Legalities For Churches: Confidentiality, Tax-Exemptions & More

Legalities for Churches - Balancing Mission and Complaince

The Church is God’s gift to humanity; its structure (1 Cor. 12:28) and purpose (Eph. 3:10) are delineated in Scripture. The members of His Church are called and “set in place” by the Holy Spirit (1 Cor. 12:18). The Church is a wonderful gift believers should respect and protect.

Church legal issues can flare when tax code and federally mandated paperwork issues are not properly addressed. Failing to follow local, state, and federal laws could result in cancelled insurance policies, being subject to legal action, and the continuance of the ministry put in jeopardy. Read on to learn more about this important issue.

Remaining In Good Standing

Some argue that religious assemblies are on a spiritual mission and therefore adhere to spiritual (biblical) rather than federal laws. Those who hold this view often cite Acts 5:29 (“We are to obey God, not man”) to support their position and justify the expression of their concerns. However, a more thorough reading of Scripture reveals that though humans should pursue religious freedom and follow biblical precepts, people (and churches) must remain compliant with the law of the land (Romans 13).

Churches and nonprofit organizations must file appropriate paperwork to remain in good standing with the state. This includes Articles of Incorporation, a Constitution & Bylaws, nonprofit (501-c3) filing, IRS-related paperwork, an EIN, and appropriate financial documents. In addition, a church or religious organization must file paperwork listing its board members, a profile of its spiritual mission, insurance paperwork, schedule regular business meetings, and maintain minutes of key meetings.

A lack of compliance can lead to fines and, possibly, to the church's closure.

According to Federal Laws, What Constitutes a Church?

Knowing how the federal government defines a church is important because tax law and compliance expectations can differ between a religious organization, a nonprofit entity, and other entities that purport to offer spiritual services.

The federal government has specific regulations defining religious entities. According to the government, a church is a “qualified organization” designed to “bring people together as the principle (sic) means of accomplishing its exempt purpose…To be a church, a religious organization must engage in the administration of sacerdotal functions and the conduct of religious worship in accordance with the tenets and practices of a particular religious body.”

If a religious organization desires tax-exempt status, it must be aware of (and comply with) laws pertaining to clergy, church property, and guidelines related to church employment. Legal counsel is often required to ensure that the religious beliefs of the organization are protected while it fulfills its legal responsibilities.

Why Does the IRS Need a Clear Definition of What a Church is?

Defining your organization's classification is important because it corresponds to the benefits the organization enjoys, the paperwork that must be filed, and the taxes it must pay. The IRS allows a "church" to enjoy tax-exempt status and other benefits (such as religious land use benefits, church property tax benefits, and pastoral housing benefits) when the church's practices, policies, and paperwork properly address IRS concerns and requisites.

Local laws may require a church to satisfy other legal requirements, such as complying with specific parking, water, and zoning ordinances. Securing legal guidance is encouraged.

In recent years, government laws, policies, and agencies have become increasingly hostile to churches. IRS probes, sexual abuse scandals, and COVID-related orders have adversely impacted many religious organizations. Religious freedom and the tax-exempt status most churches enjoy are under threat.

As we live in a time when there is an uneasy peace between religious entities and government, church or religious organization leaders are strongly encouraged to seek legal guidance to understand better the laws and regulations governing their work. Failure to do so could result in fines or new codes that substantially burden the church.

What Federal Employment Laws Apply to Churches?

According to the Church Law Center, federal employment laws apply to church staff. Church leaders should be familiar with pertinent federal laws to remain compliant and to ensure unforeseen problems do not arise. Several regulations regarding church employees follow:

• Title VII of the Civil Rights Act (1964) includes language prohibiting employers from “discriminating against…potential employees on the basis of race, color, sex, religion, or national origin.” Religious organizations are exempt from Section 702 of Title VII, which requires organizations to give equal consideration for employment to individuals who do not hold religious views or adhere to the moral standards advocated by the religious institution.
• The Americans with Disabilities Act (ADA) requires churches with more than 15 employees to accommodate employees with disabilities.
• The Family and Medical Leave Act of 1993 (FMLA) requires churches with more than 50 employees to provide unpaid but job-protected leave for certain family emergencies and medical situations.
• The Age Discrimination in Employment Act (ADEA) prohibits churches with more than 20 employees from discriminating against hiring people over 40.
• The Patient Protection and Affordable Care Act (ACA) requires churches with 50 or more employees to provide healthcare benefits to those who work more than 30 hours a week.
• The Fair Labor Standards Act (FLSA) stipulates minimum and overtime wage standards for full and part-time employees. Note: The Fair Labor Standards guidelines may or may not apply to church employees due to various variables. Seeking legal counsel on the matter is strongly recommended.

Can Churches Get in Trouble for Hiring Discrimination?

Yes, a church’s hiring, discipline, or termination policies can violate the law in certain circumstances. However, a church or religious organization can legally take advantage of a specific provision to ensure Title VII of the 1964 Civil Rights Act does not adversely impact the faith or spiritual concerns a church may have regarding its employees.

There is a compelling government interest to guard against discrimination; however, religious institutions can protect their spiritual interests and be free to exercise policies designed to ensure their clergy and staff align with the doctrinal views associated with their religion.

Can Churches Legally Do Background Checks?

Board members are responsible for protecting their congregants and the church's reputation. Background Checks are an appropriate way to guard against potential problems (including lawsuits).

Note: Churches who fail to background check staff and unknowingly hire a ‘sex offender’ are vulnerable to charges of sexual abuse and negligence, resulting in a substantial burden (financial, emotional, and spiritual) for the church.

How Do Churches Classify Their Employees?

