Does a church have to file taxes? Usually not an annual income tax return, because a church is automatically exempt under Section 501(c)(3) and is excused from the yearly Form 990 that other nonprofits must file. But that exemption is narrower than it sounds. A church still has to file and pay tax when it earns money from business activity outside its religious mission, when it employs staff, and when it pays a minister. Skip those filings and the penalties add up quickly.
The Annual Return Churches Do Not File
Most tax-exempt organizations file Form 990, 990-EZ, or the postcard-sized 990-N every year to report their finances to the IRS. Churches are exempt from all three.1Internal Revenue Service. Filing Requirements for Churches and Religious Organizations Churches are also excused from federal unemployment tax (FUTA), and they do not have to apply to the IRS for exempt status in the first place, though many file Form 1023 voluntarily to obtain a determination letter that reassures donors and banks.2Internal Revenue Service. Churches, Integrated Auxiliaries and Conventions or Associations of Churches
Tithes, offerings, and donations that support the church’s religious mission are not taxed, and investment income tied to those funds is generally exempt as well. State and local exemptions for property tax, sales tax, and state income tax often apply too, but the rules vary by state and county and sometimes require a separate application.
None of that means the mailbox is empty. The filings below are the ones churches actually have to make.
Form 990-T: Tax on Unrelated Business Income
If a church runs an activity that looks like a business, does it regularly, and cannot tie it to its religious purpose, the income is subject to Unrelated Business Income Tax.3Internal Revenue Service. Unrelated Business Income Tax Once gross income from those activities reaches $1,000, the church must file Form 990-T and pay tax on the net.4Internal Revenue Service. Publication 598, Tax on Unrelated Business Income of Exempt Organizations
Common triggers include operating a commercial parking lot, selling advertising in a church bulletin, or renting out the fellowship hall to corporate clients on a recurring basis. The fact that every dollar of profit goes back to fund ministry does not, by itself, make the activity related.4Internal Revenue Service. Publication 598, Tax on Unrelated Business Income of Exempt Organizations
Two exceptions rescue most churches from surprise UBIT bills. If substantially all the work is done by volunteers, the activity is excluded. A bake sale or rummage sale staffed by congregation members will not trigger the tax. If the church sells donated merchandise rather than merchandise it purchased, that income is also excluded, which is why church thrift stores generally owe nothing.5Internal Revenue Service. Unrelated Business Income Tax Exceptions and Exclusions
Payroll Filings for Church Employees
A church with staff has the same payroll duties as any other employer. For non-clergy employees such as office administrators and custodians, the church withholds federal income tax and pays both the employer and employee shares of Social Security and Medicare under FICA. That means filing Form 941 each quarter to report the withholding and the FICA taxes, and issuing each employee a Form W-2 at year’s end.
There is one route out of the employer FICA share. A church that is opposed on religious grounds to paying Social Security and Medicare taxes can file Form 8274 to elect an exemption from the employer’s share. The election has to be filed before the first quarterly employment tax return would otherwise be due.6Internal Revenue Service. Elective FICA Exemption – Churches and Church-Controlled Organizations The tax does not disappear. Employees of an electing church become responsible for self-employment tax on their own earnings, reported on Schedule SE. The IRS can also revoke the election retroactively if the church fails to issue W-2s for two consecutive years.
Filings Tied to Paying a Minister
Ministers sit in an unusual position. For income tax, a minister on the church’s payroll is a common-law employee and receives a W-2. For Social Security and Medicare, the same minister is treated as self-employed regardless of employment status, so the church does not withhold FICA from the minister’s pay. The minister pays self-employment tax on Schedule SE instead.7Internal Revenue Service. Topic No. 417, Earnings for Clergy Fees the minister receives directly from members for services like weddings and funerals are subject to self-employment tax too.
The housing allowance is where paperwork most often goes wrong. Under Section 107, a minister can exclude from gross income either the rental value of a home the church provides or a cash housing allowance paid as part of compensation.8Office of the Law Revision Counsel. 26 U.S. Code 107 – Rental Value of Parsonages The excludable amount is the smallest of three figures: the amount the church officially designated in advance as a housing allowance, the amount actually spent on housing, or the fair market rental value of the home with furnishings and utilities.9Internal Revenue Service. Ministers’ Compensation and Housing Allowance The exclusion applies to income tax only. The full allowance still counts as net earnings for self-employment tax, and anything above the excludable limit gets reported as wages on the minister’s individual return.
A minister who is conscientiously opposed to accepting public insurance benefits can apply to opt out of self-employment tax by filing Form 4361. Financial preference is not a valid basis. The minister has to inform the ordaining body of the opposition before filing, and the deadline is the due date (including extensions) of the return for the second year in which net self-employment earnings from ministry reached at least $400.10Internal Revenue Service. Form 4361, Application for Exemption From Self-Employment Tax Miss that window and the option is gone for good.
What a Late Filing Costs
Form 990-T carries a late-filing penalty of $20 per day, capped at either $10,500 or 5 percent of gross receipts, whichever is less. Larger organizations with gross receipts above roughly $1.1 million face a daily penalty of $105 and a cap of $54,500.11Internal Revenue Service. Annual Exempt Organization Return: Penalties for Failure to File These thresholds are adjusted for inflation. Late payroll returns and late payroll deposits carry their own separate penalties and interest.
What Can Cost a Church Its Exemption
Filing on time is only part of protecting the exemption. Three restrictions matter most.
A church’s income cannot flow to insiders for private benefit. Paying a pastor an unreasonable salary, letting a board member use church property rent-free, or funneling church funds into a leader’s business all count as private inurement.12Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations Under Section 4958, the IRS can hit the individual who received the excess benefit with an excise tax of 25 percent, rising to 200 percent if the situation is not corrected in time. Organization managers who knowingly participated face a 10 percent tax.13Office of the Law Revision Counsel. 26 U.S. Code 4958 – Taxes on Excess Benefit Transactions
Churches are absolutely prohibited from participating in political campaigns for or against any candidate for public office. Endorsements from the pulpit, campaign literature in the lobby, and contributions of church funds to a campaign all violate the rule. Nonpartisan voter registration drives and candidate forums are permitted as long as no candidate is favored.14Internal Revenue Service. Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations A church may lobby on legislation, but lobbying cannot become a substantial part of overall activity. There is no bright-line percentage, which makes the test hard to plan around.15Internal Revenue Service. Measuring Lobbying: Substantial Part Test
If exemption is revoked, all income becomes taxable and the church must begin filing corporate income tax returns, typically Form 1120. Donors lose their deduction, and the church is removed from the IRS’s list of eligible tax-exempt organizations.16Internal Revenue Service. Automatic Revocation of Exemption Reinstatement requires a fresh application, and any gap between revocation and reinstatement leaves the church exposed to tax and its donors without deductions for gifts made in the meantime.