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Employee or Independent Contractor? How Churches Should Classify Workers for Tax Purposes

Misclassifying workers can create tax problems for churches and workers. Here’s how to determine whether someone should be treated as an employee or an independent contractor for tax purposes.

The Editors
Bio

Churches often rely on a mix of paid staff and outside workers to carry out ministry. 

Musicians, custodians, bookkeepers, and technology and other specialists may serve a church in different ways.

But an important question arises whenever someone is paid for their work: Is the person an employee or an independent contractor?

It’s a critically important question because it addresses how income taxes are handled under federal tax law. 

CAUTION Determining whether a person is an employee or independent contractor depends on the nature of the inquiry. For income tax purposes, the Internal Revenue Service (IRS) provides certain criteria for determining classifications. For wage and hour law purposes, including overtime pay eligibility, the US Department of Labor provides differing criteria to make the determination. Churches must understand both. Church Law & Tax goes deeper in this article on the wage and hour law analysis.  

Misclassifying workers can create costly tax and compliance problems for churches. Church Law & Tax members get trusted guidance on worker classification, payroll practices, and minister tax issues. Join today!

Why worker classification matters

Employees and independent contractors are treated differently under federal tax law.

When a church hires an employee, it generally must:
  • Issue a Form W-2
  • Withhold applicable payroll taxes
  • Follow wage and hour laws (based on whether they are exempt or nonexempt employees)
  • Maintain employment records

Independent contractors, on the other hand, typically receive a Form 1099-NEC, and the church does not withhold payroll taxes from their compensation.

Because of these differences, the IRS carefully evaluates whether workers are properly classified.

The key factors: control and independence

The IRS focuses on the business relationship between the church and the worker, evaluating the degrees of control and independence that exist between the two. 

In general, a worker is more likely to be an employee if the church:
  • Gives instructions on when and where to do the work, the tools or equipment to use, where to purchase supplies and services, and the order and sequence to complete the work
  • Gives specific details with those instructions
  • Evaluates how the work is performed
  • Provides training to do the work
  • Guarantees a regular wage amount (hourly, weekly, or some other time period)
  • Provides benefits like insurance, pension plans, paid vacation, and sick days
  • Reimburses the worker’s expenses
  • Hires the worker with the expectation the relationship will continue indefinitely
  • Hires the worker for services that are a key aspect of the church’s mission

A worker is more likely to be an independent contractor (also known as self-employed) if the person:
  • Controls how the work is completed
  • Is hired to complete a specific project or task
  • Purchases and uses his or her own tools or equipment
  • Does not receive expense reimbursements
  • Works for multiple clients and makes his or her services available to the market
  • Faces the opportunity for profit or the risk for loss

No single factor determines the outcome. Instead, the IRS looks at the overall relationship between the church and the worker.

Common examples in churches

Certain roles in churches often raise classification questions.

For example:
  • Office staff and administrative assistants are typically employees.
  • Musicians may be employees or contractors depending on the level of direction and scheduling control.
  • Outside specialists, such as attorneys, CPAs, IT consultants, and website designers, are often independent contractors.

Churches should carefully review each working relationship, rather than assume a role automatically fits one category.

The “dual tax status” of ministers

Churches also must carefully handle the way they classify ministers. 

Most ministers are employees for federal income tax purposes. However, ministers are considered self-employed for Social Security and Medicare taxes. This is often referenced as the “dual tax status” of ministers.

Ministers must prepay their income taxes and their self-employment taxes using quarterly estimated tax payments. Overlooking their dual tax status can result in payment errors and penalties. 

Mishandling their dual tax status also can create other significant problems for ministers. They face jeopardizing their eligibility for tax-free benefits, such as a housing allowance. They also face taxes and penalties if the IRS discovers incorrect classifications.

When in doubt, seek guidance

Worker classification decisions can carry significant financial consequences if they are incorrect. Workers remain liable for their income taxes, even if misclassified, and churches may face penalties for misclassifications.

When uncertainty exists, church leaders should consult a qualified tax professional or legal advisor familiar with nonprofit employment issues.

If misclassifications are discovered, the qualified professional can help with reclassifications and also determine if Section 530 of the Revenue Act of 1978 provides the church any relief.

Taking time to classify workers correctly helps churches stay compliant with tax rules while maintaining responsible financial practices.Church Law & Tax members can access in-depth guidance on payroll practices, worker classification, and other employment issues affecting churches.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
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How Churches Can Prevent AI Impersonation and Payment Fraud

A convincing voice memo or urgent text that sounds like your pastor may not be real. Here’s how churches can strengthen verification, tighten financial controls, and reduce the risk of AI-driven payment fraud.

Tim Samuel, CPA and Church Chief Financial Officer
Bio

Not every message that sounds like your church’s pastor or leader  is actually that person.

In today’s world, an AI-generated voice memo, video clip, or text thread can trick church staff into sending real money to criminals.

For example, a church staff member receives a short, urgent voicemail from a pastor: “I need you to handle this today. I’m about to give a eulogy.”

The message includes wiring instructions for a contractor. The voice sounds exactly like the pastor. The staff member hesitates, but the tone feels familiar, and the request sounds reasonable.

Minutes later, funds have left the church, never to be recovered..

Exploiting urgency, familiarity, and distributed communication

These scams work because they blend into normal ministry life. 

Churches move fast and teams are spread across multiple campuses. Volunteers rotate, while leaders travel as requests hit phones and inboxes all day.

Fraudsters lean into that reality. They mimic a leader’s style, create urgency, and push the request outside normal tools and normal hours.

Often the initial approach does not involve a large wire transfer. It is a small test, a “quick reimbursement,” a “deposit to hold a slot,” or a vendor bank change that sets up a larger loss later.

Churches make easy targets

Churches are built on trust and responsiveness. That is a strength in ministry, but it can be a weakness in financial workflows.

When finance staff members are unavailable, such as evenings, weekends, holidays, or during services, scammers look for the person most likely to quickly help.

The more a church relies on informal approvals, text-based decisions, or “just this once” exceptions, the more the opportunity exists for a convincing fake to succeed.

How your church can protect itself

To reduce the risk of AI-driven impersonation and payment fraud, consider these safeguards:
  1. Require two-channel verification before money moves. Any request involving a wire, ACH, gift cards, or payment instructions should be confirmed through a second method. Use a known phone number or an established internal channel, not a reply to the original message.
  2. Lock down email and finance access. Turn on multi-factor authentication (MFA) for email, banking, accounting, and payroll. Limit administrative rights. Periodically review mailbox rules and forwarding settings since criminals often exploit them.
  3. Put vendor setup and bank changes behind a hard gate. Centralize who can add vendors and change bank details. Never accept updated banking instructions by email alone. Require a documented call-back to a trusted contact already on file.
  4. Strengthen approvals, especially for requests seeking exceptions to the usual process. Requests seeking exceptions should receive greater scrutiny. Automatically treat off-hours requests, urgent requests, and off-platform requests as exceptions that require a documented review and approval by two people.
  5. Train staff and volunteers, and write the response plan now. Teach staff and key volunteers to stop when something feels off, even if the message sounds like it came from a leader. Document who to call at the bank, who resets accounts, and who informs leadership if a payment is sent in error.

When churches make verification normal, criminals lose their favorite advantage: a rushed, isolated decision.

Tim Samuel is a CPA and the owner of CFO: Creating Future Opportunities, LLC, which helps churches strengthen internal controls, improve financial clarity, and protect trust.
Tim Samuel is a CPA and the chief financial officer of Bridgeway Community Church, a nondenominational, multicultural church in Columbia, Maryland, that draws more than 4,000 people each week.
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Can Ministers Claim a Double Deduction for Housing Expenses?

Federal tax law allows qualifying ministers to exclude housing allowances from taxable income while still deducting mortgage interest and real estate taxes. Here’s how the “double deduction” works—and where its limits apply.

Elaine L. Sommerville, CPA
Bio

Q: I am a minister who qualifies to receive an annual housing allowance from my church. Based on IRS guidance and your online tax guide, I also can take a “double deduction” with respect to certain housing-related expenses on my federal income tax returns. But my CPA says I can’t do this and cites a couple of Tax Court cases that she thinks supports her conclusion. Who is mistaken?

A: You are eligible to take a “double deduction” related to certain expenses.

First, you are a minister who qualifies for an annual housing allowance if designated by your church. This means a portion of your ministerial income is not taxable for federal income tax purposes (within limits). These funds can be spent on qualifying housing expenses, including monthly mortgage payments and real estate taxes. 