A church is different than a nonprofit organization (NPO). An NPO often classifies their staff as W-2 “employees.” However, many church leaders are classified as independent contractors (IC) and receive a 1099 wage form annually. Senior Pastors seem to be the exception, as most religious assemblies classify Pastors as W-2 wage-earner employees.

Misclassifying employees can be costly as back taxes and fines can be required to remain in compliance with state and federal tax law. Free Church Accounting recommends classifying all paid church workers (nursery and custodial staff, musicians, associate pastors, etc.) as W-2 employees, not 1099 independent contractors. This will cost more, but this risk management measure can serve as a guard for a church’s focus and reputation.

What Are the Stipulations When Hiring Someone for Children's Ministry?

Children are vulnerable to abuse and deserve extra safeguards to ensure their well-being—particularly in a church environment. Many churches do not believe they should subject a church member to a background check or require training of someone who is a “good mother.”

Further, too few churches have a history of taking safety or security complaints seriously or have a strategic plan to mitigate potential problems. Gaps in these areas increase the risk to children and legal exposure for the church.

ChurchLeaders.com notes that “the Church faces enormous potential legal liability in the area of children’s ministry. Many studies show this to be the number-one category that brings liability claims against the Church.” Proper risk management is warranted.

The three primary areas of concern are 1) prevention of accidental injury, 2) prevention of the spread of disease, and 3) prevention of child abuse.

Church leaders can mitigate these concerns by providing proper training, background checks, proper staffing (always at least two workers in the room), high visibility work areas (no closed-in rooms with no windows), the availability of quality first aid kits and first aid training, toys and play areas that are clean and safe, the appointment of a point person to oversee this ministry area, and insurance liability coverage to protect the church in the event of an allegation.

How Do Taxes Work When It Comes to a Church or Religious Organization?

Not too long ago, churches were viewed by the government (and the vast majority of citizens) as the primary stewards of community care. As such, the government encouraged citizens to give to churches by providing tax benefits for donations (so churches could, in turn. provide resources to the needy). The practice has been abused by some, and more IRS scruteny of donations is common. There are no limits and regulations regarding tax deductions for giving to nonprofit organizations.

Many churches provide donation receipts that allow the giver to receive a tax benefit when filing annual returns. Though the IRS does not require a donation receipt for giving under $600 annually, churches should keep proper records regarding all donations to their ministry.

First, Citizens Bank reports that a church or religious organization receives tax benefits for its service to the community. This can include beneficial religious land use agreements, a church property tax benefit, and possible zoning variance. However, to receive donations and offer receipts for tax-use purposes, an organization must:

• File the appropriate paperwork to receive a 501-c3 classification by the IRS (including Form 1023). Information on this requisite can be found HERE.
• File quarterly or annual paperwork to comply with state and federal laws.
• Operate exclusively for religious, scientific, educational, or charitable purposes.
• Ensure the organization's net earnings do not provide an advantage to a shareholder or private individuals.
• Not devote a substantial part of its activity to influencing legislation.
• Not actively participate in or support political campaigns.

503 Nonprofit Filings

A religious entity must file a 501-c3 classification request application and Form 1023 to qualify for tax-exempt status. Along with this paperwork, federal and state law may require information on the organization’s practices, mission statement, budget, board members, insurance, statement of faith, Constitution & Bylaws.

Further, to ensure compliance, state, and federal agencies may require regular (generally annual) meetings, minutes, and access to financial records upon request.

What Other Factors Should Religious Organizations Be Aware of?

Churches must stay abreast of changes in laws concerning church or religious organizations. Religious entities will likely face increasingly restrictive means to regulate agreements to lease worship space, secure insurance policies, and comply with federal laws. Securing legal counsel is advised.

According to a Partnering with the Federal Government document, religious institutions may be eligible for grants. Though this can be an attractive option, board members, pastors, and other church leaders should be aware of the stipulations concerning using grant funds from federal sources:

• Faith-based organizations may not use grant funds to support "inherently religious" activities.
• A faith-based organization must ensure that its inherently religious activities, such as worship and Bible studies, are separate - in time or location - from the government-funded services.
• Faith-based organizations may not use federal funds to purchase religious material.
• Faith-based organizations may not use Federal funds to pay a staff member's salary (who is coordinating the program the federal grant is funding).
• Organizations receiving federal funding may not discriminate against those eligible for service.
• Violators of the requirements specified in their grant may be subject to legal action.

Federal grants for religious and charitable organizations are designed to have a minimal impact an organization's charter, beliefs, and practices. The provisions in the federal code noted below address this concern. Religious entity leaders seeking a federal grant to fund community programming should keep in mind:

• Faith-based organizations may request federal grant funding for community-oriented programming based on church property.
• A faith-based organization does not need to change its name, logo, or founding documents (such as a Constitution) to become eligible to receive a federal grant.
• Church leaders do not need to appoint a government representative to their board or change how it selects members for its governing board to qualify for a federal grant.
• Receiving a federal grant will not impact a religious organization’s statement of faith or revered points of doctrine.

Receiving a federal grant can position the church to expand its community programming efforts. However, the activities the program funds (such as a food pantry or education center) must not incorporate overt spiritual programs the church is known for.

For example, a church known for outstanding preaching may not seek federal funds for a dinner service program for the homeless that requires all participants to attend a preaching service before receiving food. But wise planning can enable a church to meaningfully share the love of Christ with unchurched community members while maintaining compliance with federal regulations.

Scripture compels believers to obey the laws of the land—including paying taxes. Legal guidance is often required to help navigate and comply with the legal responsibilities to which a nonprofit organization is subject.

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