Hush Money.org posted an article giving understanding of why churches do not have to be 501(c) (3). I also was wondering since our government is considered a corporation, do the churches have to give the corporation back funds very much like dividends? Well, the pastors do with taxes owed on their salary, but their housing can be covered by the church organization they are employed with. So part of the Old Testament Jewish law of tithing (food for their storehouse) for the Levitical priests goes back to the IRS.
Let's say a pastor makes $100,000 a year which was what a pastor was paid about 20 years ago of a large church for a fact. Could he through the church board take extra tithe, allocated to a general fund and pay his taxes so no out of pocket expenses goes to the IRS?
FROM HUSH MONEY.ORG
Most churches in America have organized as "501c3 tax-exempt religious organizations." This is a fairly recent trend that has only been going on for about fifty years. Churches were only added to section 501c3 of the tax code in 1954. We can thank Sen. Lyndon B. Johnson for that. Johnson was no ally of the church. As part of his political agenda, Johnson had it in mind to silence the church and eliminate the significant influence the church had always had on shaping "public policy."
Although Johnson proffered this as a "favor" to churches, the favor also came with strings attached (more like shackles). One need not look far to see the devastating effects 501c3 acceptance has had to the church, and the consequent restrictions placed upon any 501c3 church. 501c3 churches are prohibited from addressing, in any tangible way, the vital issues of the day.
For a 501c3 church to openly speak out, or organize in opposition to, anything that the government declares "legal," even if it is immoral (e.g. abortion, homosexuality, etc.), that church will jeopardize its tax exempt status. The 501c3 has had a "chilling effect" upon the free speech rights of the church. LBJ was a shrewd and cunning politician who seemed to well-appreciate how easily many of the clergy would sell out.
Did the church ever need to seek permission from the government to be exempt from taxes? Were churches prior to 1954 taxable? No, churches have never been taxable. To be taxable a church would first need to be under the jurisdiction, and therefore under the taxing authority, of the government. The First Amendment clearly places the church outside the jurisdiction of the civil government: "Congress shall make NO LAW respecting an establishment of religion, nor prohibiting the free exercise thereof."
Religion cannot be free if you have to pay the government, through taxation, to exercise it. Since churches aren't taxable in the first place, why do so many of them go to the IRS and seek permission to be tax-exempt? It occurs out of:
Ignorance ("We didn't know any better")
Bandwagon logic ("Everyone else is doing it")
Professional advice (many attorneys and CPAs recommend it)
Does the law require, or even encourage, a church to organize as a 501c3? To answer that question let's turn to what the IRS itself has to say.
Churches Need Not Apply
In order to be considered for tax-exempt status by the IRS an organization must fill out and submit IRS Form 1023 and 1024. However, note what the IRS says regarding churches and church ministries, in Publication 557:
Some organizations are not required to file Form 1023. These include:
Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men’s or women’s organization, religious school, mission society, or youth group. These organizations are exempt automaticallyif they meet the requirements of section 501(c)(3).
Churches Are “Automatically Tax-Exempt”
According to IRS Code § 508(c)(1)(A):
Special rules with respect to section 501(c)(3) organizations.
(a) New organizations must notify secretary that they are applying for recognition of section 501(c)(3) status.
(c) Exceptions.(1) Mandatory exceptions. Subsections (a) and (b) shall not apply to—
(A) churches, their integrated auxiliaries, and conventions or associations of churches.
This is referred to as the "mandatory exception" rule. Thus, we see from the IRS’ own publications, and the tax code, that it is completely unnecessary for any church to apply for tax-exempt status. In the IRS’ own words a church “is automatically tax-exempt.”
Churches Are “Automatically Tax-Deductible”
And what about tax-deductibility? Doesn’t a church still need to become a 501c3 so that contributions to it can be taken as a tax deduction? The answer is no! According to IRS Publication 526:
Organizations That Qualify To Receive Deductible Contributions
You can deduct your contributions only if you make them to a qualified organization. To become a qualified organization, most organizations other than churches and governments, as described below, must apply to the IRS.
In the IRS’ own words a church “is automatically tax-deductible.”
