Minister & Church Questions & Answers

Below are several questions a minister should consider before preparing his/her 2006 federal tax return and some Q & A about the minister and his/her church.

Q. Must ministers pay federal income taxes?
A. Yes. Ministers are not exempt from paying federal income taxes.

Q. How much income must I earn to be required to file a tax return?
A. Generally, ministers are required to file a federal income tax return if they have earnings of $400 or more. Different rules apply to some ministers who are exempt from self-employment taxes.

Q. Can I use the simpler Forms 1040A or 1040-EZ rather than the standard Form 1040?
A. Most ministers must use the standard Form 1040.

Q. What records should I keep?
A. You should keep all receipts, canceled checks and other evidence to prove amounts you claim as deductions, exclusions or credits.

Q. What is the deadline for filing my federal income taxes?
A. April 16, 200x.

Q. What if I am unable to file my tax return by the deadline?
A. You can obtain an automatic four-month extension to file your 200x Form 1040 by filing a Form 4868 by April 15, 200x (the 15th of the fourth month following the end of the tax year). Your taxes still must be paid on or before April 15. You can remit such taxes along with Form 4868.

Q. Should I prepare my own taxes?
A. The answer depends on your ability and experience in working with financial information and in preparing tax returns. Keep in mind: Ministers' taxes reflect a number of unique rules, but these rules are not complex. Many ministers will be able to prepare their own tax returns if they understand the unique rules that apply. This is not hard. On the other hand, if you experienced unusual events in 2006, such as the sale of purchase of a home or the sale of other capital assets, it may be prudent to obtain professional tax assistance. The IRS provides a service called Taxpayer Assistance, but it is not liable in any way if its agents provide you with incorrect answers to your questions. Free taxpayer publications are available from the IRS and many of these are helpful to ministers.

Q. What constitues a "church" in the eyes of the Internal Revenue Service?
A. The Internal Revenue Code does not specifically define the term "church". However, because special tax rules apply to churches, it is important to distinguish them from other religious organizations. Certain characteristics are generally attributed to churches. These attributes were developed by the IRS and by court decisions and include the following:

• A distinct legal existence;
• A recognized creed and form of worship;
• A definite and distinct ecclesiastical government;
• A formal code of doctrine and discipline;
• A distinct religious history;
• A membership not associated with any other church or denomination;
• An organization of ordained ministers;
• Ordained ministers selected after completing prescribed courses of study or examination by doctrinal questioning;
• Established places of worship;
• A literature of its own;
• Regular congregations;
• Sunday schools for the religious instruction of the young; and
• Schools for the preparation of its ministers

Although this list is not all-inclusive, and all of the attributes need not be present in every case, these characteristics, together with other facts and circumstances, are generally used to determine whether an organization constitutes a church for federal tax purposes.

Q. Does a church have to apply to the IRS to obtain 501(c)(3) tax-exempt status?
A. 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 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 Internal Revenue Code. In general, those requirements are as follows:

1. The organization must be a corporation or have a corporation-like association.

2. The church must have a written document that sets forth its organization.

3. The organization must be organized exclusively for exempt purposes.

4. The organization must be operated exclusively for exempt purposes.

5. None of the organization's net earnings may inure to the benefit of any private individual, and the organizational document must include a dissolution clause that requires that in the event of dissolution the assets will be distributed to other exempt organizations and not to individuals.

6. The organization may not engage, to a substantial degree, in attempts to influence legislation.

7. The organization may not participate in political campaigns.

8. The organization must not engage in illegal activity or activity contrary to public policy.

Q. Why are some churches that have filed for 501(c)(3) status with IRS Form 1023 now listed in IRS publication 78?
A. While there is no governmental requirement for churches to file with the IRS 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, the listing of all non-profit organizations that have directly filed with the IRS and been officially given tax-exempt status through the filing process. (Remember, churches are exempt from having to file.) Churches wishing to participate in food bank programs, corporate matching donations, foundation grants, etc., are examples of those that elect to file IRS Form 1023 to become eligible for participation in these secular programs.

Q. Is a Federal Employer Identification Number (FEIN) necessary for a church?
A. Yes. A FEIN (sometimes erroneously referred to as a Federal Tax Number) absolutely is required. IRS Publication 1828 (Rev.7-2002) states every tax-exempt organization, including a church, is required to have a 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 employer, employee or self-employed person's tax forms (e.g., W-2, 1099 Misc, 941 Quarterly Employment Tax Return, 990-T) that must be filed with the IRS to account for pay and any tax withholdings. Churches can obtain a FEIN by submitting an IRS Form SS-4 to the IRS. The FEIN number assigned will be a nine-digit number in the following format: 00-1234567

Q. Does a church have to file an annual income tax return with the IRS?
A. 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 From Income Tax). However, the church may have to file Form 990-T, Exempt Organization Business Income Tax Return, if it is generating gross income from an unrelated business of $1,000 or more. Don't confuse income tax returns with the "employment" tax return(s)that may be required for your church if you have employees

Q. Is a church subject to tax on any income from an activity thatis unrelated to its exempt purposes?
A. 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 (UBIT). 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 IRS 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. See IRS website for an additional explanation.

Income from an activity will be subject to UBIT if the following three conditions are met:

1. The activity constitutes a trade or business.

2. The trade or business is regularly carried on.

3. The trade or business is not substantially related to the organization's exempt purpose

Q. Are churches liable for withholding and payment to the government of payroll taxes? A. 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. Substantial penalties may be imposed against an organization that fails to withhold and pay the proper employment tax. For example, in April 2001, one church ran up a tax debt of $6 million for its 16-year refusal to withhold employee income taxes and to pay the employer's share of Social Security taxes. Upon court order, United States marshals seized the entire church property, including the parsonage, as payment of the back taxes and penalties.

Q. When are churches not liable for Social Security and Medicare taxes?
A. Wages paid to non-ministerial (lay) church employees are subject to Social Security and Medicare taxes unless one of the following applies:

• The church pays the employee wages of less than $100 in a calendar year.
• 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 IRS Form 8274, Certification by Church and Qualified Church Controlled Organizations Electing Exemption From Employer Social Security and Medicare Taxes, to elect exemption from Social Security and Medicare taxes. The IRS Form 8274 must be filed within the first quarter after hiring your first employee who is not a minister. This election does not relieve the organization of its requirement to withhold income tax on wages paid to its lay employees. Further, if such election is made, the (lay) employees of the church who are exempt from Social Security and Medicare tax withholding and matching, must pay 100 percent of the self-employment tax themselves in quarterly payments to the IRS by filing IRS Form 1040-ES each quarter.

Q. What does the IRS look for to determine whether or not an organization is "tax-exempt"?
A. To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Click here for a full discourse regarding a church being "tax-exempt".

• Ask other ministers in your community for their recommendations.
• If possible, use a CPA who specializes in tax law and who is familiar with the rules that apply to ministers. A CPA that has completed a rigorous educational program and is subject to strict ethical requirements.
• Ask local tax professionals if they work with ministers and, if so, with how many.
• Ask local tax professionals a few questions to test their familiarity with ministers' tax issues. For example, ask whether ministers are employees or self-employed for Social Security purposes. Anyone familiar with ministers' taxes will know that ministers always are self-employed for Social Security purposes with respect to their ministerial duties. Or, ask a tax professional if a minister's church salary is subject to income tax withholding. The correct answer is no, and anyone familiar with ministers' taxes should be able to correctly answer this question.