Religious schools that qualify as tax-exempt under Section 501(c)(3) of the Internal Revenue Code do not pay federal income tax on tuition, donations, or other revenue tied to their educational and religious mission. That is the short answer to whether religious schools pay taxes, and it is the reason most people ask the question. The longer answer is that exemption is not blanket. These schools still owe tax on income from activities unrelated to their mission, they still pay most employment taxes, and property and sales tax treatment is decided by each state rather than by the federal exemption.
Where the Exemption Comes From
Section 501(c)(3) exempts organizations operated exclusively for religious, educational, or charitable purposes.1Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. A religious school fits both prongs. Most independent religious schools apply for recognition by filing Form 1023 with the IRS and receive a determination letter confirming their status.2Internal Revenue Service. About Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
Churches, integrated auxiliaries of churches, and conventions or associations of churches are not required to file Form 1023 to be treated as tax-exempt.3Internal Revenue Service. Instructions for Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) A school operating as an integrated part of a church may fall under this exception automatically. Many church-run schools apply anyway, because a determination letter makes state agency, donor, and lender dealings simpler.
What the Federal Exemption Actually Covers
With 501(c)(3) status, the school pays no federal income tax on tuition, student fees, or charitable contributions. Donors also benefit: gifts to the school are tax-deductible for the giver.4Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
Property and Sales Taxes Are a State Question
The federal exemption does not automatically exempt a religious school from property or sales taxes. Those are state and local taxes governed by state law. Every state offers some form of property tax exemption for religious and educational nonprofits, but the school usually has to apply separately with the county or municipal assessor and show that the property is used for exempt purposes. Any portion used for unrelated commercial activity may stay taxable.
Sales tax works similarly. Many states exempt qualifying nonprofits from paying sales tax on purchases for educational use. Some states issue an exemption certificate the school presents at the register; others require the school to pay and file for a refund. The federal determination letter is almost always part of the state-level application.
Unrelated Business Income Is Taxed
Exemption ends where the school’s commercial activity begins. Income from a trade or business that is regularly carried on and not substantially related to the school’s educational or religious purpose is subject to Unrelated Business Income Tax. Renting facilities for commercial events, running a restaurant open to the public, and selling merchandise unrelated to the mission are common triggers. Once gross income from these activities reaches $1,000, the school files Form 990-T and pays tax on the net at the 21% corporate rate.5Internal Revenue Service. Unrelated Business Income Tax
Several statutory exceptions keep normal school operations out of UBIT. Under Section 513(a)(2), any trade or business carried on primarily for the convenience of the school’s students, officers, or employees is excluded.6Office of the Law Revision Counsel. 26 U.S. Code 513 – Unrelated Trade or Business That covers cafeterias and campus bookstores selling to enrolled students.7Internal Revenue Service. The Marketing of Goods and Services by Institutions of Higher Learning – UBIT Implications Section 513(a)(1) excludes any trade or business where substantially all the work is done without compensation, which protects fundraisers staffed by parent volunteers.8Internal Revenue Service. Volunteer Labor Exclusion From Unrelated Trade or Business
Employment Taxes Still Apply
Payroll is where “tax-exempt” clearly does not mean “tax-free.” For non-minister staff at a typical religious school, the school pays the employer share of Social Security and Medicare, 7.65% of wages, and withholds the employee’s matching share. Federal unemployment tax applies in most cases.
The Church-Controlled School FICA Election
Religious schools that are controlled, operated, or principally supported by a church have one option other employers do not. If the school is opposed for religious reasons to paying Social Security and Medicare taxes, it can elect exemption from employer FICA by filing Form 8274 before the first quarterly employment tax return would otherwise be due.9Internal Revenue Service. Elective FICA Exemption – Churches and Church-Controlled Organizations Employees then owe their own Social Security and Medicare through the self-employment tax system.
Ministers on the Payroll
Ministers who work at religious schools have a dual status the school needs to handle carefully. For Social Security and Medicare, ministerial earnings are treated as self-employment income even when the minister is on the school’s payroll as a W-2 employee. The minister pays self-employment tax rather than splitting FICA with the school.10Internal Revenue Service. Publication 517 (2025) – Social Security and Other Information for Members of the Clergy and Religious Workers For income tax and retirement plan purposes, they are treated as regular employees.
Ordained teachers and administrators may also qualify for the Section 107 housing allowance, which lets a minister of the gospel exclude from gross income either the rental value of a provided home or an allowance used to rent or furnish one.11Office of the Law Revision Counsel. 26 U.S. Code 107 – Rental Value of Parsonages It is not automatic. The IRS applies a balancing test that looks at whether the individual conducts worship services, administers sacraments, and serves as a spiritual leader. An ordained person doing work indistinguishable from a secular school job generally will not qualify.12Internal Revenue Service. Members of the Clergy
Student Employees
Under Section 3121(b)(10), services performed by a student who is enrolled and regularly attending classes are exempt from FICA when the work is incidental to the course of study, generally requiring at least a half-time course load.13Internal Revenue Service. Student FICA Exception If the student receives benefits like vacation, sick leave, or a retirement plan, the IRS treats them as a professional employee and the exception is lost regardless of enrollment.
How a Religious School Can Lose the Exemption
The federal exemption is conditional, and several ongoing requirements decide whether the school keeps it.
No Private Benefit
None of the school’s net earnings can benefit any private individual. Revenue must serve the mission, not enrich founders, board members, administrators, or their families.14Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations Reasonable compensation is fine; excessive pay and sweetheart deals are not. When an insider receives an excess benefit, the IRS can impose excise taxes under Section 4958 on the recipient, and in serious cases can revoke the school’s exemption.15Internal Revenue Service. Exempt Organizations Technical Guide TG 3-8 – Disqualifying and Non-Exempt Activities, Inurement and Private Benefit
No Political Campaign Activity
Section 501(c)(3) organizations face an absolute ban on participating or intervening in any political campaign for or against a candidate for public office.16Internal Revenue Service. Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations Endorsements, campaign contributions, and statements for or against a candidate all cross the line. Non-partisan voter education, such as a candidates’ forum with all sides represented equally, is allowed. Lobbying is a separate matter and is permitted so long as it is not a substantial part of the school’s activities.1Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
Racial Nondiscrimination
Every private school claiming 501(c)(3) status must adopt and publicize a racially nondiscriminatory admissions policy and admit students of any race to all programs and activities.17Internal Revenue Service. Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax The policy must appear on the school’s primary website where visitors would reasonably notice it. Compliance is certified annually: schools that file Form 990 or 990-EZ use Schedule E, and schools that do not file a Form 990, including many church-controlled schools, file Form 5578 by the 15th day of the fifth month after their accounting period ends, May 15 for calendar-year filers. A school without this policy does not qualify for exemption.18Internal Revenue Service. Revenue Ruling 71-447 – Racial Nondiscrimination Policy for Private Schools
Three Missed Annual Filings
Most tax-exempt schools must file an annual information return with the IRS, either Form 990, 990-EZ, or the 990-N e-Postcard depending on size.19Internal Revenue Service. Filing Requirements for Churches and Religious Organizations Churches and some church-affiliated organizations are excepted, and an integrated auxiliary of a church may fall within the exception.
Any organization that must file and fails to do so for three consecutive years automatically loses its tax-exempt status. There is no warning letter, no grace period, and no appeals process. Revocation takes effect on the due date of the third missed return.20Internal Revenue Service. Automatic Revocation of Exemption Once revoked, the school owes federal income tax, donors can no longer deduct contributions, and the only way back is to reapply from scratch, even for a school that was originally exempt without applying.