Church Tax & Law

Churches are not set apart from Uncle Sam's reach for taxes.

Houses of worship and religious organizations in the U.S. must meet certain requirements to attain tax-exempt status. The IRS Tax Guide for Churches and Religious Organizations states that such organizations must have "religious, educational, scientific or other charitable purposes," and the net earnings must not go to any one person or shareholder. To gain tax-exempt status, churches need to file IRS Form 1023: Application for Recognition of Exemption Under Section 501(c)(3).

Significance

Churches, while generally tax-exempt, still must know which taxes and laws may affect their operation, such as those related to clergy. The Internal Revenue Service defines clergy as people "duly ordained, commissioned or licensed by a religious body constituting a church or church denomination," according to IRS Publication 517, Social Security and Other information for Members of the Clergy and Religious Workers.

Income Tax

Churches report wages given to clergy by using Form W-2, but don't have to withhold income tax from clergy, the IRS says. The employees, however, may choose to withhold money by filing IRS Form W-4, Employees Withholding Allowance Certificate. Other items to consider regarding the compensation of ministers include Social Security, Medicare allowance and housing allowance, if applicable.

Unrelated Business

Though tax-exempt as an entity, a church's income-generating activities must stay in compliance with the law. The IRS considers an activity subject to tax if it constitutes a trade or a business, occurs regularly or is substantially unrelated to the exempt purpose of the organization. The IRS points to advertising, gaming, sale of merchandise and publications as examples of potentially tax-incurring activities.

Mileage and Housing

Mileage rates constantly change, and the deduction rates for 2010 vary according to use of the car. For instance, the IRS allows a deduction of 50 cents per mile for a vehicle used for ministry, and 16.5 cents when used for moving. Charitable use of the car brings a 14-cent deduction. Housing allowances, while not excluded for self-employment tax purposes, aren't included in gross income for income tax purposes.

Considerations

Churches must also consider the laws regarding charitable contributions. The IRS says religious organizations must offer to provide a disclosure statement to donors, which donors can use as proof of a contribution on their federal income tax return. The statement may include the name of the organization, the amount of cash contribution or description of a non-cash contribution, and a statement that the church provided no goods or services in exchange for the contribution, if applicable.

References

• IRS.gov: Tax Information for Churches and Religious Organizations
• Synod of Mid-America: Minister's Salary Committee Report
• IRS.gov: Social Security and Other Information for Members of the Clergy and Religious Workers
• IRS.gov: Charitable Contributions Substantiation and Disclosure Requirements
• IRS.gov: Tax Guide for Churches and Religious Organizations

Resources

• IRS.gov: Form 1023