How to Start a Church: The Legal and Tax Steps, in Order

The steps at a glance

What the IRS counts as a church

Federal tax law has no single definition. Publication 1828 lists characteristics the IRS and the courts have attributed to churches, and the IRS weighs a combination of them with the other facts. They include a distinct legal existence, a recognized creed and form of worship, a definite ecclesiastical government, a formal code of doctrine and discipline, an organization of ordained ministers, established places of worship, regular congregations and regular religious services. The IRS says it does not evaluate the content of the doctrine, as long as the beliefs are sincerely held and the practices are not illegal or against clearly defined public policy.

A group that does not meet that bar can still be a religious organization under section 501(c)(3), but the rules differ: unlike a church, it generally must apply for exemption unless its gross receipts normally stay at $5,000 a year or less, and it files the annual Form 990 series.

The steps, in order

1. Choose the legal form and file it with the state. State law decides how a church can be organized. Many incorporate as a nonprofit corporation, which gives the church a legal existence separate from its members and leaders. In Texas, for example, that is Form 202, the Certificate of Formation for a nonprofit corporation, filed with the Secretary of State for $25. It names a registered agent, says whether the corporation will have members, and states its purpose. Other states use their own forms and fees, and a church that belongs to a denomination should ask it first, because the denomination may have its own structure.
2. Adopt bylaws and seat the board. Bylaws say who governs, how leaders are chosen and removed, and how money is approved. Write in that no earnings go to any private person, and keep minutes. Publication 1828 bars inurement to insiders such as the minister and board members, which includes unreasonable pay.
3. Get the EIN. Apply only after the state has formed the church, in the exact legal name it approved. On Form SS-4, line 9a has a box for Church or church-controlled organization, and the IRS tells applicants to choose that type rather than another nonprofit type. The application needs a responsible party: a real person who controls the church, such as the pastor or board chair. See EIN for a nonprofit for the line-by-line SS-4, and who counts as the responsible party.
4. Open the bank account. Publication 1828 names a bank account as one of the things a church needs the EIN for. Banks usually also ask for the formation papers and a board resolution naming who can sign. See what a bank asks for.
5. Decide whether to file Form 1023. It is optional. The IRS letter it produces reassures donors and grant makers and puts the church in the IRS search tool. A church can be recognized from the date it was formed, even if it applies years later. If the church belongs to a denomination with a group ruling, it may already be covered: ask the parent, and enter the group exemption number on the SS-4 if you have one.
6. Apply for state exemptions separately. The IRS says the EIN is not a tax-exempt number. Sales tax exemption, and any property tax exemption, come from your state and local agencies, each with its own application.
7. Set up payroll before the first paycheck. See the next section.

Does the church need the EIN if it has no employees?

Yes. The IRS says every tax-exempt organization, including a church, should have an EIN whether or not it has employees. Beyond the bank account, the church uses it on Forms W-2 and 1099, on Form 990-T if it has unrelated business income, and to be listed as a subordinate under a group ruling. One mistake to avoid: the IRS notes that some churches landed on its automatic revocation list because its records showed them as another kind of organization, one that must file an annual return. Choosing the church entity type on the EIN application keeps that record right from the start.

Already have a number and need to check it? Use the nonprofit EIN lookup or the 501(c)(3) lookup tool. A church that never filed Form 1023 will usually not appear in the IRS exemption search, and that is normal.

Paying a pastor and staff

Ministers

A minister's pay for ministerial services is treated in two ways at once. For Social Security and Medicare, the church does not withhold or pay FICA; the minister pays self-employment tax instead, unless the minister applied for and received an exemption on Form 4361. For income tax, the church is not required to withhold, but the minister can ask it to with a Form W-4. The church reports the pay on Form W-2 if the minister is an employee.

A housing allowance, or the fair rental value of a parsonage, is excluded from the minister's income for income tax, but not for self-employment tax. The church must designate the allowance by official action before it is paid, so put it in the board minutes each year.

Other employees

For staff who are not ministers, the church withholds income tax and FICA and files Form 941 like any employer. A church that is opposed to Social Security and Medicare taxes for religious reasons can elect out of the employer share with Form 8274, but only if it files before its first quarterly employment tax return is due. The election does not stop income tax withholding, and the employees then owe self-employment tax. Churches do not owe federal unemployment (FUTA) tax. Your state will have its own withholding rules; see state employer ID numbers.

The rules that keep the exemption

• No private benefit. Church money cannot go to insiders beyond reasonable pay for real work.
• No campaigning for candidates. The IRS says section 501(c)(3) organizations are absolutely prohibited from participating in any political campaign for or against a candidate for public office. Nonpartisan voter registration and voter education are allowed.
• Limited lobbying. No substantial part of the church's activity may be attempting to influence legislation.
• Keep records. Every church must keep books that support its exemption, whether or not the IRS has recognized it.

Quick answers