Church accounting & tax compliance guide
Churches enjoy unusual tax advantages — and rules that are easy to miss. This is our plain-English guide for treasurers and boards: exemption, paying your pastor, what you must file, fund accounting, and the controls that keep a congregation out of trouble.
Last updated: June 2026. General information, not tax advice — please confirm your situation with a CPA.
- 1. Does a church need to apply for 501(c)(3) status?
- 2. How should a church pay its pastor?
- 3. Does a church have to file Form 990?
- 4. What is Unrelated Business Income Tax (UBIT)?
- 5. Restricted vs. unrestricted funds — what boards must track
- 6. Handling contributions and donor receipts
- 7. What payroll and information returns must a church file?
- 8. Recordkeeping and internal controls for churches
- 9. Common church compliance mistakes we see
- Frequently asked questions
Churches enjoy automatic exemption and relief from the annual return most nonprofits file — but those advantages come with obligations that are easy to overlook, especially when the books rest on a volunteer treasurer.
At LaCombe, CPA, church work is a focus of the firm. This guide covers the compliance essentials; if your situation is complex, use it as a map, not a substitute for advice.
1. Does a church need to apply for 501(c)(3) status?
Generally no. A church that meets the requirements of Section 501(c)(3) is automatically considered tax-exempt and is not required to apply to the IRS. Many churches still choose to apply (Form 1023) for an official determination letter — useful for donor confidence, grants, and some state registrations.
Unlike most nonprofits, a qualifying church is exempt by operation of law and does not have to file for recognition. Donations are still tax-deductible to donors, and the church is still exempt, without a determination letter.
That said, a determination letter can be worth obtaining. It gives donors and grant-makers documented proof of exempt status, can simplify state sales-tax exemption and charity registration, and removes doubt for banks or vendors. Whether to apply is a judgment call based on the church’s activities and funding.
IRS source: IRS Publication 1828 (Tax Guide for Churches and Religious Organizations); IRC §508(c)(1)(A).
2. How should a church pay its pastor?
In almost all cases a pastor is an employee and should receive a W-2 — not a 1099. Because of clergy “dual status,” the church does not withhold Social Security and Medicare (FICA), and it should set up a housing allowance (designated in advance) and an accountable plan for expenses.
Misclassifying a pastor as an independent contractor is one of the most common — and riskiest — church payroll errors. Most ministers are common-law employees, so the church issues a W-2. The twist is FICA: ministers are treated as self-employed for Social Security and Medicare, so the church withholds no FICA and pays no employer share. Ministerial wages are also exempt from mandatory income-tax withholding, so any income-tax withholding is voluntary (via the pastor’s Form W-4) — and many ministers ask for extra so it also covers their SECA.
Two setup steps protect everyone: designate a housing allowance in advance and in writing, and adopt an accountable plan so ministry expense reimbursements are tax-free and off the W-2. (See our companion Minister & Clergy Taxes guide for the minister’s side.)
| Do | Don’t |
|---|---|
| Issue the pastor a W-2 | Pay the pastor on a 1099 as a “contractor” |
| Withhold income tax only if the pastor requests it | Withhold Social Security / Medicare (FICA) from the pastor |
| Designate the housing allowance in advance, in writing | Designate (or change) it after pay is earned |
| Reimburse ministry expenses via an accountable plan | Lump expense money into taxable pay |
IRS source: IRS Publication 517; IRS Publication 15-A.
3. Does a church have to file Form 990?
No. Churches, their integrated auxiliaries, and conventions or associations of churches are generally not required to file the annual Form 990 that other nonprofits file. A church may still have other duties — payroll returns, W-2s and 1099s, and Form 990-T if it owes tax on unrelated business income.
The Form 990 exemption is a meaningful relief — most exempt organizations must file it every year, but qualifying churches do not. The exemption is specific to the 990; it does not excuse a church from its other federal obligations.
Even a church that files no 990 typically must still handle payroll reporting (Form 941 or 944, plus W-2/W-3), issue Forms 1099 to qualifying contractors, and file Form 990-T if it has unrelated business income.
IRS source: IRS Publication 1828; IRC §6033(a)(3); Form 990 instructions.
4. What is Unrelated Business Income Tax (UBIT)?
UBIT is tax a church owes on income from a trade or business that is regularly carried on and not substantially related to its religious purpose. If a church has $1,000 or more of gross unrelated business income in a year, it generally must file Form 990-T and may owe tax.
Three tests determine whether income is “unrelated”: it must come from a trade or business, that is regularly carried on, and is not substantially related to the church’s exempt purpose. Classic examples include advertising income, certain debt-financed property income, and some parking or facility-rental arrangements.
Several exceptions exist. Income from activities run substantially by volunteers, sales of donated goods, and activities for the convenience of members are generally excluded — and most passive income (interest, dividends, and many rents) is typically not treated as unrelated business income.
IRS source: IRS Publication 598 (Tax on Unrelated Business Income); IRS Publication 1828.
