What do incorporation and filing for a 501(c)(3) ruling involve?
To incorporate and obtain an IRS ruling of 501(c)(3) status is a substantial piece of work. Here are the steps:
1. Prepare articles of incorporation under the best available authorizing statute in your state.
2. Record the articles with the secretary of state (or, in Alabama, probate judge). There will be modest filing fees, typically less than $100.
3. Elect officers. In a typical Church of Christ, this would be the elders. If you have no elders, than you have to name someone with authority to sign for the church — maybe the chairman of the men’s business meeting. But someone has to have authority to act for the church.
4. Obtain an Employer Identification Number from the IRS. You’ll need this to obtain a bank account and to file for 501(c)(3) status. You’ll also need it to file payroll tax returns for employees. This is free.
5. Open two checking accounts with a bank — a general fund account and a payroll tax account (for withheld taxes of employees).
For a corporation to be respected, it has to treat its assets as separate from the assets of the preacher or its sponsoring church. It has to have its own account because its money is no one else’s money. The bank will want to see the recorded articles of incorporation and the IRS form giving you an Employer Identification Number. It’ll require an account contract signed by an officer.
Money withheld from the wages of employees, including the preacher, does not belong to the church. It’s trust money held for the benefit of the IRS and other tax authorities. Don’t borrow from that account! It’s not your money.
6. If you have an existing church, transfer the assets to the new corporation (by deed, bill of sale, etc.). Lots of good lawyers forget to transfer title. It doesn’t happen by magic. You have to have instruments of conveyance. Put the church’s money in the church’s checking account. Keep good records.
7. Buy liability insurance. There are companies that specialize in church insurance. Shop. If you’re a church plant, you might be able to get under the policy of your sponsoring church and save a little money.
8. Prepare IRS Form 1023. This is the application for recognition of tax exempt status. It’s a challenging form. Read the instructions carefully. Fill it out exactly. Don’t skip steps. Don’t rationalize. Try to get it exactly right the first time.
If you’re an ADHD or creative type who can’t handle detailed, persnickety work, get help.
You’ll have to pay a filing fee of $400 or $850 (as of 2012). This changes every year or so.
9. For federal self-employment tax purposes, a minister of the gospel is treated as self-employed. This means that the preacher pays his self-employment taxes (in lieu of FICA) by filing quarterly estimates. Unless he elects otherwise (by filing a Form W-4 with the church), he is allowed to pay his income taxes as though self-employed (quarterly estimates rather than withholding), too. This avoids the need for the church to get set up as an employer paying payroll taxes — for federal purposes.
However, in Alabama, preachers are not automatically self-employed for Alabama income tax purposes. If he would be an employee for other purposes, he is an employee for Alabama income tax purposes. Preachers who work fulltime for a single congregation will nearly always be employees for all purposes other than federal self-employment tax purposes.
Therefore, in Alabama, the church has to be set up to withhold Alabama income taxes on the preacher, filing periodic payroll tax returns. It’s a royal pain in the neck, and I recommend the use of a outside payroll tax service. It’s just too easy to mess up.
States may also impose state unemployment tax contributions, workers compensation, and other payroll obligations on the church or the preacher. But many states exempt churches from these requirements. Let a pro handle this.
If you’re a church plant, you may be able to work a deal with whoever does payroll for the sponsoring church. At least, that church should be astute enough to be able to tell you what the rules in your state are (although the ignorance of tax and payroll law by church people knows no bounds).
Because Alabama forces us to make payroll on our ministers, we require our ministers to elect to have their federal income taxes withheld, too, and we withhold enough to cover their self-employment taxes as well, avoiding the necessity for quarterly estimates (unless they have substantial other self-employment income, such as from preaching meetings or publishing books) and avoiding the risk of preachers who don’t pay their taxes.
Now, remember this: No matter how well you organize the church, nothing protects the preacher from liability for his own actions. Seduce a 14 year old, and you’ll go to jail and lose your house (as well as your wife and children) regardless of being incorporated.
The corporation protects the members from being liable for your mistakes, but not you. It does protect you from the mistakes of others if you have no culpability, such as a slip-and-fall accident on church grounds. And it protects you from debts incurred in the name of the church, unless you guaranty those debts.
If the church withholds taxes and doesn’t pay them over to the IRS, the preacher likely has personal liability to the IRS, regardless of its form of organization. The IRS can collect from anyone who had power to make sure the taxes were paid to the IRS, and in most small churches, that includes the treasurer, the bookkeeper, and the preacher. Don’t borrow from the payroll tax account to balance the budget! It’s not your money!
Sadly, as you can see, once a church is big enough to have a fulltime preacher, even if its a mission outpost or church plant, the law quickly makes things complicated. And as messy as things are, they are far simpler than for the typical small business. Churches are exempted from many laws that apply to businesses.
On the other hand, in the case of a true missionary church, where the missionary works for a sponsoring church and not the newly created congregation, he might be properly on the payroll of the sponsoring church. The question is who has authority to direct to work of the preacher. If he answers to the local church, then he’s their employee and the above rules apply to him. But if he answers to the sponsoring church, and is their missionary, not the local church’s preacher, he may well be an employee of the sponsoring church.
Given the congregational autonomy practiced by Churches of Christ, it would be unusual for a fulltime preacher not to be an employee of the church he preaches for, but in mission settings, there are other possibilities. You may need to run your facts by a skilled tax attorney or CPA.
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