You need to know what you don’t have to pay!
It seems crazy to think that a church, which is a tax-exempt entity, could be paying taxes needlessly. Because your federal exemption exempts your church only from paying federal income tax many state and local authorities may try to charge you tax as well. Knowing what taxes your church doesn’t have to pay is very important!
1. Sales tax. Do you know for sure that the individual in your accounting department is diligently monitoring every invoice to make sure you are not paying sales and use tax? Even recurring bills can include sales tax without your realizing it. Sales tax can be rolled into other items or even miscoded on utility bills.
Depending on the state you are in, it could be years before your church realizes it. Follow up with your staff members and ask them to call every vendor to make sure they know your organization is a church, and verify that you have been classified correctly in their billing software. One church received a refund check for three years’ worth of overpayment on taxes from an electric bill!
2. Property taxes. Always review how much your state’s property taxes are for your church building, any auxiliary property the church owns, land owned by the church and church-owned parsonages. Some states have exemptions for ministers who live in church-owned property, for religious property, or for those with a duly held license, so be sure to thoroughly research the exemptions in your state.
If you have an additional church- or ministry-owned property, the local assessor’s office may try to assess it if particular criteria for the property are not specified, such as for use as a “worship auditorium” or other purpose. Be sure that the assessment has been thoroughly analyzed to confirm that you are not overpaying.
If the fair market value of your church or church property has decreased, be sure to thoroughly check the assessment to make sure items are calculated correctly—if by chance you live in a county where certain property taxes may be applicable. You might want to consider hiring a local property-tax professional who specializes in reducing tax bills to assist your church.
3. Payroll taxes. Are you absolutely certain your church payroll is being run correctly? In our experience, numerous administrators believe so, but upon closer review discover numerous errors. Do you use a large company to process your payroll automatically? If so, be sure the company hasn’t set you up as a for-profit corporation instead of a church. If you are incorrectly set up as a for-profit, they might be charging you Federal Unemployment Tax Act (FUTA) or State Unemployment Tax Act (SUTA) taxes.
Ensure that your payroll processor is running the ministerial payroll correctly and not inadvertently charging the church FUTA or SUTA (if applicable, and subject to state laws). Verify that all payroll benefits are being properly processed, and all deductions are being processed as pre- or post-tax. These errors could be needlessly costing the church additional employer FICA taxes on certain benefits. Make sure you are not overpaying, because every dollar counts.
4. Hotel use and occupancy tax. Numerous states allow exemptions from certain hotel and occupancy taxes for 501(c)(3) organizations. When your staff plans to travel, diligently fulfill your hotel’s requirements for applying the tax exemption before they travel. Check with the hotel to see if you can fax in advance copies of your church’s IRS 501(c)(3) letter.
Never let a church staff member check out from a hotel without carefully examining the bill to see if any of those taxes were inadvertently charged. Take the time to visit the front desk to have the erroneous charges deleted. It is surprising the amount of money these taxes can add up to over time!
Pamela M. Schavey, J.D., is a CPA and tax attorney with ChurchShield LLC (churchshield.com), which assists churches and ministries in IRS compliance with legal, accounting, tax and payroll matters.