Do churches have to pay taxes? Mostly no on federal income tax, but yes on several other things. A church owes no federal income tax on tithes, offerings, and donations tied to its religious mission, but it still pays employment taxes on lay staff, may owe a 21% federal tax on income from commercial side businesses, and faces state and local rules that shift from one jurisdiction to the next.
What Churches Don’t Pay
Federal income tax is the big one. Organizations operated exclusively for religious, charitable, or educational purposes are exempt under the Internal Revenue Code.1Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. Tithes, offerings, donations, and other revenue connected to religious activities pass through untaxed.
Churches also skip two paperwork requirements that apply to most other nonprofits. They’re automatically recognized as tax-exempt without having to file Form 1023 for a determination letter.2Office of the Law Revision Counsel. 26 US Code 508 – Special Rules With Respect to Section 501(c)(3) Organizations Some churches file anyway because a determination letter simplifies dealings with banks, state agencies, and donors. Churches are also excused from the annual Form 990 informational return that other exempt organizations must submit.3Office of the Law Revision Counsel. 26 US Code 6033 – Returns by Exempt Organizations
Federal unemployment tax is another one churches genuinely don’t pay. Services performed for a 501(c)(3) are excluded from covered employment under FUTA, so no federal unemployment tax is owed for any church employee, minister or lay.4Office of the Law Revision Counsel. 26 US Code 3306 – Definitions State unemployment rules vary; some states require churches to participate in their programs, others don’t.
Tax on Unrelated Business Income
The biggest hole in a church’s income tax exemption is the Unrelated Business Income Tax, or UBIT. If a church runs a business that isn’t substantially related to its religious mission, the profits are taxable. Funneling those profits back into ministry doesn’t cure the problem; the business itself has to be related.5Office of the Law Revision Counsel. 26 US Code 513 – Unrelated Trade or Business
A paid public parking lot on church property or a coffee shop open to the general public are the classic examples. Once gross income from unrelated business activities passes $1,000 in a year, the church files Form 990-T and pays tax on the net profits at the 21% corporate rate.6Internal Revenue Service. Unrelated Business Income Tax
Several categories of income escape UBIT even when the activity isn’t religious in nature. Businesses where substantially all the work is done by unpaid volunteers are exempt, so a volunteer-staffed car wash doesn’t trigger tax. Thrift stores selling mostly donated goods are exempt regardless of revenue.5Office of the Law Revision Counsel. 26 US Code 513 – Unrelated Trade or Business Passive investment income including dividends, interest, royalties, and rents from real property is generally excluded.7Office of the Law Revision Counsel. 26 US Code 512 – Unrelated Business Taxable Income
The rental exclusion has a catch. If the property carrying the rent has a mortgage on it, a share of the income can be taxed as debt-financed income. Churches get a more generous exception here than other nonprofits: land bought for future religious use isn’t treated as debt-financed for 15 years, compared to 10 years elsewhere.8eCFR. 26 CFR 1.514(b)-1 – Definition of Debt-Financed Property
Payroll Taxes
Tax-exempt status doesn’t spare a church from payroll. It’s an employer, and it carries most of the same obligations as any business, with one significant twist for ministers.
Lay Staff
For secretaries, custodians, music directors, bookkeepers, and other non-minister employees, the church withholds federal income tax from wages, withholds the employee’s share of Social Security and Medicare, and pays the employer’s share.9Internal Revenue Service. Publication 517 (2025), Social Security and Other Information for Members of the Clergy and Religious Workers Combined FICA runs 15.3% of wages, split evenly at 7.65% each.
Ministers Have Dual Tax Status
Ordained, commissioned, or licensed ministers sit in an unusual spot. For income tax, a minister serving a church is an employee and gets a W-2. For Social Security and Medicare, the same minister is treated as self-employed.10Internal Revenue Service. Members of the Clergy The church doesn’t withhold FICA and doesn’t pay the employer half.
