Clergy & the Church
This page contains questions and answers that pertain to churches as bodies.
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1 - What constitutes a church in the eyes of the Internal Revenue
2 - Does a church have to apply to the IRS to obtain 501(c)(3) tax-exempt status?
3 - Why have I heard about churches that have filed for 5-1(c)(3) status with IRS Form 1023 and are now listed in IRS Publication 78?
4 - Is a Federal Employer Identification Number (FEIN) necessary for a church?
5 - Does a church have to file an annual income tax return with the IRS?
6 - Is a church subject to tax on any income from an activity that is unrelated to its exempt purposes?
7 - Are churches liable for withholding and payment to the government of payroll taxes?
8 - When are churches not liable for Social Security and Medicare taxes?
1. What constitutes a church?
The Internal Revenue code does not specifically define the term
church. However, because special tax rules apply to churches,
it is important to distinguish churches from other religious organizations.
Certain characteristics are generally attributed to churches.
These attributes were developed by the IRS and by court decisions,
and they include the following:
1. A distinct legal existence.
2. A recognized creed and form of worship
3. A definite and distinct ecclesiastical government
4. A formal code of doctrine and discipline.
5. A distinct religious history
6. A membership not associated with any other church or denomination.
7. An organization of ordained ministers
8. Ordained ministers selected after completing prescribed courses of study or examination by doctrinal questioning
9. Established places of worship
10. A literature of its own
11. Regular congregations
12. Sunday schools for the religious instruction of the young
13. Schools for the preparation of its ministers
Although the foregoing list is not all inclusive and not all the attributes must be present in every case, these characteristics, together with other faces and circumstances, are generally used to determine whether an organization constitutes a church for federal tax purposes.
2. Does a church have to apply for tax exempt status?
No! Section 508(c) of the Internal Revenue Code specifically states that churches, their integrated auxiliaries, and conventions or associations of churches are not required to apply for (IRS Form 1023) and obtain recognition of tax-exempt status from the IRS in order to be treated as tax exempt, provided they meet the requirements of section 501(c)(3) of the IRS Code. In general, those requirements are as follows:
1 The organization is organized exclusively for exempt purposes, (i.e. religious, charitable, educational) purposes;
2. The organization is operated exclusively for exempt purposes;
3. None of the organization's net earnings inures to the benefit of any private individuals;
4. The organization does not engage in any substantial efforts to influence legislation; and
5. The organization does not intervene or participate in political campaigns. A properly constituted Constitution and Bylaws are also required.
3. 501(c)(3) status and IRS Publication 78
While there is no governmental requirement for churches to file with ITS to obtain 501(c)(3) status, some churches have elected to do so to meet the requirements for participation in various secular activities or programs that require the church to be listed in IRS Publication 78. Churches wishing to participate in food bank programs, corporate matching donations, foundation grants, etc., are examples of those who elect to file IRS Form 1023.
4. Federal Employer Identification Number
Yes! A FEIN (sometimes erroneously referred to as Federal Tax Number) is absolutely required. Federal Regulations state that every tax-exempt organization, including a church, is required to have a Federal Employer Identification Number (FEIN) whether or not it has any employees. It is to be given to the bank when opening church bank accounts and must be used on any employee or self-employed person's tax forms (i.e., W-2, 1099 MISC, 941 Quarterly, etc.) that must be filed with the IRS to account for employee pay and any tax withholdings. You can obtain FEIN by submitting an IRS Form SS-4 to the IRS. The FEIN number that you will receive will be a nine digit number in the following format:m 12-3456789.
5. Annual income tax return
No! Exempt churches, their integrated auxiliaries, and conventions or associations of churches are not required to file federal income tax returns on church income, or, for that matter, the usual information return filed by tax-exempt entities (Form 990, Return of Organization Exempt fromIncome Tax). However, the organization may have to file Form 990-T, Exempt Organizations Business Income Tax Return, if it is generating gross income from an unrelated business of $1,000 or more.
6. Taxes on income from activities not related to tax-exempt status.
Yes! Churches, like other tax-exempt organizations, may engage in income producing activities unrelated to their tax-exempt purposes. However, the net income from such activities may be subject to unrelated business income tax. If a church or other exempt organization has gross receipts of $1,000 or more from the conduct of any unrelated trade or business, it may be required to file Form 990-T, Exempt Organization Business Income Tax Return. The Form 990-T is due the 15th day of the fifth month following the end of the church's tax year.
Income from an activity will be subject to the unrelated business income tax if the following three conditions are met:
1. The activity constitutes a trade or business;
2. The trade or business is regularly carried on; and
3. The trade or business is not substantially related to the organization's exempt purpose.
The fact that the organization uses the income to further its charitable or religious purposes does not make the activity substantially related to its exempt purposes.
There are certain exceptions and exclusions to the unrelated business income tax. Therefore, even if an activity meets the above three criteria, the income may not be subject to the unrelated business income tax if, for example, (1) substantially all of the work in operating the trade or business is performed by volunteers; or (2) the trade or business involves the selling of merchandise substantially all of which was donated. If either of these exceptions applies, the income from the activity is not treated as unrelated trade or business income. Further, in general, royalties and interest aren't subject to the unrelated business income tax.
Generally, the income derived from the rental of real property or certain personal property is excluded from unrelated trade or business income. However, there are certain situations in which rental income may be unrelated business taxable income. For example, if a church rents out property on which there is debt outstanding (for example, a mortgage note), the rental income may constitute unrelated debt financed income subject to unrelated business income tax. Also, if personal services are rendered in connection with the rental, then the income may be unrelated business taxable income (for example, if church facilities are rented out for wedding receptions and catering services are provided by the church). Whether an income producing activity is unrelated trade or business activity depends on all the facts and circumstances.
Yes! While churches in general are exempt from federal income tax on their income, they are not exempt from the requirement to withhold (and submit to the government) payroll taxes for their employees, as well as to pay the employer's share of Social Security and Medicare taxes. The federal income tax is a pay-as-you-go tax system. You must pay your taxes you receive or earn income during the taxable year. There are two ways to pay as you go; (1) through normal payroll withholding by your employer, or (2) through estimated tax payments by the ordained, licensed, or commissioned minister, to the IRS.
Wages paid to non-ministerial church employees are subject to Social Security and Medicare taxes unless one of the following applies:
1. The church pays the employee wages of less than $100 in a
2. A church, its integrated auxiliaries, or a convention or association of churches that is opposed to the payment of Social Security and Medicare taxes for religious reasons can file Form 8274 (Certification by Churches and Qualified Church Controlled organizations Electing Exemption from Employer Social Security and Medicare Taxes) to elect exemption from Social Security and Medicare taxes. The organization must file for exemption before the first date on which a quarterly employment tax return would otherwise be due (Form 941). Simply put, the Form 8274 must be filed within the first quarter after hiring your first non-ordained, licensed, or commissioned employee.
This election does not relieve the organization of its requirement to withhold income tax on wages paid to its employees. Further, if such election is made, the employee of the church that is exempt from Social Security and Medicare tax withholding and matching, must pay 100% of the self-employment tax (currently 15.3%) themselves in quarterly payments direct to the IRS by filing IRS Form 1040ES each quarter.