Churches Have a Mandatory Exception To Filing Tax Returns
Not only is it completely unnecessary for any church to seek 501c3 status, to do so becomes a grant of jurisdiction to the IRS by any church that obtains that State favor. In the words of Steve Nestor, IRS Sr. Revenue Officer (ret.):
"I am not the only IRS employee who’s wondered why churches go to the government and seek permission to be exempted from a tax they didn’t owe to begin with, and to seek a tax deductible status that they’ve always had anyway. Many of us have marveled at how church leaders want to be regulated and controlled by an agency of government that most Americans have prayed would just get out of their lives. Churches are in an amazingly unique position, but they don’t seem to know or appreciate the implications of what it would mean to be free of government control."
from the Forward of In Caesar's Grip, by Peter Kershaw
Here is the info from the IRS website for pastors...
Topic 417 - Earnings for Clergy
A licensed, commissioned, or ordained minister is generally the common law employee of the church, denomination, sect, or organization that employs him or her to provide ministerial services. However, there are some exceptions, such as traveling evangelists who are independent contractors (self-employed) under the common law. If you're a minister performing ministerial services, all of your earnings, including wages, offerings, and fees you receive for performing marriages, baptisms, funerals, etc., are subject to income tax, whether you earn the amount as an employee or self-employed person. However, how you treat expenses related to those earnings differs if you earn the income as an employee or as a self-employed person.
For social security and Medicare tax purposes, regardless of your status under the common law, the services you perform in the exercise of your ministry are considered self-employment earnings and are generally subject to self-employment tax. See Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, for limited exceptions from self-employment tax.
Facts and circumstances determine whether you're considered an employee or a self-employed person under common-law rules. Generally, you're an employee if the church or organization you perform services for has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, see Publication 15-A (PDF), Employer's Supplemental Tax Guide. If a congregation employs you for a salary, you're generally a common-law employee of the congregation and your salary is considered wages for income tax withholding purposes. However, amounts you receive directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are generally earnings from self-employment for income tax purposes. Both the salary you receive from the congregation and fees you receive from members of the congregation are subject to self-employment tax.
If you itemize your deductions, you may be able to deduct certain unreimbursed business expenses related to your services as a common-law employee on Form 1040, Schedule A (PDF), Itemized Deductions. You may need to fill out Form 2106 (PDF), Employee Business Expenses, and attach it to your Form 1040 (PDF), U.S. Individual Income Tax Return. Refer to Topic 514 for information on employee business expenses, and Topic 508 for information on the 2% of adjusted gross income limitation. For your self-employment income (the offerings or fees you receive for performing marriages, baptisms, funerals, etc.), use Form 1040, Schedule C (PDF), Profit or Loss From Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit From Business (Sole Proprietorship), to report these earnings and related expenses.
A licensed, commissioned, or ordained minister may be able to exclude from income the fair rental value of a home (a parsonage) or a housing allowance provided as compensation for ministerial services performed as an employee. A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded can't be more than reasonable compensation for the minister's services.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it's used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly relating to providing a home. The amount excluded can't be more than the reasonable compensation for the minister's services.
If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable compensation, the fair rental value of the home, or your actual expenses, you must include the amount of the excess in income.
The minister's employing organization must officially designate the allowance as a housing allowance before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable only for income tax purposes. The minister must include the amount for self-employment tax purposes.
For social security and Medicare tax purposes, a duly ordained, licensed, or commissioned minister performing ministerial services is considered to be self-employed. This means that your salary on Form W-2 (PDF), Wage and Tax Statement, the net profit on Schedule C or C-EZ, and your housing allowance less your employee business expenses are subject to self-employment tax on Form 1040, Schedule SE(PDF), Self-Employment Tax.
However, you can request an exemption from self-employment tax for your ministerial earnings, if you're opposed to certain public insurance for religious or conscientious reasons. You can't request exemption for economic reasons. To request the exemption, file Form 4361 (PDF), Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, with the IRS. You must file it by the due date of your income tax return (including extensions) for the second tax year in which you have net earnings from self-employment of at least $400. This rule applies if any part of your net earnings from each of the two years came from the performance of ministerial services. The two years don't have to be consecutive.
For more information, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.