When it comes to the IRS and religious organizations, these organizations fall into two categories – churches and other religious organizations. Due to the First Amendment, the IRS is extremely reluctant to tread in the area of church organizations. This is not to say that churches have carte blanche to ignore the tax laws, but that the IRS grants them a great deal of leeway in regulating them. All religious organizations are subject to the law in regard to taxation. However, many operate as if the laws do not apply to them. Some of the most common mistakes made by religious organizations are the subject of this article.
At the outset, it should be noted that churches do not have to apply for 501(c)(3) status. They may choose to do so, and there are some very good reasons that they might wish to make such an application. All other religious organizations must apply for this status by completing and filing Form 1023 or Form 1023EZ. A church is automatically treated as though it has 501(c)(3) status.
Filing a return. Churches do not have to file a Form 990. However, some churches file these returns. This is unnecessary and may cause the IRS to take a closer look at the organization. If you don’t have to file, don’t file.
Not filing a return. At the other extreme are those religious organizations that are required to file, but fail to do so. Every 501(c)(3) religious organization that is not a church must file a 990, 990-EZ, or 990-N each year. Failure to do so will result in a penalty of $20 for every day the return is late.
Improper tax treatment of employees. Some religious organizations and churches give ministers and other employees a 1099-MISC rather than a W-2 or do not give the employee any document at all. The rules determining whether a person is an employee or independent contractor are the same for religious organizations as for any other organization.
Inadequate disclosure. Religious organizations cannot hide behind the First Amendment and fail to properly disclose required information on the tax return. If the form calls for certain information, it must be provided. Likewise, expenditures should be properly categorized.
Failure to realize the purpose of filing a Form 990. In granting a religious (or any other) organization tax-exempt status, it is conferring a benefit on that organization. In return, the public has the expectation that any tax-exempt organization is being operated in a manner consistent with its purpose and within the applicable tax laws. The 990 is a public document that demonstrates a certain level of accountability to the public.
Failure to include Schedule B on the return. Schedule B is a listing of donors contributing $5,000 or more in cash or in-kind contributions during the tax year. The organization is required to disclose this information on the return. Even though the Form 990 is a public document, Schedule B is not disclosed to the public. This information is redacted.
Failure to implement or properly administer an accountable reimbursable plan for employee reimbursements. Many churches and religious organizations frequently give certain employees a travel or other allowance. Treating this as a allowance with no accountability makes this amount taxable income to the employee and should be included on a W-2. With an accountable reimbursable plan, the employee accounts to the employer for the expenses and is reimbursed. When done properly, the reimbursements are not taxable income to the employee.
Failure to deal properly with unemployment tax issues. This varies from state to state, but many states exempt churches and religious organizations from liability for unemployment taxes. Other states may levy taxes on some or all employees.
Failure to properly handle a minister’s tax withholding. Ministers occupy a unique status in our tax code. They are considered employees for income tax purposes and self-employed for social security and Medicare. The minister may choose to have voluntary withholding for income tax purposes, but the church is not permitted to treat the minister as an employee for social security and Medicare. They may not withhold these taxes from the minister.
The area of church and clergy tax law occupies a unique niche in the United States Tax Code. Many church financial secretaries, church treasurers, and even some tax preparers do not know the law in regard to churches and clergy. Some of these characteristics are also applicable to non-church religious organizations. Having a knowledgeable expert on these issues in your corner is a wise decision.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
2 comments on “Mistakes Religious Organizations Make When Filing a Tax Return”
What taxes does a minister pay on housing allowance. Federal, State, Social security, and Medicare?
A minister’s housing allowance is not subject to income tax – state or federal. However, it is subject to social security and Medicare unless the minister has opted out of social security and Medicare by filing Form 4361 and it being approved by the IRS.
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