The IRS doesn't provide clear guidance about exactly how churches are supposed to acknowledge and handle pastoral love offerings.
In our experience we recommend the following guidelines for classifying love offerings:
1. It cannot be for services rendered
2. Must be spontaneous in nature
3. Cannot be solicited
4. Cannot be a tax deduction for the donor
A pastor that has love offerings given to him by members of the church are taxable...because when a love offering is given to a minister by a church member it's because the church member is motivated by his or her leadership or services as a minister, and for this reason the love offering is not a gift, but rather compensation that is taxable. Even if the members wanted him to receive it as a gift, it cannot be ruled as a gift because of his relationship with the members as a minister of the gospel.
This being said, a pastor is "given" a love offering in two ways. Either from the member through the church which in turn gives it to the pastor, or directly from the member to the pastor. Either way the love offering is taxable income, however, with the latter the gift is voluntarily reportable; meaning the only person that can enforce the reporting of the income is the pastor himself. The church on the other hand acts as an agent of the IRS and is required to document the love offerings and report them on the pastors W-2.
The absolute worst thing a church can do is collect love offerings then hand it directly to the pastor. All offerings received from the congregation should be documented decently and in order and then deposited into the church's bank account.
For more clarification or if you have additional questions or concerns, please contact us.