Second, while nontaxable income (such as the housing allowance) may be used to pay the mortgage payments and real estate taxes, you are also still allowed to claim on Schedule A (Form 1040) itemized deductions for home mortgage interest and real estate taxes. 

Your ability to claim a deduction for expenses paid with tax-free income is what’s known as a “double deduction.” This “double deduction” is specifically made possible under Internal Revenue Code (IRC) Section 265(a)(6), which Congress adopted in 1986. 

IRC Section 265 generally prohibits expense deductions paid with tax-free income. But Section 265(a)(6) allows clergy to include in itemized deductions their mortgage interest and real estate taxes on their federal income tax returns, even when they used part of their tax-free housing allowances to pay those expenses. 

The cases your CPA cites— Dalan v. Commissioner, decided in 1988, and McFarland v. Commissioner, decided in 1992—both involved ordained ministers with tax-free housing allowances designated by their employing churches. 

However, the Tax Court in both instances concluded the ministers could not itemize deductions for expenses covered by their allowances other than the mortgage interest and real estate taxes. 

Audit guidance from the Internal Revenue Service (IRS), as well as IRS publications, affirms this double deduction exception for ministers for mortgage interest and taxes. However, this guidance also affirms this special treatment does not extend to other types of deductions, such as unreimbursed employee business expenses. To learn more, Chapter 6 of Church Law & Tax’s online tax guide provides further details.
Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.
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Johnson Amendment Lawsuit Dismissed—What Churches Need to Know Now

A federal court dismissed a high-profile challenge to the Johnson Amendment on procedural grounds, leaving existing IRS restrictions on political activity intact—for now. Here’s what churches and pastors need to understand about the ruling and what could come next.

Matthew Branaugh, Attorney and Editor
Bio

The Johnson Amendment—the controversial Internal Revenue Code (IRC) provision prohibiting most political activities by churches and other tax-exempt organizations—remains alive, despite a highly publicized lawsuit seeking to undo it. 

A federal judge in Texas dismissed the case “without prejudice” on jurisdictional grounds, leaving the door open for a future challenge to the law against the Internal Revenue Service (IRS), the agency responsible for enforcing it.

Get clear, practical guidance on political activity, tax rules, and risk management—join Church Law & Tax today.

The four plaintiffs, which included the National Religious Broadcasters and two churches, plan to appeal.

For the time being, the outcome means churches and other tax-exempt organizations are bound to the limitations found under section 501(c)(3) of the IRC: 
  • no public support for, or opposition to, political candidates
  • limited lobbying and advocacy efforts tied to legislation and ballot measures

What was at stake

The court considered a proposed settlement between the IRS and the four plaintiffs. The settlement included a statement from the IRS suggesting houses of worship should enjoy greater latitude when it comes to supporting or opposing political candidates for elected office. 

The development triggered numerous filings from outside groups supporting and opposing the settlement, and an unsuccessful attempt to intervene in the case by Americans United for Separation of Church and State. 

Had the court approved the settlement, the IRS statement would have become binding only in the US District Court for the Eastern District of Texas, Tyler Division. 

However, it could have helped guide other courts handling similar cases nationwide—and the IRS was already prioritizing revisions to its guidance on the topic in anticipation of an approved settlement. 

Deemed a “tax” case

The Johnson Amendment became part of IRC section 501(c)(3) in 1954. 

The plaintiffs argued the amendment violated their free speech and Free Exercise rights under the First Amendment of the Constitution. They also argued it violates constitutionally granted rights of due process and equal protection, and rights protected under the federal Religious Freedom Restoration Act (RFRA). 

However, the presiding judge determined “plaintiffs’ claims are ‘in respect to’ taxes and seek to restrain the threat of tax collection or assessment based on certain activity.”

Two federal tax laws—the Tax Anti-Injunction Act (AIA) and the Declaratory Judgment Act (DJA)—thus barred the court’s jurisdiction over the case, the judge said. 

Future challenges

The pending appeal by the plaintiffs will require time.

Future challenges to the Johnson Amendment also can be brought if other facts and circumstances exist, the judge noted. 

If a church engaged in political activities and was taxed by the IRS, a refund lawsuit could be filed, the judge said. 

Additionally, an exception to the DJA allows declaratory lawsuits in one of three courts based in Washington, D.C. An IRS revocation of a church’s tax-exempt status, for instance, would create “a specific set of facts” for such a lawsuit.  

What this means for churches and pastors

For now, the ruling means the same guidance for churches and ministers regarding political activities remains in place. 

Churches and ministers enjoy First Amendment protections regarding publicly supporting or opposing political candidates for office and advocating on legislative matters and ballot measures. 

However, those activities may draw IRS attention, thus jeopardizing a church’s tax-exempt status. 

With respect to political candidates, the prohibition is absolute, although the IRS has not widely enforced it. 

With respect to lobbying and advocacy, a limited amount of activity is permitted. 

Separately, but relatedly, ministers still remain protected by the First Amendment to speak and preach on matters of social, biblical, and moral importance without fear of government intervention. 

Chapter 12 of Church Law & Tax’s online Church & Clergy Tax Guide provides more details and specific guidance regarding churches and political activities.
Matthew Branaugh is an attorney and editor for Church Law & Tax.
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Seven Things Many Pastors Don’t Know About Unrelated Business Income

Seven key facets of unrelated business income tax (UBIT) that every pastor and church leader should understand.

The Editors
Bio

Unrelated business income tax (UBIT)  is an income tax on the unrelated business income (UBI) of churches and other tax-exempt charities.

UBI generally is income from the operation of a trade or business that is regularly carried on. 

Seven things every pastor should understand about UBIT:
  • This isn’t about profit—it’s about activity.
    A church can owe UBIT even if an activity supports ministry goals or raises money for good causes. If the activity is a regular trade or business and not substantially related to the church’s exempt purpose, the Internal Revenue Service (IRS) may treat the income as taxable.
  • “Occasional” can still be considered regular.
    Repeated fundraisers, rentals, or sales—even if seasonal or part-time—may qualify as “regularly carried on.” Frequency and consistency matter more than intent.
  • Rent isn’t always tax-free.
    Rental income is often exempt, but not always. Providing services (cleaning, staffing, event setup) or renting debt-financed property can turn otherwise exempt rental income into taxable UBI.
  • Volunteers don’t automatically eliminate UBIT risk.
    Income may be exempt if substantially all the work is performed by volunteers—but that standard is higher than many churches assume. Involvement by a few paid staff can change the analysis.
  • Advertising is different from sponsorships.
    Selling ads (logos, promotions, calls to action) in a church publication or online can generate UBI. True sponsorships that simply acknowledge donors are usually not taxable—but the line between the two is easy to cross.
  • UBI can affect more than taxes.
    Too much unrelated business activity can raise red flags about whether the church is operating primarily for exempt purposes—especially if it becomes a major focus or revenue source. This can affect things like sales and property tax exemptions, for example.
  • IRS filings may be required.
    Churches are not required to file an annual Form 990 or the related Form 990-T. However, UBI over certain revenue thresholds can trigger filing requirements, penalties, and interest if ignored. Additional state-related requirements and filings also may emerge.

Bottom line for churches: UBI is highly fact-specific. Before starting new income activities—or assuming old ones are safe—church leaders should slow down, ask questions, and consult trusted tax guidance tailored to churches.

Wondering how UBIT applies in real-life church decisions?
For example, many churches consider selling items like T-shirts, mugs, or water bottles with the church logo. Does that make the sales related to ministry—or could it create unrelated business income?

→ Read the Q&A: Does Our Church Owe Unrelated Business Income on Goods Sold?
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
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Annual Church Legal Checklist for Governance and Compliance

An annual legal review helps churches reduce risk, strengthen governance, and protect their tax-exempt statuses. Use this checklist to guide a proactive compliance strategy.

The Editors
Bio

Legal compliance for churches is continuous, not episodic. Federal tax law, state nonprofit corporation statutes, charitable solicitation regulations, employment law, and risk management standards intersect in ways that directly affect church governance and tax-exempt status.

An annual legal review allows a church board, senior pastor, and executive leadership to evaluate whether the organization remains legally compliant, structurally sound, and aligned with its religious mission.

Lead with Confidence. Stay Legally Compliant.

Church legal compliance doesn’t happen by accident. From tax-exempt rules and board governance to employment law and risk management, today’s churches face an increasingly complex legal landscape. One oversight can expose a ministry to audits, liability, or reputational harm.

Join Church Law & Tax today and give your leadership team the tools to protect your church and its mission.

