Exempt Status

• Most churches qualify for tax exempt status, both because of their religious purpose and their nonprofit status. Churches receive automatic tax exemption under Internal Revenue Code 503 (c) (3). This means the church does not need to pay business or income taxes on its regular revenue. To qualify for 503 (c) (3) protection a church must have primarily religious, charitable or educational purposes and not involve itself in any political campaigns or legislative developments. Despite automatic exempt status, churches still need to obtain Employer Identification Numbers from the IRS.
  
  

Business Income Tax

• Churches are still subject to Unrelated Business Income Tax, or UBIT, for any income they earn through businesses that are not directly linked to religious or educational activities. If a church's business activities remain a smaller part of its operation that its religious purposes, it can safely keep its tax-exempt status as long as it pays UBIT. Activities that subject a church to UBIT include renting property, selling merchandise, selling advertisements in church publications and charging others to use its parking lot or other facilities. Churches pay UBIT by filing IRS form 990-T, which is an Exempt Organization Business Income Tax Return.
  
  

Taxing Clergy

• Members of a church's clergy are subject to many of the same income tax laws as employees and independent contractors in other fields of work. A clergy member may be either an employee of the church or serve as a self-employed independent contractor. In the case of clergy members who are employees, as well as other church employees including custodial and office staff members, the church must withhold payroll taxes for Social Security, income tax and unemployment insurance. Self-employed clergy members are obligated to pay tax on what they earn from church duties and may need to file estimated payments throughout the course of a tax year. Clergy members who receive housing as a form of compensation do not need to claim the value of the housing as income.
  
  

Accounting

• To verify a church's tax-exempt status, the IRS requires churches to maintain accounting records that show income, payments and donations to charitable organizations or other nonprofit groups. Churches found to use income as a means of profit for an individual or shareholders risk losing their tax-exempt status. To supply proof of their tax status, churches also need to be able to supply their charter documents as well as written bylaws or a constitution that governs the organization's activities.