Any payments by a church to individuals for services rendered to the ministry represent taxable income to the recipients. If an individual is properly classified as an independent contractor (IRS Publication 15-A can help in this determination), then he or she must be issued Form 1099-MISC if his or her annual receipts paid by the church equals or exceeds $600. Each recipient properly classified as an employee must receive a Form W-2 by January 31 of the succeeding year. Church employees other than ministers are generally subject to social security and medicare tax withholding and employer matching; the exceptions to this requirement are rare. Churches are not subject to federal unemployment taxes.
Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant. IRS Publication 598 states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property. However, a second concern not a...
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