This annual church legal checklist is designed to help church leaders identify governance weaknesses, compliance gaps, and emerging legal risks before they escalate.

Review Governing Documents, Corporate Status, and Organizational Authority
  • Confirm that articles of incorporation, bylaws, and any amendments comply with current state nonprofit corporation law.
  • Verify the church remains in good standing with the state’s secretary of state or equivalent agency. Review whether the church’s stated religious and charitable purposes align with actual ministry activities.
  • Evaluate whether governance practices follow written bylaws, including board elections, officer appointments, quorum requirements, voting thresholds, and member rights (if applicable).
  • Maintain organized corporate records, including board minutes, written consents, standing resolutions, and governance policies. Proper documentation reinforces corporate actions and reduces any personal liability exposure.

Confirm Federal Tax-Exempt Compliance and IRS Requirements

Churches qualify for federal tax exemption under Internal Revenue Code Section 501(c)(3), but exemption requires ongoing operational compliance.

Strengthen Board Governance and Fiduciary Accountability

Board members owe fiduciary duties of care, loyalty, and obedience under state law.
  • Require annual conflict-of-interest disclosures from directors, officers, and key employees. 
  • Review and enforce confidentiality standards regarding donor data, executive sessions, and sensitive personnel matters.
  • Confirm the board exercises appropriate oversight of financial reporting and internal controls, risk management, and legal compliance without assuming day-to-day operational control.
  • Well-documented oversight mitigates governance disputes and regulatory scrutiny.

Verify State Registrations and Charitable Solicitation Compliance

Audit Employment Law Compliance and Ministerial Classification

Update Child Protection, Mandatory Reporting, and Safety Protocols

Sexual misconduct claims remain one of the most significant sources of church liability exposure:

Assess Insurance Coverage and Enterprise Risk Management
  • Conduct an annual insurance review covering:
    • general liability, 
    • sexual misconduct liability, 
    • directors and officers (D&O) liability, 
    • employment practices liability (EPLI), 
    • cyber liability, and 
    • property coverage.
    • Evaluate policy limits, exclusions, deductibles, and defense cost structures. 
    • Consider whether ministry expansion — counseling services, childcare programs, mission travel, or digital ministry — alters risk exposure.

Insurance should align with operational reality.

Review Data Privacy, Cybersecurity, and Technology Governance

Churches routinely collect personally identifiable information (PII), donor financial data, and confidential pastoral counseling records.
  • Confirm cybersecurity safeguards, data breach response plans, and vendor agreements for online giving platforms and church management software.
  • Develop or update policies governing artificial intelligence tools, automated transcription services, and digital record retention to reduce confidentiality and privacy risks.

Evaluate Financial Controls and Internal Audit Practices

Strong financial controls support transparency, accountability, and integrity in stewardship.

An annual church legal checklist is a governance safeguard.

Proactive review strengthens fiduciary accountability, protects tax-exempt status, reduces regulatory exposure, and reinforces congregational trust.

Church governance is not merely administrative. It is stewardship in action.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
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Five Ways Churches Can Jeopardize Their Tax-Exempt Status

Churches are automatically recognized as 501(c)(3) organizations — but that status carries strict requirements. Here are five common areas leaders should watch closely to ensure compliance.

The Editors
Bio

Last Reviewed: April 9, 2026

Churches enjoy automatic recognition as tax-exempt organizations under Internal Revenue Code Section 501(c)(3). That status brings significant benefits — exemption from federal income tax, eligibility to receive tax-deductible contributions, and often relief from certain state and local taxes.

But tax exemption is not unconditional.

While revocation is rare, it does happen. More often, churches face audits, penalties, excise taxes, or reputational damage because leaders misunderstand what the law requires.

Stay Ahead of Church Tax Risks

Church tax law is complex—and the consequences of getting it wrong can be serious. Church Law & Tax members receive expert analysis, real-world case studies, and practical guidance to help their churches operate confidently within the law.

Become a member today and equip your church to navigate these challenges wisely.

Here are five of the most common ways churches put their tax-exempt status at risk.

1. Engaging in Political Campaign Activity

The most well-known restriction involves churches and political candidates — although change may be afoot.

Under current federal tax law, a church may not directly or indirectly participate in, or intervene in, any political campaign supporting or opposing a candidate for public office. This includes:
  • Endorsing candidates from the pulpit
  • Publishing or distributing statements supporting or opposing a candidate
  • Donating church funds to a political candidate’s campaign
  • Allowing church resources to be used in a partisan way

The prohibition applies to federal, state, and local races.

It’s important to note that a limited amount of issue advocacy is still permitted for tax-exempt entities under the federal tax code. Churches may speak about moral and social issues. They may educate voters. They may encourage civic engagement. They need only exercise caution about the amount of time and resources spent on such activities when they relate to specific ballot measures or legislation (though the IRS is vague about how much is too much).

And, even with the 501(c)(3) rules in place, the First Amendment rights of the free exercise of religion and freedom of speech still protect ministers and their abilities to preach about social and moral issues.

Church leaders are wise to review the rules and monitor developments, especially heading into the 2026 midterm elections. 

Lastly, a legal challenge to the Johnson Amendment by four ministries, including the National Religious Broadcasters and two churches, was dismissed in April 2026 by a federal judge in Texas on jurisdictional grounds. The plaintiffs indicated plans to appeal. Until then, the Johnson Amendment—and all tax guidance associated with it—remains in place.

2. Providing Private Inurement or Private Benefits

A church must operate exclusively for exempt religious purposes. That means its income and assets cannot improperly financially benefit private individuals.

Two issues matter here: private inurement and private benefit.

Private inurement occurs when insiders — such as pastors, board members, or key employees — receive an economic benefit that far exceeds what they provide in return (also known as an excess benefit transaction). Examples include:
  • Excessive salary or housing benefits, unapproved bonuses, or deferred compensation arrangements
  • Below-market loans
  • Personal use of church property without proper reporting
  • Transfers of property to insiders for below-market value
  • Nonaccountable expense reimbursements

Private inurement subjects insiders to excise taxes of up to 225 percent of the benefit received. 

Those who approved the benefit (such as church board members) also face a tax of up to 10 percent (capped at $20,000). 

Certain types of transactions can automatically trigger these penalties, too (even if the amounts involved are relatively insignificant). One example is a church’s payment or reimbursement of a pastor’s personal or business expenses under a nonaccountable arrangement. Another example is the failure to report any fringe benefit an insider receives.

Additionally, the church itself faces the loss of its tax-exempt status for any private inurement and excess benefit transactions that occur on its watch.

Private benefit prohibitions are based on similar principles, but work differently. 

A private benefit is one that benefits an individual or business, regardless of whether the persons who benefit are insiders or not.  It involves benefiting these individuals or businesses in a way that is more than incidental to the church’s exempt purpose.

The primary risk is the church’s loss of its tax-exempt status.

To avoid problems with private inurement or private benefit, leaders should: 
  • Ensure all transactions with insiders are reasonable and properly documented.
  • Avoid allowing personal use of church funds or assets.
  • Structure activities clearly for public — not private — benefit.

3. Failing to Comply With Rules Involving Alternative Revenue

Aside from tithes and offerings, churches may generate income from a variety of activities. They may sell books, operate cafés, rent facilities, host conferences, or run seasonal fundraisers. 

Alternative revenue alone does not necessarily result in taxes or threaten exemption. 

But the manner in which the activities are conducted, along with other facts and circumstances, may trigger unrelated business income tax (UBIT) that the church must pay, and expansive ongoing activities also may call the church’s tax-exempt status into question.

Warning signs include:
  • A commercial venture that dominates staff time and resources
  • A business activity competing directly with for-profit enterprises
  • Little connection between the activity and the church’s ministry

Occasional fundraising events are generally safe. But sustained, commercial-like operations require careful analysis.

Church leaders should regularly evaluate whether revenue-generating activities advance — or distract from — their churches’ exempt religious purposes.

4. Failing to Maintain Proper Governance and Financial Controls

Tax exemption requires organizational integrity.

Churches are not required to annually file Form 990. But poor governance increases their audit risk, weakens their legal protections, and makes them more vulnerable to exploitation.

Red flags include:
  • Lack of independent board oversight
  • Undocumented financial decisions
  • Commingled personal and church funds
  • Failure to follow bylaws
  • Inadequate internal controls

Sloppy administration does not automatically revoke exemption. But patterns of mismanagement can support findings of private inurement, excess benefit transactions, or operational failures — things that can jeopardize the church’s tax exemption.

Strong governance is not optional. It is part of demonstrating that the church operates exclusively for religious purposes and stewards charitable assets appropriately.

