Many people wonder, "Are churches required to file tax returns, and if so, how?" A church is exempt from federal taxation for most purposes, as long as it qualifies as a tax-exempt organization under IRS rules.
Do churches file tax returns? Yes, even if they don't have a tax obligation in some years. Do churches have to pay taxes? Yes, in some instances, based on how they earn certain types of income.
For example, a church can be taxed on income derived from activities not related to its nonprofit purpose and must file tax returns with the IRS under certain circumstances. Donors will be able to write off cash and non-cash contributions to the church on their individual income tax returns up to specific amounts announced by the IRS each year.
Read More: How to Make Church Contribution Statements
Tax Exemption for Churches
To receive church tax benefits, a church must qualify as a 501(c)(3) nonprofit organization. If it also qualifies as a 'church' under IRS rules, it need not petition the IRS for recognition as a nonprofit organization or wait for approval. In other words, anyone who donates to church that meets the requirements of a 501(c)(3) is permitted to claim a charitable deduction for donations, even though the church has not sought recognition of its non-profit status.
The IRS has set several criteria that a church must meet to qualify for tax benefits. These include a particular creed, an ecclesiastical government, a code of doctrine, an established place of worship and a regular congregation, among others. Just because an organization incorporates as a nonprofit at the state level does not mean it is a federally tax-exempt organization. It must apply for and receive 501(c) status.
Read More: Tax Laws on Church Donations
Tax Exemption for Donors
Tax-exempt status encourages people to donate money to churches by providing donors with tax benefits. For 2021, individuals can deduct a $300 donation, while couples filing jointly can donate up to $600, above and beyond their standard deduction. Those who itemize can get a deduction for qualified cash donations to churches up to 100 percent of their adjusted gross income.
Since the deduction lowers taxable income, it can also drop the donor into a lower tax bracket, resulting in a net tax savings if the donor carefully plans the amount and timing of donations. Under the CARES act and extension, this percentage has changed, so talk with a tax professional to determine the 2021 number and for years going forward.
Although churches are required to provide donors with written acknowledgements.) of donations worth $250 or more in cash, or $500 in non-cash, they need not file tax returns for donations as long as the donations are used for religious purposes.
Taxable Church Activities
Some income-producing church activity is taxable. Whether income is taxable or not depends on its relationship to the church's tax-exempt purpose.
If a church earns money selling religious literature, this income is not taxable even though the money was not donated. If a church earns money by holding a bake sale, however, the IRS might question whether a bake sale is sufficiently related to religious activity, even if the proceeds were used for religious purposes.
If a church earns more than $1,000 in income from unrelated activity during the tax year, it must file Form 990-T and pay tax on the amount in excess of $1,000.
Read More: How to Calculate Payroll Taxes
Payroll Taxes for Churches
If a church hires employees, it must deduct Medicare and Social Security taxes from employee paychecks. Two exceptions apply: churches need not deduct Medicare or Social Security from the paychecks of ordained ministers, and churches who object to withholding Medicare and Social Security taxes for religious reasons by be exempted by filing Form 8274.
Churches must issue Form W-2 to employees and Form 1099-NEC to independent contractors so that they can file their individual tax returns. They must also file Form 1096 with the IRS.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.