Churches often seek meaningful ways to show appreciation for their pastor(s), especially during Pastor Appreciation Sunday. If your church plans to provide a monetary gift, understanding the tax impact and considering a "gross-up" can help ensure the gift remains a true blessing, rather than an extra tax bill in disguise.
One way to help offset the pastor's tax burden is to "gross up" the gift. A gross-up is an additional amount paid by the church within the payroll to help cover the taxes generated by the gift itself.
As a general estimate, churches may consider grossing up a gift by:
15.3% for Self-Employment Contributions Act (SECA) taxes, and
An estimated amount for federal and state income taxes.
We frequently use estimates of:
15% for federal income tax, and
5% for state income tax.
Actual tax rates will vary based on the pastor's individual tax situation, so these percentages should be viewed only as estimates.
Example
Suppose a church wants to provide a $250 gift card to its pastor.
To offset the estimated tax impact, the church could calculate a grossed-up amount of approximately $386.40. A true gross up calculation takes into consideration that the amount added to the initial amount will be taxable in addition to the original gift.
The church would:
Present the $250 gift card to the pastor.
Record $386.40 as taxable compensation through payroll.
Record $136.40 as withheld taxes (or provide equivalent compensation if income taxes are not being withheld).
Record the $250 gift card as an advance or prepaid portion of the compensation.
Without a gross-up, the pastor receives the full $250 gift card but may ultimately owe approximately $88.25 (35% of original $250) in additional taxes when filing their tax return, reducing the net value of the gift to approximately $161.75.
Need Assistance?
Most payroll providers should be able to help churches properly record these transactions. If you have questions about pastor compensation, payroll reporting, or gross-up calculations, contact Wisdom for assistance.