Clear policies, documented board minutes, and transparent compensation practices are essential safeguards.

5. Using Church Resources for Non-Exempt Purposes

A church must be organized and operated primarily for religious purposes.

When facilities, funds, or leadership are consistently used for activities unrelated to ministry, exemption concerns arise.

Examples may include:
  • Allowing long-term use of church property for private commercial gain without fair compensation
  • Diverting donations to purposes inconsistent with donor intent
  • Supporting non-charitable ventures that lack a religious nexus

Occasional facility rentals at fair market value are generally permissible. However, problems develop when non-exempt activities become central rather than incidental.

Intent matters. So does documentation.

If questioned, a church must demonstrate how its activities further its religious mission.

The Bottom Line for Church Leaders

Loss of tax-exempt status can happen.

Even if it doesn’t, other risks from mishandling these issues can arise, including audits, excise taxes, penalties, civil lawsuits, and reputational damage. Most problems stem from misunderstanding boundaries around political activity, compensation, business ventures, and governance.

Church boards and senior pastors should regularly review:
  • Political engagement policies
  • Compensation-setting procedures
  • Unrelated business income exposure
  • Conflict-of-interest policy
  • Financial accountability systems

Tax exemption is not merely a status. It is a legal framework that requires ongoing compliance.

Church Law & Tax provides in-depth analysis, case studies, and practical guidance to help leaders protect their church’s exempt status while advancing their mission confidently and lawfully.

If your church has not reviewed these risk areas recently, now is the time.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
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Church Expense Reimbursements: IRS Rules, Accountable Plans, and Common Mistakes

Mishandled church expense reimbursements can create taxable income and payroll errors. Here’s how accountable reimbursement arrangements work—and where risks frequently arise.

The Editors
Bio

Church expense reimbursements directly affect payroll reporting, taxable income, and IRS compliance. 

When mishandled, they can unintentionally increase a pastor or church employee’s tax burden, distort compensation reporting, and expose the church to penalties. 

Expense reimbursements are just one area where churches face complex tax and payroll rules.

And a Church Law & Tax membership gives executive pastors, administrators, and finance leaders access to trusted guidance on accountable plans, minister taxes, payroll compliance, and financial governance.

Therefore, executive pastors, church administrators, finance leaders, and church board members should understand that expense reimbursements are not optional matters—they should be handled with planning and intentionality through accountable reimbursement arrangements.

This article explains how church expense reimbursements work, what an accountable plan requires, and the most common areas where churches make mistakes.

What Are Church Expense Reimbursements?

Church expense reimbursements occur when a church repays a pastor or employee for ministry-related expenses. These may include:
  • Meals
  • Office supplies
  • Materials and goods for ministry events and programs
  • Mileage and travel
  • Conferences and continuing education
  • Ministry-related technology
  • Professional dues and resources

The tax treatment depends entirely on how the reimbursement is structured.

If done correctly, reimbursements are not taxable income.

If done incorrectly, they become wages.

Accountable Expense Reimbursement Arrangements

The safest and most compliant method for handling church expense reimbursements is through an accountable expense reimbursement arrangement, often called an accountable plan.

To qualify under IRS rules, the arrangement must meet these requirements:

1. Business Connection

The expense must be directly related to ministry or church business.

2. Substantiation

The pastor or employee must provide documentation within 60 days, including:
  • Receipts
  • Mileage logs
  • Dates and locations
  • Ministry business purposes

3. Return of Excess

Any reimbursement exceeding the documented expense must be returned within 120 days.

4. Only Employer Funds are Used

Only employer funds are used to cover reimbursements–a minister or employee’s salary isn’t used to cover amounts.

Why This Matters

When these standards are met:
  • Reimbursements are not reported on Form W-2
  • They are not subject to income tax
  • Ministers and employees avoid unnecessary tax burdens
  • Churches avoid payroll reporting errors (more on that below)

If these standards are not met, the plan becomes “nonaccountable,” and all payments must be treated as taxable wages.

A written, board-approved accountable plan is a governance best practice.

Accountable Plan vs. Salary Increase

Many small churches attempt to simplify administration by increasing a pastor or employee’s salary to “cover expenses.”

This approach creates tax inefficiency.

Salary is always taxable income. Reimbursements under a compliant accountable plan are not taxable. Higher taxable wages hit employees hard. They hit ministers even harder, both for federal income tax purposes and  self-employment (SECA) taxes (due to ministers’ “dual tax statuses”).

Separating compensation from reimbursements protects both the church and its pastors and staff.

Common Church Expense Reimbursement Mistakes

Churches often believe they are compliant—until an audit or employment transition reveals gaps. The most frequent issues include:

Informal Reimbursements

Paying expenses without documentation or written policy.

Mileage Oversight

Failing to require contemporaneous mileage logs for hospital visits, counseling, conferences, and ministry meetings.

Conference and Travel Errors

Reimbursing lump sums without receipts or reimbursing  personal expenses from a trip that mixed ministry purposes with personal ones.

Technology Blending

Reimbursing full cell phone or internet bills without distinguishing ministry from personal use.

Housing Allowance Confusion

Confusing housing allowance with expense reimbursement. Housing allowance is a compensation designation, not a reimbursement plan.

Each of these mistakes can inadvertently create taxable income.

How Church Expense Reimbursements Affect Payroll Reporting

Improper reimbursements can trigger problems for the church, too:
  • Incorrect Form W-2 reporting
  • Underreported taxable wages
  • Payroll tax discrepancies
  • Potential penalties and interest

Governance and Board Oversight

Church boards should confirm:
  • A written accountable reimbursement arrangement policy exists
  • Substantiation procedures are consistently followed
  • Excess reimbursements are promptly returned
  • Payroll reporting distinguishes wages from reimbursements
  • Housing allowances are approved in advance

Expense reimbursements sit at the intersection of tax law, payroll compliance, and fiduciary responsibility. 

Given the stakes involved for churches, pastors, and employees, payroll and reimbursement policies should be aligned and annually reviewed.

Frequently Asked Questions About Church Expense Reimbursements

Are church expense reimbursements taxable?

They are taxable unless paid under a properly structured accountable reimbursement arrangement that meets IRS requirements.

Does the IRS require receipts?

Yes. Substantiation—including receipts and mileage logs—is mandatory for accountable plans.

Are there deadlines?

Generally speaking, yes. Reimbursement requests, along with proper documentation and ministry business justifications, should be submitted within 60 days of when they’re incurred. 

The Bottom Line

Church expense reimbursements are not casual transactions. They require documentation, structure, and board oversight. When properly handled through an accountable plan, they protect pastors from unnecessary tax burdens and protect churches from compliance risk.

Church leaders who take time to formalize reimbursement policies strengthen financial transparency, payroll accuracy, and long-term stewardship.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: iStock/Bits and Splits

8 IRS “Dirty Dozen” Tax Scams Churches and Pastors Should Watch in 2026

The IRS’s annual “Dirty Dozen” warns taxpayers about evolving tax scams. Here are eight schemes that could affect churches, pastors, and ministry employees in 2026—and how to avoid them.

The Editors
Bio

The Internal Revenue Service released its annual “Dirty Dozen” list of tax scams for 2026, warning taxpayers, tax-exempt organizations, businesses, and tax professionals about common schemes that threaten personal and financial information.

IRS officials emphasize that scammers constantly adapt their tactics to exploit taxpayers.

We’ve identified eight of the 12 scams that are relevant to churches and ministries, and pastors and employees.

Stay Informed About Risks Facing Churches


From tax scams to legal compliance issues, church leaders need reliable guidance. A Church Law & Tax membership equips you with expert insights and practical tools to protect your ministry.

They are:
  1. IRS impersonation through emails and texts (phishing and smishing). Criminals send messages that appear to come from the IRS, often using urgent language or QR codes that lead to fake websites designed to steal personal information or install malware.
  2. AI-enabled IRS impersonation by phone. Scammers use robocalls, spoofed caller IDs, and even AI-generated voices to impersonate IRS agents and demand payment or sensitive information. Remember: The IRS contacts taxpayers by mail first and never threatens arrest or demands immediate payment over the phone.
  3. Fake charities. Fraudsters create fake nonprofit organizations, often after disasters or tragedies, to collect donations and personal information from unsuspecting donors.
  4. Misleading tax advice on social media. Viral “tax hacks” may encourage people to claim credits they don’t qualify for or file inaccurate returns, which can result in audits, penalties, or criminal charges.
  5. Bogus “Self-Employment Tax Credit” promotions. Misleading claims about special tax credits encourage taxpayers to file inaccurate returns in hopes of receiving improper refunds.
  6. Ghost tax preparers. Some preparers complete returns but refuse to sign them or provide a Preparer Tax Identification Number (PTIN), leaving taxpayers legally responsible for potentially fraudulent filings.
  7. Non-cash charitable contribution schemes. These involve inflated appraisals of donated property, such as art or conservation easements, to create exaggerated tax deductions.
  8. Overstated withholding schemes. Taxpayers are encouraged to falsely report higher tax withholding amounts on forms to generate larger refunds.