5. Restricted vs. unrestricted funds — what boards must track
Donor-restricted funds are gifts a donor designated for a specific purpose (a building fund, missions, benevolence); the church must use them only for that purpose. Unrestricted funds can be used for general operations. Money the board itself sets aside is still unrestricted.
Honoring donor intent is both an ethical and a legal duty. If a member gives “for the new roof,” that money cannot quietly fund payroll. Good church accounting tracks each restriction so leaders always know what is truly available for general use.
A frequent point of confusion: funds the board votes to set aside (say, a reserve) are board-designated, not donor-restricted — they remain unrestricted and the board can re-direct them later. (In formal accounting terms under FASB ASC 958, the two buckets are “net assets with donor restrictions” and “net assets without donor restrictions.”)
IRS source: FASB ASC 958 (not-for-profit financial reporting); recordkeeping expectations in IRS Publication 1828.
6. Handling contributions and donor receipts
For any single gift of $250 or more, the donor needs a written acknowledgment from the church (stating whether they received anything in return) to claim a deduction. When a donor pays more than $75 and gets goods or services back (a “quid pro quo” gift), the church must give a written disclosure of the deductible portion.
Churches don’t deduct anything themselves, but they are the gatekeeper for their donors’ deductions. Two thresholds matter: a contemporaneous written acknowledgment for gifts of $250+, and a quid pro quo disclosure when a donor gives more than $75 and receives something in return.
Most churches issue year-end giving statements that list contributions and include the required “no goods or services were provided in exchange for these gifts, other than intangible religious benefits” language. Getting that wording right protects your donors.
IRS source: IRS Publication 1771 (Charitable Contributions — Substantiation and Disclosure); IRC §170(f)(8) and §6115.
7. What payroll and information returns must a church file?
Even though a church usually files no Form 990, it generally must run real payroll: Form 941 (or annual Form 944), Forms W-2/W-3 by January 31, and Forms 1099-NEC for non-employee contractors paid $2,000 or more in a year (the threshold rose from $600 to $2,000 for 2026 payments under the 2025 OBBBA). Remember the clergy exception — no FICA on the pastor’s wages.
Payroll is where churches most often drift out of compliance. Lay employees (office staff, custodians, childcare workers) are ordinary employees with normal withholding. The pastor is the special case: a W-2 employee for income tax, but no FICA withheld.
On the information-return side, a church that pays an unincorporated contractor $2,000 or more in a year generally must issue a Form 1099-NEC. That threshold rose from $600 to $2,000 beginning with 2026 payments (indexed for inflation from 2027) — though a church filing in January 2026 for 2025 payments still uses the old $600 figure. Either way, keeping a W-9 on file for every vendor up front makes January painless.
IRS source: IRS Publication 15 (Circular E); Form 1099-NEC instructions; IRS Publication 1828.
8. Recordkeeping and internal controls for churches
Good controls protect both the church’s money and its leaders’ reputations. The essentials: count offerings with two unrelated people, separate who handles money from who records it, work from a board-approved budget, reconcile bank accounts monthly, and give the board clear statements at every meeting.
Most church financial trouble isn’t fraud — it’s the absence of simple controls that makes mistakes (and suspicion) possible. Count the offering with at least two unrelated people and document it; separate duties so the person who handles money is not the one who records and reconciles it; operate from a board-approved budget and compare actual to budget monthly; reconcile every account monthly; give the board readable statements at each meeting; and consider an annual independent review as you grow.
None of this requires a finance background — it requires a system. That system is exactly what a church-focused CPA can set up and then quietly maintain, so the load never falls on one volunteer.
9. Common church compliance mistakes we see
The recurring, preventable ones: paying the pastor on a 1099, withholding FICA from the pastor, spending donor-restricted gifts on general operations, skipping 1099s, weak giving statements, ignoring unrelated business income, and having no second counter or reconciliation.
Paying the pastor on a 1099. Most pastors are employees and should receive a W-2.
Withholding FICA from the pastor. Clergy are self-employed for Social Security/Medicare — the church withholds no FICA on ministerial wages.
Spending donor-restricted gifts on general operations. Restricted funds must be used as the donor directed.
Skipping 1099s for contractors. Guest speakers, musicians, and repair vendors paid $2,000+ in 2026 generally need a Form 1099-NEC (the threshold rose from $600 under the 2025 OBBBA).
Weak or missing giving statements. Donors need proper $250+ acknowledgments (with the no-goods-or-services language) to deduct their gifts.
Ignoring unrelated business income. Activities like advertising or certain rentals can trigger UBIT and a Form 990-T filing.
Frequently asked questions
Is our church automatically tax-exempt, or do we have to apply?
Do we have to file a Form 990 every year?
Can we pay our pastor as a contractor to keep it simple?
Do we withhold Social Security and Medicare from our pastor?
A member gave money “for missions.” Can we use it elsewhere?
Do we need to give donors a receipt?
When does a church owe UBIT?
We’re a small church with one volunteer treasurer — is that enough?
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