Do churches pay taxes? Eleven questions about churches and the tax man

Ask five people at a dinner party whether churches pay taxes and you will get six answers and one argument. One guest will say churches are tax-free because they are greedy. Another will say they are tax-free because the Constitution says so. A third will announce that the pastor does not pay a dime, which would surprise the pastor. Somebody will bring up a televangelist. The dessert will arrive cold.

Let me save you the argument. The honest answer is that it depends on which tax you mean, and the details are more interesting than the slogans on either side. This is a question-and-answer post, eleven questions in all, and I will give the straight version of each, including the best case against the exemption. Nothing here is tax or legal advice, and the rules vary by state, so for your own church, talk to your denomination, a tax professional, and your state revenue department.

The short answer

Churches are generally exempt from federal income tax and, under state law, from property tax on land used for worship. They are not exempt from every tax. Employees' wages are generally subject to withholding. A church that runs an unrelated business can owe tax on that income. And pastors pay income tax and Social Security tax, with one special rule about housing that we will get to.

Income tax and exempt status

1. Do churches pay federal income tax?

Generally not. Section 501(c)(3) of the Internal Revenue Code exempts organizations "organized and operated exclusively" for religious, charitable, educational and certain other purposes, and churches fall within it. The same section covers hospitals, schools, museums and charities. A church is not singled out for special treatment. It is one of a large family of nonprofits that Congress has chosen not to tax on their mission income.

2. Does a church have to apply for exemption?

No. Most nonprofits must file an application with the IRS to be recognized as exempt. Churches do not. Section 508(c)(1)(A) treats them as exempt automatically. A church may ask the IRS for a determination letter, and many do, because a letter reassures donors, banks and grant makers. But the exemption does not depend on it.

Why the difference? Part of the answer is history, and part is about avoiding government judgment about what counts as a church. Any application process would require an agency to decide whether a particular group's religion is real, and that is a question a government has no business deciding.

3. Do churches pay any taxes at all?

Yes, several kinds.

• Payroll taxes. A church that employs a janitor, a secretary or a music director generally withholds income tax and Social Security from their wages like any employer. The pastor is handled differently, as we will see.
• Tax on unrelated business income. Since the Tax Reform Act of 1969, churches have been subject to the tax on income from a trade or business regularly carried on that is not substantially related to their exempt purpose. If a church runs a commercial parking lot or a restaurant open to the public, expect to owe on the profit.
• Sales and other local taxes. These depend on the state. Some exempt church purchases and some do not.

Notice the logic. The exemption is for the religious mission, not for running a pizzeria on the side.

Property tax

4. Why are church buildings exempt from property tax?

Because every state has chosen to exempt them, and the Supreme Court has said that the choice is constitutional. Property tax is a state and local matter, so the exemption comes from state law, not from the federal government.

The leading case is Walz v. Tax Commission of the City of New York, decided in 1970. A property owner in New York challenged the exemption of church property, arguing that it forced him to subsidize religion. The Court rejected the challenge by a vote of 7-1, in an opinion by Chief Justice Burger. Three points stand out.

First, the Court said that exempting churches is an act of what it called benevolent neutrality, not sponsorship. The government was not endorsing religion. It was declining to tax a class of institutions that included churches, hospitals, libraries and other nonprofit groups.

Second, taxing churches would create its own entanglement. Assessors would have to value sanctuaries, tax collectors would have to examine church finances, and liens and foreclosures would put government in the position of seizing houses of worship. The Court thought that more entangling than leaving them alone.

Third, the practice was old. Exemption had been universal across the states for as long as there had been states.

Justice Douglas dissented, arguing that tax exemption is a form of financial aid. His dissent is where much of the modern argument against the exemption starts.

One note: most states exempt only property used for religious purposes. A church that owns an apartment building and rents it out commercially may find that property taxed. The details differ by state.

5. Isn't the exemption just a subsidy?

This is the best argument against the exemption, so let me state it at its strongest.

The critic says: when a church does not pay property tax, the fire department still shows up when the building burns. The police still patrol the block. The roads still carry the congregation on Sunday. Someone pays for those services, and it is the neighbors. An exemption is therefore a transfer from taxpayers to churches, whatever we call it. Economists count it as a "tax expenditure," a cost that Congress or a legislature has chosen to bear. In a town where a large share of the land is exempt, the burden on the remaining taxpayers can be real. And if it is a subsidy, then a person who rejects a particular church's teaching is helping to pay for it.

That is a serious argument, and part of it is right: the burden on the rest of the tax base in towns with a lot of exempt land is genuine. Here are the answers.

1. Not taking is not the same as giving. A subsidy is a payment from the treasury. An exemption leaves money in the hands of the people who earned or donated it. Critics say this is semantics, and I'd answer that the semantics are the whole question: a government that decides what to tax is not thereby the owner of everything it chooses not to tax.

1. Churches are not singled out. The same rule covers charities, schools, hospitals and museums. Taxing only churches would target religion, and the Court has said the Free Exercise Clause does not allow that.

1. Taxation requires evaluation, and evaluation requires entanglement. John Marshall wrote in 1819 that the power to tax involves the power to destroy. The entanglement reasoning in Walz rests on the same worry: a power to tax churches shades into a power over churches.

1. The local-cost problem has local remedies. Many cities ask large nonprofits to make voluntary payments in lieu of taxes, and some churches do. A state legislature can also address the problem directly.