How taxpayers can protect themselves

The IRS advises taxpayers to avoid clicking suspicious links or attachments, hang up on suspicious calls, and verify communications through official IRS channels. Suspicious IRS-related emails or messages should be forwarded to phishing@irs.gov, and individuals who suspect identity theft should visit IRS.gov/idtheft.The IRS also encourages reporting scams or fraudulent tax schemes through its Submit a Tip tool at IRS.gov/SubmitATip, which allows confidential reporting of suspected tax fraud and helps authorities stop scams more quickly.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: iStock/Sirichat. Camphol

IRS Revenue Procedure 2026-8: What Churches Must Know About New Group Exemption Rules

After a five-year freeze, the IRS has finalized changes to group exemption rulings. Here’s what churches, denominations, and associations need to know—and do next.

The Editors
Bio

For nearly four decades, IRS Revenue Procedure 80-27 governed how denominations and other central organizations obtained and maintained group exemption rulings. That changed in January 2026, when the IRS issued Revenue Procedure 2026-8—formally reopening the application process after a five-year pause and replacing key parts of the old framework.

The new rules mostly affect new group exemptions, but one key change also affects group exemptions.

While the guidance applies broadly to all tax-exempt groups, churches and conventions or associations of churches receive some meaningful accommodations based on their religious natures.

Here’s what matters most.

Group Structure and Eligibility

Under Revenue Procedure 2026-8, a central organization must already be recognized as tax-exempt—or apply for recognition at the same time it seeks a group exemption. If the central organization loses its exemption, all subordinate organizations lose coverage under the group ruling.

New group exemptions must include at least five subordinate organizations. Existing groups must maintain at least one subordinate to keep their ruling. A central organization may hold only one group exemption letter, though transition relief applies to certain existing arrangements.

Each subordinate must:
  • Be a separate legal entity with its own governing instrument
  • Have its own employer identification number (EIN)
  • Qualify under the same paragraph of Section 501(c)

Type III supporting organizations and private foundations are not eligible for inclusion.

Affiliation and Supervision

For churches and church associations, affiliation is satisfied by “the sharing of common religious bonds or convictions.” Importantly, hierarchical control over local churches is not required. Inclusion in a denominational directory may help demonstrate affiliation.

Subordinates must also be subject to either general supervision or control by the central organization.

Supervision generally requires the central organization to:
  • Annually obtain information about subordinates’ activities and compliance
  • Annually communicate information about maintaining tax-exempt status

However, churches receive significant relief. Because churches are not required to file Form 990, central organizations are not required to collect annual financial data from subordinate churches. This accommodation substantially reduces administrative burdens.

By January 22, 2027, central organizations must confirm that each subordinate satisfies the affiliation and supervision or control tests. Organizations that do not qualify must be removed from the group ruling.

New Annual Communication Requirement

Beginning after January 22, 2027, all central organizations—including churches and conventions—must annually communicate with subordinates about how to maintain tax-exempt status.

This rule applies to both existing and new group exemptions.

This requirement can be satisfied simply by providing a link to IRS Publication 1828 or Publication 557. For most denominations, this will be a modest administrative addition rather than a significant compliance hurdle.

Churches remain exempt from mandatory annual reporting to the IRS regarding changes in subordinates. Reporting updates is optional, though it may help donors verify deductibility through the IRS Business Master File.

Attention Advantage Members: This updated section of our online Church & Clergy Tax Guide provides more detailed coverage of the changes. This update also provides a checklist for central organizations to follow, as well as a sample email for communication with subordinate organizations (a requirement for all central organizations to meet starting next January).

Church Law & Tax’s updated section about group exemptions in its online tax guide provides a sample email that central organizations can use to fulfill this annual communication requirement.

Uniform Purpose Statements

One of the most significant changes involves a “uniform purpose statement” requirement for new subordinate organizations joining a group exemption. New subordinates sharing the same purpose must include consistent language in their governing documents.

This requirement does not apply to churches already covered by a group exemption as of the issuance of Revenue Procedure 2026-8. It also does not apply retroactively.

Still, denominations that allow fully autonomous local church governance may face practical challenges in implementing standardized purpose language for new applicants.

Transition and Ongoing Relief

Certain structural requirements must be satisfied by January 22, 2027. After that date, central organizations must fully comply with the new standards.

Churches retain substantial protections. They remain exempt from Form 990 filing, are not subject to financial reporting oversight within the group, and benefit from permanent relief from certain administrative restrictions.

The Bottom Line

Revenue Procedure 2026-8 modernizes group exemption oversight without fundamentally altering church autonomy. The most significant new obligation is an annual educational communication to subordinates beginning in 2027.

With proactive roster reviews and modest administrative planning, most churches and denominational bodies should be well-positioned to maintain—and even expand—their group exemption coverage under the new framework.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: iStock/WrightStudio

Compensation Issues Every Church Leader Should Understand

Church compensation involves more than payroll. From reasonable pay and housing allowances to retirement, Social Security, and health benefits, these five issues affect compliance, governance, and long-term risk.

The Editors
Bio

Setting compensation for pastors and church staff is not just a budgeting exercise.

Church compensation decisions have legal, tax, and governance consequences that differ sharply from those faced by for-profit employers. 

Executive pastors, administrators, finance leaders, and board members all play a role—and misunderstandings can expose a church to penalties, audits, or loss of tax benefits.

Here are the compensation issues every church leader should understand.

Churches are tax-exempt organizations, but there are strings attached. The IRS requires tax-exempt entities, including churches, to pay “reasonable compensation”—generally defined as what similar organizations pay similarly qualified individuals for comparable work.

Excessive pay in a church can trigger serious consequences. Excess compensation can jeopardize tax-exempt status, trigger steep excise taxes for the recipient, and expose board members who approved the pay to personal penalties. Compensation decisions should be documented, reviewed, and based on objective data—not assumptions or goodwill.

Launch your Church Law & Tax Advantage membership today to take advantage of our fully searchable, online Church & Clergy Tax Guide updated annually.

2. Housing Allowances Are Valuable—but Strictly Regulated

The minister’s housing allowance is one of the most significant and misunderstood tax benefits in church compensation. Properly structured, it allows qualifying ministers to exclude housing expenses from federal income tax (within defined limits). Improperly handled, it can create compliance problems for both the church and the minister.

Housing allowances must be approved in advance, documented in writing, and carefully limited to actual housing expenses and fair rental value (furnished, plus utilities). Churches should also think long-term: pastors living in church-owned housing may struggle to build equity, making retirement planning more complex.

3. Retirement Plans Work Differently for Churches

Churches can offer 403(b) and 403(b)(9) retirement plans, which provide flexibility not available in most for-profit plans. These plans may allow faith-based investment options, unequal employer contributions, and continued funding even after employment ends.

Some retirement benefits paid to ministers can also qualify for housing allowance treatment during retirement. These advantages can strengthen a compensation package—but only if they are set up and administered correctly.

4. Ministers Are Employees—and Self-Employed

For income tax purposes, most ministers are treated as employees and receive a Form W-2. However, for Social Security and Medicare (the Federal Insurance Contributions Act, or FICA, taxes), they are considered self-employed and must pay self-employment (SECA) taxes covering both the employer and employee portions.

Churches should not withhold Social Security taxes from ministers’ pay, and ministers should understand how this affects cash flow and retirement planning. While some ministers may wish to opt out of Social Security, that decision is typically permanent and should be made only with professional guidance.

5. Health Care Benefits Require Careful Planning

Health insurance remains one of the most challenging aspects of church compensation. Options such as QSEHRAs and ICHRAs can help smaller churches reimburse medical expenses or insurance premiums—but these arrangements are governed by strict rules.

Mistakes are common, especially when churches reimburse premiums informally without establishing a compliant plan. Churches must also be careful not to limit certain benefits to ministers only, which can violate federal requirements.

