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Are Unincorporated Churches Treated Differently?

Question:

A church has opted to not incorporate with its State nor file for Internal Revenue Code section 501(c)(3) tax exempt status, having adopted the stance that churches are already tax-exempt according to IRS tax codes and publications.

May such a church give occasional "gifts" to individuals (who perform ministerial services) within the church from money that was given to the church by donors who write their contributions off as tax-deductible and the recipients of these gifts not be required to report the receipts as taxable income?

Answer:

Regardless of whether a church incorporates, files for formal recognition as a tax-exempt, or utilizes many States' statutes that recognize the exempt nature of unincorporated churches, gifts to individuals who perform ministerial services represent taxable compensation to them.

In ignorance, some churches fail to file proper documents with the IRS (typically Form W-2, but in some circumstances, Form 1099-MISC). Of course, ministers should report taxable income as such even though the payer fails in its duty to disclose the taxable compensation.

Exceptions to these reporting requirements relate to the distribution of funds for non-compensatory purposes (e.g., benevolence, ministry-related expense reimbursements).

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