensation over a reasonable amount in penalties under Section 4858, Intermediate Sanctions.) In all cases, gifts from employers to employees are always taxable and reportable and should be included in Box 1 of the employee's W-2.
Given the cost of a qualified attorney (on average about $1,500) and potential financial penalties to the recipient, thank-you gifts may be more trouble than they’re worth for both parties.