Why This Matters

Compensation mistakes rarely announce themselves right away. Problems often surface years later—during an audit, a leadership transition, or a financial crisis. Church leaders who understand these issues are better positioned to protect the church, care for staff, and steward resources wisely.For deeper guidance, expert analysis, and step-by-step explanations, explore resources like Church Compensation, Second Edition, the Church & Clergy Tax Guide, subscribe to Church Law & Tax newsletters, or consider membership for ongoing updates and practical tools.

The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: iStock/David Gales

How USPS Postmark Delays Could Impact Church Tax Documents

USPS delays could disrupt timely church and clergy tax filings—here’s how to stay compliant and avoid IRS penalties.

The Editors
Bio

The United States Postal Service (USPS) changed its process for postmarking first-class mail in December 2025, relegating the task to regional offices instead of local ones. 

This means postmarks applied by USPS for first-class mail may be delayed by one or more days, potentially affecting time-sensitive, payroll-related documents sent by churches to the Internal Revenue Service (IRS) or employees.

Though many of these documents are filed or sent electronically by many churches and their employees, there are instances when the use of first-class mail may arise. 

Example. A very small church that falls under the combined 10-document threshold for electronically filing W-2s, 1099s, and other information. 

Example. Employees who choose to file their federal and state income tax returns by mail. 

Example. A minister who pays quarterly estimated taxes by mail.

When a church or employee needs to mail something with a postmark date that proves timely submission, they should consider requesting a manual postmark at their local office, using certified mail (receipt requested), or possibly even using alternatives to USPS.  

NOTE: This change also affects year-end charitable contribution reporting.

Key Resources: 

  • The 2026 Tax Prep Guide for Churches & Clergy provides step-by-step guidance for pastors to do their federal income tax returns, and information for churches to meet their federal reporting responsibilities, including this year’s key dates and deadlines.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: iStock/logoboom

How USPS Postmark Delays May Impact Year-End Charitable Contributions

A late 2025 USPS change may delay postmarks—and impact donor deductions for year-end gifts. Here’s what churches need to know and communicate.

The Editors
Bio

The United States Postal Service (USPS) changed its process for postmarking first-class mail in December 2025, relegating the task to regional offices instead of local ones. 

This means postmarks applied by USPS for first-class mail may be delayed by one or more days, potentially affecting year-end contributions sent by donors who itemize deductions and hope to count their donations toward the 2025 tax year.

Charitable contributions must be claimed in the year they are delivered, even if they are dated on or before December 31, notes Richard Hammar in the online Church & Clergy Tax Guide. 

Gain full, unlimited, and always-up-to-date tax guidance as an Advantage Member. Join today!

But checks mailed to a church are deductible in the year the check is mailed and postmarked—even if they are received by the church early in the next year. 

With the USPS’s change right before the end of 2025, many donors may not realize their checks still received 2026 postmarks.  

Church leaders may want to alert donors regarding this development. 

NOTE: This change also affects church tax documents.

Looking ahead, leaders also should encourage donors to mail checks earlier, request a manual postmark at the local office, use certified mail (receipt requested), or possibly even use alternatives to USPS. 

Key Resources: 

The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: iStock/basketman23

What Churches Need to Know When Protests Disrupt Worship

What to know—and do—when protests enter your church: federal protections, trespassing laws, and steps pastors can take to stay in control.

The Editors
Bio

Recent events in Minneapolis—where protesters and a journalist entered a church sanctuary during a worship gathering—have left many churches asking an uncomfortable question: What are our legal rights when a protest crosses the church doors?

One federal law often mentioned in these moments is the Freedom of Access to Clinic Entrances (FACE) Act. While originally aimed at protecting reproductive health facilities, the law can apply in religious contexts as well.

Here’s what pastors and churchgoers need to understand:

What the FACE Act Is—and Why Churches Should Care

The FACE Act is a federal law that prohibits the use of force, threat of force, or physical obstruction to intentionally interfere with people exercising certain protected activities.

Those protected activities include:
  • Obtaining or providing reproductive health services
  • Exercising the right to religious freedom at a place of worship

In short: the law can apply inside and outside church buildings, not just clinics.

When FACE May Be Triggered

The law does not prohibit protests or expressive activity by itself. It focuses on conduct.

Potential red flags include:
  • Physically blocking entrances or aisles
  • Interrupting or stopping a worship service
  • Using threats or intimidation toward congregants or clergy
  • Preventing people from entering or leaving the sanctuary

Whether a specific incident violates FACE depends on the facts of the situation—but churches are not legally powerless.

So, when does a person’s presence at a worship service turn into a trespass?

Church Law & Tax Attorney and Editor Matthew Branaugh explains that while churches are open and welcoming places when conducting regularly scheduled worship services, they are still private property, and leaders have the right to ask someone to leave. 

“To determine whether someone has trespassed on private property, courts evaluate whether a property owner consented to the person’s presence,” he says. “By asking a disruptive person or group to leave, the church eliminates any doubt about consent.”

“Leaders should remain calm,” Branaugh adds, “and contact local law enforcement to ensure the situation does not escalate. Document the situation with video if it is safe to do so.” 

Leaders also should avoid physical contact when escorting trespassers off church property. 

“Avoiding touch as much as possible will eliminate any perceived (or real) provocation,” Branaugh says. 

Some states permit acts of self-defense when signs of imminent danger arise, but self-defense should only be a last resort. 

Some states also offer additional legal protections to houses of worship when it comes to protests and other disruptions. For instance, California, Florida, Ohio, and Oklahoma make it a crime to disrupt a religious meeting.

Addressing Recurring Problems

If a church faces repeated disruptions, it should consider taking additional actions to protect itself, Branaugh notes. 

He points to Wagenmaker & Oberly, a Chicago-based law firm serving churches and ministries (and co-founded by attorney Sally Wagenmaker, a senior editorial advisor for Church Law & Tax). The firm offers several steps for addressing a known or anticipated trespasser, including:
  • Issuing a written “no trespass” notice to the party (consult with qualified legal counsel who is familiar with local and state laws before doing so)
  • Contacting local law enforcement before services regarding ways to address disruptions, and possibly request additional patrol support during services
  • Seeking a court-issued restraining order

First Amendment Rights Go Both Ways

Protesters have speech rights—but churches have constitutional protections too.

A key point pastors often miss:

The First Amendment does not guarantee a right to disrupt worship on private property.

Churches generally retain the right to:
  • Control access to their buildings
  • Remove individuals who disrupt services
  • Call law enforcement when necessary

Want to dive deeper into religious freedom in the United States? Try our state-by-state survey of religious freedom laws.

Journalists Are Not Automatically Exempt

Being a member of the press does not override:
  • Private property rights
  • Trespass laws
  • Church authority to maintain order during worship

Also remember: Media presence does not turn a sanctuary into a public forum.

Even if no law is ultimately violated, the harm is real:
  • Worship disruption
  • Congregational fear
  • Pastoral distress
  • Escalating conflict

Churches that plan ahead are better positioned to respond calmly and lawfully.

What Pastors Should Do Next

This primer is only the starting point. Churches should:

Learn more and dive deeper into crisis management, protest response, and facility security—before the next disruption happens—with a Church Law & Tax membership.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: iStock/hobitnjak

Seven Things Many Pastors Don’t Know About Unrelated Business Income

What pastors need to know about UBIT, how it’s triggered, and why it can affect more than just federal income taxes.

The Editors
Bio

Unrelated business income tax (UBIT)  is an income tax on the unrelated business income (UBI) of churches and other tax-exempt charities.

UBI generally is income from the operation of a trade or business that is regularly carried on. 

Seven things every pastor should understand about UBIT:
  • This isn’t about profit—it’s about activity.
    A church can owe UBIT even if an activity supports ministry goals or raises money for good causes. If the activity is a regular trade or business and not substantially related to the church’s exempt purpose, the Internal Revenue Service (IRS) may treat the income as taxable.
  • “Occasional” can still be considered regular.
    Repeated fundraisers, rentals, or sales—even if seasonal or part-time—may qualify as “regularly carried on.” Frequency and consistency matter more than intent.
  • Rent isn’t always tax-free.
    Rental income is often exempt, but not always. Providing services (cleaning, staffing, event setup) or renting debt-financed property can turn otherwise exempt rental income into taxable UBI.
  • Volunteers don’t automatically eliminate UBIT risk.
    Income may be exempt if substantially all the work is performed by volunteers—but that standard is higher than many churches assume. Involvement by a few paid staff can change the analysis.
  • Advertising is different from sponsorships.
    Selling ads (logos, promotions, calls to action) in a church publication or online can generate UBI. True sponsorships that simply acknowledge donors are usually not taxable—but the line between the two is easy to cross.
  • UBI can affect more than taxes.
    Too much unrelated business activity can raise red flags about whether the church is operating primarily for exempt purposes—especially if it becomes a major focus or revenue source. This can affect things like sales and property tax exemptions, for example.
  • IRS filings may be required.
    Churches are not required to file an annual Form 990 or the related Form 990-T. However, UBI over certain revenue thresholds can trigger filing requirements, penalties, and interest if ignored. Additional state-related requirements and filings also may emerge.

