Do We Need to Tell the IRS About Money We Make at Church?

Churches usually don't think they need to keep track of any form of money because they are nonprofit religious groups. It's true that the IRS gives churches a lot of tax incentives and special rights, but the truth regarding how to disclose income is more difficult. Church leaders, administrators, and board members need to know if their church has to keep track of money, what kinds of income need to be recorded, and how to stay in compliance.

Find Out What Churches Need to Report and Why They Don't Have to Pay Taxes

Churches don't have to apply for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code like other nonprofits do. Churches don't have to pay federal income tax on money they make that is related to their tax-exempt activities. Churches still need to be careful about several rules concerning how to declare money, though.

Automatic Exemption

Churches don't have to ask for 501(c)(3) status, but they do have to follow IRS guidelines to preserve their tax-exempt status.

If the church makes money from things that aren't related to its religious mission, it may have to pay taxes on that money and report it on IRS Form 990-T. This is called Unrelated Business Income Tax (UBIT).

Donor Reporting

Churches must thank people for their donations, especially those of $250 or more.

Churches must keep track of how much they pay their workers and make sure they pay the proper amount of taxes.

Types of Income That Churches Get a Lot Of

• Tithes and Offerings: Most of the time, they don't count as income for tax purposes.
• Rental Income: The church may have to pay taxes on the money it makes from renting out property that isn't related to its tax-exempt purpose.
• Fundraising Events: The money made from these events may or may not be taxed, depending on the type of event.
• Sales of Goods and Services: Sales that have to do with the church's tax-exempt purpose usually aren't taxed, but sales that don't have to do with the church's purpose might be taxed.
• You could have to report interest, dividends, and capital gains as investment income.

When Do Churches Have to Tell the Government How Much Money They Make?

If the church regularly performs business or trades and the money it makes isn't directly related to its exempt purpose, it has to pay Unrelated Business Income Tax (UBIT). Churches must fill out Form 990-T to report this income and pay taxes on it.

Reporting on Jobs and Paychecks

Churches must keep track of their employees' compensation, deduct income taxes, and pay Social Security and Medicare taxes unless the employee qualifies for an exemption.

State and Local Reporting Requirements

In addition to federal rules, churches may need to keep track of things like sales tax, property tax exemptions, and registrations for charity solicitations at the state and municipal levels.

How to Properly Report Church Income

• Keep Accurate Financial Records: Be very careful with all of your money sources.
• Distinguish Exempt and Non-Exempt Activities: Clearly distinguish the money that is and isn't related to the activity.
• Say Thank You for Donations: Give out receipts that meet IRS rules.
• Fill Out the Required Tax Forms: Churches that don't have to pay taxes nevertheless have to fill out employment-related forms like Form 990-T if they want to.
• To be sure you are following all the new laws and rules, talk to lawyers and tax professionals.

How the Tier 1: THE STARTUP PLAN Can Help You Report Your Income

Tier 1 is for congregations with less than 900 members. It gives:

• 10% off work that isn't part of a bundle
• $250 a month for legal work on consultations
• Email assistance for issues about following the rules
• Get the STRONGCHURCHES training and legal papers that explain how to handle money and report on it.
• A limited group of reliable advisors you can talk to

These tools help small churches feel sure that they can declare their income and preserve their tax-exempt status.

Common Questions About Reporting Church Income

• Do we have to fill out Form 990? Most churches don't have to fill out Form 990, but if they get money from a business that isn't connected to their church, they do have to fill out Form 990-T.
• Are tithes taxable income? You don't have to pay income tax on the tithes and offerings you donate to your church.
• What if we make money by renting? If you rent out property that isn't part of your business, you might have to pay taxes on the money you make. You have to tell the truth and pay the taxes.
• What should we do with gifts of land or stocks? To be legal, items must be carefully evaluated, and the donor must be acknowledged.

Disclaimer of Legal Responsibility

This blog post is not legal advice; it is just meant to give you information. If you need help with church taxes or reporting church income, please see a lawyer who is allowed to do so.

Links Inside

• Report on the Church's Legal Audit and Compliance
• Course for STRONGCHURCHES
• More information on the Startup Plan

Links Outside

• IRS Parsonage Allowance and Church Tax Info: https://www.irs.gov/charities-non-profits/churches
• ECFA Financial Accountability: https://www.ecfa.org/Content/Financial-Accountability
• State and Local Compliance Guide: https://www.nonprofitquarterly.org/compliance-state-nonprofits