Churches occupy a distinct place in the tax code of the United States. They are tax exempt, but that is not where the uniqueness lies. Many types of charitable organizations are considered tax-exempt non-profit organizations. Most organizations wishing to obtain tax exempt status must first file Form 1023 (or the new Form 1023EZ) with the IRS, seeking approval as an IRS-qualified tax exempt organization. The unique aspect of a church is that qualifying as tax exempt is automatic if it meets the IRS definition of a 501(c)(3) organization:
1. The organization must be organized and operated exclusively for religious, charitable, scientific, or other charitable purpose.
2. Net earnings may not inure to the benefit of any private individual or shareholder.
3. No substantial part of its activity may be attempting to influence legislation.
4. The organization may not intervene in political campaigns.
5. The organization’s purposes and activities may not be illegal or violate fundamental public policy.
Obviously, there are many organizations that meet this criteria, but not all are churches. Colleges and universities, medical research, humanitarian organizations, and the like can all be tax exempt organizations, but are in no way considered churches. Nothing in this definition would define a church. But an organization meeting these criteria that affirms they are a church will receive the automatic exemption. At least two issues arise at this point.
First, a distinction must be made between a church and a religious organization. All churches are considered religious organizations, but not all religious organizations are considered churches. Religious organizations are not places of worship. They are typically nondenominational ministries, or interdenominational and ecumenical organizations; or entities whose principal purpose is the study or advancement of religion. This distinction is important, as a religious organization must file Form 1023 to obtain tax exempt status.
The second issue is that if the IRS suspects that an organization is falsely claiming to be a church, it will investigate and make a determination. The IRS has 14 criteria that it considers important in determining whether an organization qualifies as a church. It should be noted that all 14 criteria do not need to be met, however the IRS has been unwilling to state how many are required or if some are more heavily weighted than others. However, it is apparent that the IRS considers the factors separately, giving more weight those dealing with the traditional understanding of churches such as having regular meetings and congregations.
The factors are:
1. A distinct legal existence. This normally refers to the church having the corporate form of organization.
2. A recognized creed and form of worship.
3. A definite and distinct ecclesiastical government.
4. A formal code of doctrine and discipline.
5. A distinct religious history.
6. A membership not associated with any other church or denomination.
7. An organization of ordained ministers.
8. Ordained ministers selected after completing prescribed studies.
9. A literature of its own.
10. Established places of worship.
11. Regular congregations.
12. Regular religious services.
13. Sunday schools for religious instruction of the young.
14. Schools for the preparation of its ministers.
In observing these, criteria it is somewhat apparent that they tend to favor traditional church structures or, stated another way, they favor some forms of legitimate religious expression over others. A newly-formed nondenominational church would fail to meet many of these criteria. Some courts have sought to avoid this “discrimination” by applying the “associational test” which considers an organization a church if it “brings a body of believers together on a regular basis for communal worship.” The bottom line on this is that if it looks like a church and acts like a church, it will probably be considered a church by the IRS.
One thing to keep in mind is that status as a church does not exempt a church from filing all tax returns. The church is still liable for payroll taxes on employees and must file Form 941. W-2 and 1099 forms must also be prepared and filed, as appropriate. If the church has unrelated business taxable income (UBTI), Form 990-T must be filed and tax paid on that income. Absent any UBTI, the church does not file a Form 990, nor is it liable for federal unemployment taxes. State laws vary, and some states do subject churches to state unemployment taxes.