From time to time churches come to me to ask about the use of Benevolence Fund to help the needy. Sometimes there are people in the church who want to help certain needy individuals. Sometimes the churches establish such Fund to provide help to those in need. Besides benevolent purposes, designated giving to missionaries or short-term missions participants falls under the same principles. There are important tax issues involved, since the donors would usually want tax deductible receipts.
Q: Is benevolence donation tax-deductible?
A: It depends on how it is set up and done. If I give the church $500 and specify that it is for XXX, and the church follows my order and give it to XXX, then it is a gift and not tax deductible. But if the church sets up a benevolence fund, and the church decides on how to use the fund to help people, and I give $500 to the benevolence fund without any specific designation, then the church can consider this a donation and issue me a tax deductible receipt. The key is the church alone controls on how the funds are used.
Q:Is benevolence payment taxable income? Should our church issue 1099 to recipients?
A: If it is a one time giving then it is a gift and no 1099-MISC or 1099-NECis needed. But if you are doing this every month for several months then you need to issue 1099-NEC which is a new form for 2020. The recipient may need to treat it as nonemployee compensation and report it on their tax return.
Q. Any limitation on benevolence payment?
A. No. The church can consider the needs and make its decision. It should not be based on how much money it receives. The best way is to decide on an amount ahead of time, and then encourage members to contribute into the benevolence fund. The amount the church decides should be unrelated to how much contribution is received from the members.
Q. How should church handle benevolence fund?
A. Some Chinese churches have this benevolence fund set up so they can respond to needs quickly. Most Chinese churches do not have such a fund set up, and when the need arises then they would make a special collection to help. It is always better to have a fund already set up and ready to go. The things that should be considered include:
1. Oversight and accountability: the Deacon Board or Church Council should have oversight responsibility for establishing policies regarding the raising and disbursing this fund. It should review the fund annually to make sure it adheres to policies.
2. On-going administration: where is such fund kept? Most churches would use the same bank that the church has the bank account. Some even put it in the same bank account with a Church’s General and building funds but they use sub-ledgers to segregate each fund. How often should the oversight committee be given an accounting of the fund? Is the church going to issue 1099 forms or not? If it is a one time assistance then you do not need to issue any 1099. However, if it’s on-going and over $600 then 1099s forms have to be issued.
3. Source of funding: How do you raise the initial funding? The church could decide to move some funds from General Fund into this Fund to get it started. How do you replenish the fund? Members of the church can donate into the fund and get a deductible receipt as long as they do not designate to whom the funds should be given to.
4. Target of assistance: need to decide if only church members can receive assistance? What about the Christian community in general? What about the entire community in general?
5. Criteria for providing financial assistance: the fund should provide individuals or families during a time of hardship or crisis by temporarily assisting them with their basic needs. You probably do not want to provide assistance when people are in debt due to mismanagement of personal finances or addictions, business losses or other non-basic needs.
6. Application and approval process: How should people apply for assistance? Who needs to approve the giving of such funds. You can consider giving pastoral staff a certain limit to approve the disbursement of search funds. If the disbursement is over this limit then it needs to go to Church Council or the committee for approval.
Q. Do you have a Benevolence Fund Policy sample?
A. Here is one from the ECFA which you can use as a model.