Bottom line for churches: UBI is highly fact-specific. Before starting new income activities—or assuming old ones are safe—church leaders should slow down, ask questions, and consult trusted tax guidance tailored to churches.

🤔 Wondering how UBIT applies in real-life church decisions?
For example, many churches consider selling items like T-shirts, mugs, or water bottles with the church logo. Does that make the sales related to ministry—or could it create unrelated business income?

→ Read the Q&A: Does Our Church Owe Unrelated Business Income on Goods Sold?

Clarity on church taxes starts with a Church Law & Tax annual membership. AI-assisted search, exclusive webinars, cohorts, expert analysis and tips—and a host of content trusted by church leaders for decades—all for pennies a day!
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
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Webinar: Mastering the 2026 Tax Season with CPA Elaine Sommerville

Key updates for churches and clergy related to 2026 tax filing and readiness, including the affects of OBBBA, early-year tax filing requirements, and a whole lot more.

The Editors
Bio

Charge ahead into the 2026 tax preparation season with this on-demand, members-only webinar hosted by Church Law & Tax and CPA Elaine Sommerville.

In the next hour, you’ll be read in to a wide array of crucial topics for navigating the upcoming tax season, from the effects of One Big Beautiful Bill Act (OBBBA) on churches and clergy, to February tax filing requirements and other beginning-of-year tasks, to tax considerations for individual ministers and clergy.

Meanwhile, “9 Things Church Law & Tax is Watching in 2026,” offers even more guidance from Church Law & Tax Attorney and Editor Matthew Branaugh.

Don’t wait! Join Church Law & Tax today and tap in to more than four decades’ of tax, legal, financial, abuse prevention, and risk management expertise.

Download the presentation notes (below), and watch the video now:
Mastering the 2026 Tax SeasonDownload
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The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
Image: AdobeStock/Concept Photo Studio

Nine Things Church Law & Tax is Watching in 2026

A quick scan of the legal, tax, employment, and religious liberty developments most likely to affect churches in 2026—and what leaders should do now.

Matthew Branaugh, Attorney and Editor
Bio

Last Reviewed: February 12, 2026

1) Will churches get more leeway to support or oppose political candidates? 

We don’t know just yet.

The fate of a proposed statement from the Internal Revenue Service (IRS) regarding churches and their activities involving political candidates likely will get decided in 2026. 

The statement, included with a proposed settlement in a lawsuit against the IRS, suggests churches as tax-exempt entities should enjoy more latitude when it comes to supporting or opposing political candidates—a major departure from tax-exempt regulations in place for decades. 

The development caused controversy, and the federal judge in the case is mulling whether to approve the settlement. 

If he approves it, the IRS has already prioritized work in 2026 to revise its guidance.

2) The “church autonomy doctrine” expands. 

The long-standing “church autonomy doctrine” generally bars civil courts from resolving internal church disputes that involve faith and doctrine. 

It may further expand as a defense for churches after two recent federal court decisions. 
  • In October 2025, the US Court of Appeals for the Fifth Circuit said a lower court properly dismissed a lawsuit filed against a missions organization by its former executive director—and cited the doctrine as the reason. 
  • Separately, through an early January 2026 decision, the US Court of Appeals for the Ninth Circuit specifically recognized the doctrine as a defense in employment claims. The court said a Washington-based Christian ministry can apply the doctrine to justify employment decisions it makes for nonministerial employees when they are based solely upon religious beliefs. 

3) Changes to the US Postal Service (USPS) postmarking processes. 

A few weeks ago USPS changed the way it postmarks first-class mail—significantly affecting postmark-dependent legal- and tax-related matters.

According to USPS, postmarking now will be handled by regional offices, not local ones, which will delay postmark dates. 

This is critically important for church leaders. 

Postmarks are used to determine whether legal filings and correspondences are made on time. 

Additionally, the Internal Revenue Code contains a “mailbox rule” that relies upon postmarks for determining timely filings and compliance. 

Later postmark dates can affect anything ranging from court filings, to IRS reporting requirements, to donor checks sent around the end of the calendar year. 

Church leaders should consider using certified mail, requesting manual postmarks at the local USPS office, or possibly securing alternative mail services to ensure timely postmarks. 

4) More clarity about the One Big Beautiful Bill Act (OBBBA). 

The IRS is prioritizing guidance and updates for OBBBA-related items in 2026. 

That includes reporting tips and overtime wages, excess compensation paid by tax-exempt entities, and more. 

STAY INFORMED. The 2026 Tax Prep Guide for Churches & Clergy covers all OBBBA-related developments affecting churches, clergy, and employees. The online Church & Clergy Tax Guide has been updated—and will remain updated as changes unfold throughout 2026. Get access to it all today as an Advantage Member, along with our annual early-year, on-demand webinar with CPA Elaine Sommerville.

5) Continued shaping of the “ministerial exception.” 

The “ministerial exception,” a subset of the church autonomy doctrine, also continues to evolve since the US Supreme Court’s unanimous 2012 decision recognizing it. This doctrine, based upon the First Amendment, allows houses of worship to hire and fire ministers without interference from civil courts. Key decisions last year continued to shape it—setting the stage for more in 2026. 

In 2025, New York’s highest court said the doctrine applied to a religious school teacher fired for a blog post she published, while a lower-level New York court said the ministerial exception did not apply to hostile work environment claims brought by teachers against a Catholic school and its principal. 

Elsewhere, a Louisiana federal district court used the doctrine to dismiss a priest’s discrimination and defamation claims.

WATCH: Learn more from Matthew Branaugh, attorney and editor for Church Law & Tax, about the ministerial exception. 

6) Worker classifications. 

Churches must make sure they properly classify individuals as employees or independent contractors—or else face hefty penalties. Several cases decided last year, including one involving the ride-sharing app Lyft, revealed how expensive misclassifications can run. Lyft paid the state of New Jersey nearly $20 million after misclassifying 100,000 people as independent contractors.

7) Payroll tax compliance. 

Churches must verify payroll taxes are correctly paid, whether directly or through a third-party payroll service, or face significant liability (see “Employment Taxes” in our online Legal Library). 

A former certified public accountant from Texas was found guilty of payroll tax fraud in 2025 after withholding taxes from employee wages, but never paying them to the IRS, according to Thomson Reuters. 

Remember, churches must withhold income, Social Security, and Medicare taxes from employees’ wages, but do not withhold Social Security or Medicare taxes from ministerial wages.

8) Substantiating noncash donations remains crucial. 

A recent US Tax Court decision denied a couple’s ability to deduct nearly $200,000 in noncash charitable contributions, largely because they did not provide substantiation regarding how, when, and at what value they acquired the personal property—and the person they used to appraise the property’s value when they donated it did not meet statutory and regulatory requirements for an appraiser.

LEARN MORE: Advantage Members have access to the onlineChurch & Clergy Tax Guide, which goes deeper into noncash charitable contributions, including substantiation requirements and the required IRS form to complete.

9) Religious freedom issues persist.

Religious freedom issues continue to spring up locally and nationally. These recent headlines illustrate how:

Church Law & Tax will track these issues—and many more—throughout 2026. Be sure to sign up for the free weekly e-newsletter to keep up.

Or, become a member today and enjoy our slate of webinars, including our annual early-bird webinar featuring expert advice and insights on 2026 tax readiness with CPA Elaine Sommerville.
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Matthew Branaugh is an attorney and editor for Church Law & Tax.
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IRS Approves Mileage Rates for Business Use in 2026

The IRS approved a 2.5-cent bump in standard mileage rates for 2026. Meanwhile, the 14 cent rate for miles driven in service of charitable organizations remains the same.

The Editors
Bio

Last Reviewed: January 7, 2026

The Internal Revenue Service (IRS) has released the 2026 optional standard mileage rates. Use them to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The 2026 Tax Prep Guide for Churches and Clergy is updated and ready to download! Get your copy today!

Effective January 1, 2026, the rates are:
  • 72.5 cents per mile driven for business use (up 2.5 cents from the 2025 rate).
  • 20.5 cents per mile driven for medical or moving purposes for certain members of the Armed Forces and Intelligence community (a half-cent down from the 2025 rate).
  • 14 cents per mile driven in service of charitable organizations (it takes an act of Congress to change this rate).

