Churches Must Comply with Payroll Tax Reporting Requirements

Federal court rules tax obligations do not violate the First Amendment.

Churches are not exempt from complying with payroll tax reporting requirements. So ruled a federal appeals court in a recent case. In 1986 a church stopped filing federal employment tax returns and paying the federal employment taxes for which it was responsible. Church leaders insisted that the government could not regulate an unincorporated “New Testament church.” When IRS attempts to discuss the matter with church leaders failed, the IRS assessed $5.3 million in unpaid taxes and interest. The IRS asked a federal court to enter a judgment for the full $5.3 million, and to foreclose on a tax lien the IRS had placed on the church’s property. In defense of its failure to pay, the church argued that the first amendment guarantee of religious freedom protected it from liability. The court rejected the church’s position, noting that “neutral laws of general application that burden religious practices do not run afoul” of the first amendment. Since federal employment tax laws are “neutral laws of general application” (that is, they apply to a large class of employers, and do not single out religious employers for less favorable treatment) they do not violate the first amendment. As this case illustrates, any attempt by a church to avoid compliance with federal payroll tax obligations (including the withholding and payment of income taxes and social security taxes) on the basis of the first amendment will be summarily rejected by the civil courts. Indianapolis Baptist Temple v. United States, 2000 2 USTC ΒΆ50,663 (7th Cir. 2000).

This content originally appeared in Church Treasurer Alert, February 2001.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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