Ministers instead pay both halves themselves through the Self-Employment Contributions Act (SECA) tax, reported on Schedule SE. The rate is the full 15.3%, and it applies to salary, fees for weddings and funerals, and the fair rental value of a parsonage or housing allowance.9Internal Revenue Service. Publication 517 (2025), Social Security and Other Information for Members of the Clergy and Religious Workers
A minister conscientiously opposed on religious grounds to accepting public insurance benefits can apply to exempt themselves from SECA by filing Form 4361. The deadline is the due date of the return for the second year in which net ministry earnings hit at least $400. Once approved, the exemption is generally irrevocable, and the minister permanently forfeits Social Security and Medicare benefits based on ministerial earnings.11Social Security Administration. 1131 – Exemptions From Self-Employment Coverage Many ministers later regret this decision, so it isn’t a routine tax move.
The Housing Allowance and Its Catch
A minister can exclude from gross income either the rental value of a parsonage the church provides, or a designated housing allowance used to rent or buy a home, up to the fair rental value of the home including furnishings and utilities.12Office of the Law Revision Counsel. 26 USC 107 – Rental Value of Parsonages The church has to designate the allowance formally and in advance, through a resolution, employment contract, or budget line item. Retroactive designation doesn’t work.13eCFR. 26 CFR 1.107-1 – Rental Value of Parsonages Rent, mortgage payments, insurance, utilities, and furnishings qualify. Food and household staff don’t.
Here’s the part that catches ministers off guard: the housing allowance is excluded from income tax but not from self-employment tax. It has to be added back in when calculating the SECA obligation.14Office of the Law Revision Counsel. 26 US Code 1402 – Definitions The amount that disappeared from the W-2 reappears on Schedule SE.
State and Local Taxes
State and local rules are where church tax obligations turn unpredictable. Every jurisdiction sets its own.
Property Tax
Most states exempt church-owned real estate, but typically only the portion used for religious purposes. A sanctuary and fellowship hall generally qualify. A rental property or a commercial building on the same campus may not. Most jurisdictions require an application with the local tax assessor, and continued eligibility can depend on annual filings or periodic reviews.
Sales Tax
Sales tax treatment ranges from broad exemption for items a church buys for its own use to no special treatment at all. Where an exemption exists, the church usually needs a state-issued certificate to present to vendors. Certificate validity runs from one year to indefinite depending on the state, so churches should track renewal deadlines.
Political Activity and Lobbying Limits
The federal income tax exemption comes with a hard prohibition on political campaign activity. Section 501(c)(3) flatly forbids participating in or intervening in any campaign for or against a candidate for public office, a rule commonly called the Johnson Amendment.1Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. Violation can cost a church its exempt status.
Endorsing candidates from the pulpit, distributing campaign material, or donating church funds to a campaign all fall on the prohibited side. Speaking on moral or social issues doesn’t, even when those issues sit inside political debates. Non-partisan voter guides, candidate forums with equal time, and voter registration drives are allowed. Church leaders can express personal political views as private citizens, so long as they aren’t speaking on behalf of the church.
A separate rule limits lobbying. Tax-exempt organizations can’t devote a “substantial part” of their activities to influencing legislation, judged case by case on time and money spent relative to total activities.15Internal Revenue Service. Measuring Lobbying: Substantial Part Test Churches aren’t subject to the excise taxes secular charities face for excessive lobbying, but they can still lose their exempt status.
Donor Acknowledgments
Not a tax the church pays, but a compliance duty that directly affects its donors. For any single contribution of $250 or more, the church must give the donor a written acknowledgment listing the organization’s name, the cash amount (or a description of any non-cash gift), and a statement about whether the church provided any goods or services in return.16Internal Revenue Service. Charitable Contributions: Written Acknowledgments If something was given in return, such as a dinner at a fundraising event, the letter has to include a good-faith estimate of its value. Without the acknowledgment, the donor can’t deduct the contribution.