As we discussed in Part 1, Churches are not completely exempt from “rendering unto Caesar” what is due.
We’re going to pick up where we left off.
Fourth, I closely check the church’s revenue. If the church is receiving income unrelated to the exempted purpose of the organization—income that is therefore taxable. This kind of revenue is called “unrelated business income” by the IRS, and it is taxable. Now, some clever pastor may argue that the gymnasium is being used for outreach. But he needs to make that argument with the support of an accountant and/or a lawyer, and he needs to hope he wins. If your building is rented for anything other than the purposes that qualify you as a nonprofit, it’s taxable. Returning to our example of renting out a gymnasium, the back taxes can add up to thousands of dollars. Failure to pay could result in your having to pay the tax plus penalties and interest, which could easily double or even triple the tax you owed in the first place.
Fifth, nonprofits and churches are not exempt from copyright law—or the consequences of infringement. You cannot broadcast music that is not in the public domain without paying royalties to the writers and the production companies. Whether it’s a song lyric, a movie line, an excerpt from a television show, or another type of media, make sure you pay for the rights to use it, if necessary. While this may not actually help you with the IRS, it will help you develop a sense of principles for the organization that will trickle throughout how the church completes its taxes.
Sixth, if you are a pastor or a ministry leader, don’t ask an employee to wash your car, clean your house, cut your lawn, watch your kids, walk your dog, schedule you a haircut, or do any other personal service on company time. If you do, you should pay him or her out of your own pocket. Even if the employee wants to provide the service, the burden, as well as the penalties, rests with the employer to follow federal wage and hour laws. Any employees who attend your church and desire to volunteer there must do so in a capacity that is unrelated to their salaried job. Otherwise, the Wage and Hour Division of the U.S. Department of Labor will view his volunteering as work for which he should be paid according to federal regulations.
If you follow these guidelines and try your best to honor the IRS, your church will have fewer problems. Even though it may seem taxing to follow the rules (see what I did there?), it is far less challenging and costly than to deal with the IRS on their terms. Do what is right and you will win with the IRS.