Note: The rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

Don’t wait! Start 2026 on a good footing with a Church Law & Tax Advantage Membership and gain access to AI-assisted search and content surfacing, exclusive cohorts, webinars, product discounts, and more, including full access to trusted content from our trusted team of legal, tax, finance, HR and technology advisors.
For more on reimbursements of transportation expenses and other key tax guidance for churches and ministers, see the Church & Clergy Tax Guide.

Limitations created under Tax Cuts and Jobs Act of 2017 made permanent under One Big Beautiful Bill Act (OBBBA)

Under the Tax Cuts and Jobs Act of 2017 and now under OBBBA, taxpayers cannot:
  • claim a miscellaneous itemized deduction for unreimbursed employee travel expenses and,
  • cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station. See Moving Expenses for Members of the Armed Forces for more details

Taxpayers can calculate the actual costs of using their vehicle rather than using the standard mileage rates. Taxpayers can usually only use the standard mileage rate in the first year a car is available for business use. In later years, taxpayers can choose either the standard mileage rate or actual expenses.

Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals). This applies if the standard mileage rate is chosen.

What does the business mileage rate increase mean for churches?

Increased amounts of reimbursement represent increased budget expenses, and that means adjusting budgets in ways that affect other ministry spending.

Conversely, eliminating or reducing reimbursements shifts the burden to pastors and employees using personalvehicles for church-related business.

Note: Unreimbursed employee business expenses are not deductible under the Tax Cuts and Jobs Act of 2017 (the “Act”) and OBBBA made this permanent. As a result, pastors and employees with unreimbursed mileage cannot seek tax relief on next year’s federal income tax returns.

You may also want read through this Q&A with CPA and Church Law & Tax Senior Editorial Advisor Michael Batts.

One final note:

Churches with an accountable reimbursement arrangement can reimburse eligible employees who use their vehicles for church-related business. Employees and pastors must properly track and document their business miles under these arrangements.

Unreimbursed employee business expenses are not deductible. Therefore, employees can no longer calculate a mileage deduction on their annual tax returns.

 
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.
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Image: iStock/Dzmitry

Federal Tax Law Changes Churches and Clergy Must Know for 2025–2026

A major new law—the One Big Beautiful Bill Act—plus court rulings and IRS actions brought 50 federal tax developments that churches and clergy need to track for 2025 tax returns and 2026 compliance. This overview highlights a portion of that list.

Richard R. Hammar, Attorney, CPA
Bio

Numerous developments and updates related to tax law emerged in 2025, but none more impactful than a major legislation passed by Congress mid-year affecting the tax reporting by both churches and church staff for 2025 and future years: The One Big Beautiful Bill Act (OBBBA).

All told, 50 developments and changes should be noted by churches and clergy for 2025 federal tax returns and 2026 year-round compliance. 

We’ve highlighted the first five here.

The rest are available in Church Law & Tax’s downloadable resource, 2026 Tax Prep Guide For Churches & Clergy, available for $69.95 and offered free of charge to our Advantage Members.

Highlight 1: 1099 threshold increase

Forms 1099-MISC/1099-NEC filing threshold rises from $600 to $2,000, effective for payments made after December 31, 2025, with inflation adjustments starting in 2027—reducing future Form 1099 volume for churches.

Highlight 2: Non-itemizer charitable deduction returns

Starting 2026, a permanent deduction for cash gifts allows up to $1,000 (single) or $2,000 (married filing jointly) for non-itemizers, limited to qualified charities (not donor-advised funds or supporting organizations).

Highlight 3: 0.5% Adjusted Gross Income (AGI) floor for itemized charitable gifts

Beginning January 1, 2026, itemizers may deduct only charitable contributions above 0.5% of AGI (e.g., $100,000 AGI → first $500 not deductible).

TIP: Donors who itemize may wish to consider a “bunching” strategy for 2026 and beyond. This means bunching multiple years’ giving into one year to exceed the 0.5% AGI floor, then using the standard deduction in other years.

Highlight 4: Extensions of increased Child Tax Credit and other dependent credit

After December 31, 2025, the Child Tax Credit was set to decrease to $1,000 per qualifying child under age 17, and fewer American families would qualify for the credit as the income phase-out levels returned to much lower thresholds. Similarly, the nonrefundable Other Dependent Credit—$500 for older children or adults who are unable to care for themselves—was also set to expire.

OBBBA provides a child tax credit of $2,200 per child for 2025 and adjusts it annually for inflation starting in 2026. Phaseout thresholds for 2025 and 2026 are $200,000 for single filers and $400,000 for married filing jointly. A taxpayer (or spouse, if married filing jointly) must provide a Social Security number, along with the child’s Social Security number.

The nonrefundable Other Dependent Credit is also made permanent, although it will not adjust annually for inflation.

Highlight 5: Termination of deduction for personal exemptions and the addition of an enhanced deduction for seniors

Under prior law, the deduction for personal exemptions was set to return after December 31, 2025. The deduction for personal exemptions is permanently eliminated. However, a temporary deduction for tax years 2025 through 2028 for seniors (age 65 or older) of $6,000 per eligible filer, regardless of whether they are itemizers or non-itemizers is now available. The deduction is available to taxpayers with a modified adjusted gross income that does not exceed $75,000 for single filers ($150,000 for married filing jointly). This deduction expires after 2028 unless extended by Congress.

Again, our complete list is available in Church Law & Tax’s downloadable resource, 2026 Tax Prep Guide For Churches & Clergy, available for $69.95 and offered free of charge to our Advantage Members.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: iStock/@adha

Beware the Holiday ‘Overpay-and-Refund’ Scam

A holiday-weekend “mistake donation” turned into a costly scam for one church when a fraudulent donor pressured staff into issuing a partial refund before the original gift cleared.

Tim Samuel, CPA and Church Chief Financial Officer
Bio

Not all generosity is genuine. 

When someone donated $2,000 online to a church on a holiday weekend, the donor soon after contacted the church and claimed the donation should only have been $20.

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They demanded a refund of the difference.

Exploiting trust, timing, and natural helpfulness

It all happened at an inconvenient time.. The church office was closed for the holiday. 

So, rather than wait, the individual began contacting various church staff members directly, hoping someone would bypass normal protocols and issue the refund. 

This put undue pressure on the team, especially those not involved in the church’s finances.

And because the online gift had been made but had not yet been cleared, someone at the church approved the $1,880 refund. 

Days later, the original online payment failed to clear. The church lost the refunded amount. 

And they weren’t alone. They were one of several victims of a larger scam that exploited trust, timing, and the natural responsiveness of ministry teams.

The person behind the scam went to federal prison for a pattern of similar fraudulent activity across multiple organizations. 

While justice was ultimately served, the experience offers valuable lessons for churches.

Churches make easy targets

Churches are often targets for financial manipulation. Their culture of trust and generosity, combined with decentralized communication across ministry teams, can create opportunities for bad actors. 

Holidays and weekends increase this vulnerability when financial staff are unavailable and the pressure to respond quickly is high.

How your church can protect itself

To protect churches from similar incidents, the following safeguards are recommended:
  1. Do not issue refunds until the funds have fully cleared. Even when the story sounds credible, timing is critical. Waiting protects both the church and the donor. Even if the money has cleared, issue the refund the same way the gift was made to the same card or bank account as the gift.  Restrict financial transactions to designated personnel. Staff outside the finance team should not handle giving corrections, refunds, or check verifications. All such requests should be redirected appropriately.
  2. Avoid processing financial changes outside of office hours. Set clear boundaries around when and how financial matters can be addressed. Emergencies are rare and should be treated with caution.
  3. Educate your team on manipulation tactics. Scammers often use urgency, emotional pressure, and multiple contact points to bypass safeguards. Training your staff to recognize these signs is an essential part of financial stewardship.
  4. Implement a response protocol for holiday weekends. If donor services must remain available during closures, assign one trained person with clear limits and accountability to handle inquiries.

Stewardship is not only about handling resources wisely. 

It is also about building systems that honor integrity, protect staff, and preserve trust. 

Even a single incident of fraud can impact morale, operations, and the public witness of a congregation. By holding financial boundaries with compassion and strength, churches safeguard not just their accounts–they safeguard their calling.

Tim Samuel is a CPA and the chief financial officer of Bridgeway Community Church, a nondenominational, multicultural church in Columbia, Maryland, that draws more than 4,000 people each week.

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