I think the exemption is justified, but I do not think the critics are acting in bad faith, and a conservative should be able to explain the position without sneering.

Politics from the pulpit

6. What is the Johnson Amendment?

In 1954, Congress added to the tax code a rule, offered by then-Senator Lyndon Johnson, that organizations exempt under Section 501(c)(3) may not "participate in, or intervene in" any political campaign on behalf of or in opposition to a candidate for public office. Historians still argue about why he proposed it. The text is what matters. It applies to all 501(c)(3) organizations, not only churches. The penalty for violating it can include loss of exempt status and excise taxes.

Conservatives have complained about the rule for decades, arguing that it chills pastors' speech and that the government has no business policing sermons. In May 2017, President Trump signed an executive order directing the Treasury Department to use maximum enforcement discretion and avoid taking adverse action against religious groups for speech on political issues from a religious perspective. An executive order cannot repeal a statute, however, so the amendment remains in the code unless Congress changes it. If you want the legal debate over what the government may and may not tell a church, why the government cannot tell a church who its ministers are covers a related area.

7. So what can a pastor say about politics?

Quite a lot. The rule does not prohibit preaching on policy and moral issues. A pastor may preach on abortion, marriage, poverty, immigration, war, taxes or religious liberty, and name the biblical basis for the view. A church may also host nonpartisan voter registration, circulate nonpartisan voter guides, and, within limits, engage in lobbying that is not a substantial part of its activities.

What it may not do is endorse or oppose a candidate. The line runs between "here is what Scripture says about the unborn" and "vote for Candidate X because of it." A pastor speaking in a personal capacity, outside the pulpit and not on church letterhead, is generally in a different position from the church itself. Where the line gets blurry, ask a lawyer before the sermon, not after the audit.

Pastors and paperwork

8. What is the parsonage allowance?

Section 107 of the Internal Revenue Code lets a minister of the gospel exclude from income either the rental value of a home provided as part of pay, or a housing allowance paid to the minister, to the extent it is used for housing. The amount is limited to the lowest of the amount designated in advance by the church, the actual housing costs, and the fair rental value of the home with furnishings and utilities.

The exclusion for a parsonage goes back to the 1920s, and the allowance for cash was added in 1954. The rule was challenged as unconstitutional, and in 2019 the Seventh Circuit upheld it. It is not a loophole for the church. It benefits the minister, and critics call it a special break for clergy. Supporters answer that it is a historic rule that mirrors the tax-free housing provided to military personnel and certain employees who must live on site.

9. Does the pastor pay Social Security tax?

Yes, in a way that surprises people. For income tax purposes a minister is generally treated as an employee of the church. For Social Security purposes, ministers are treated as self-employed, which means they pay the self-employment tax on their ministerial earnings, and the housing allowance, though excluded from income tax, is generally included for that purpose. A minister who has a conscientious objection to accepting public insurance benefits may apply for an exemption, but the application is for a narrow category and the deadline is short. A tax professional familiar with clergy rules is worth the fee.

10. Why don't churches file Form 990?

Most tax-exempt organizations with significant revenue must file an annual information return, Form 990, which becomes public and lists revenue, spending and compensation of top staff. Churches are excused by statute, as are their integrated auxiliaries and conventions or associations of churches.

Why? The same entanglement concern as before. A mandatory return would mean government forms asking a church to classify its spending as religious or not. Critics argue that this leaves donors without information. Many churches respond with voluntary accountability, such as publishing budgets, using outside auditors, or joining a group like the Evangelical Council for Financial Accountability, which was founded in 1979 to set standards for member ministries. If you give to a church, ask to see its budget. A well-run church will be glad to show you.

11. Can the IRS audit a church?

Yes, but with guardrails. Section 7611, enacted in 1984, sets special rules for church tax inquiries and examinations. In outline: the IRS may begin an inquiry only if a high-level Treasury official reasonably believes, on the basis of facts and circumstances, that the church may not qualify for exemption or may be engaged in taxable activity. The church gets written notice and an opportunity to respond. A full examination of church records can follow only if concerns are not resolved, and there are time limits, including a two-year limit on completing the examination.

The rule exists because the power to inspect a church's books is a power over the church. Congress decided to put a high-level official between a suspicion and an auditor's visit.

What to do with all this

If you belong to a church, do not guess about any of this. Ask your treasurer what the church files, and if your church has a food pantry or other ministry, see A church food pantry checklist, from IRS rules to dignity at the door for the practical side. If you give, Does your giving change your tax bill? A worksheet for church families shows how your gifts interact with your own return. For a plain-English look at the debate over what the tax code actually does to families, seven tax myths that scare working families and cost them money is a good companion. And the broader church-and-state background is in where 'a wall of separation' really comes from and what it was built for.

The bottom line

• Churches are generally exempt from federal income tax, automatically, and from state property tax on worship property. They still pay payroll taxes on employees and tax on unrelated business income.
• The Supreme Court upheld the property-tax exemption 7-1 in Walz in 1970. The exemption is a policy choice by the states, and the critic's subsidy argument deserves a real answer, not a sneer.
• Pastors can preach on any issue, but a church may not endorse or oppose a candidate. When in doubt, call a lawyer before the sermon.
• Pastors pay income tax and self-employment tax, with a special housing exclusion under Section 107.
• If you give to a church, ask to see the budget. Voluntary transparency is the conservative answer to the missing Form 990.