While most nonprofits are required to register in many states to conduct charitable fundraising, religious organizations are generally exempt from the registration requirement. It’s important to be aware, however, that the scope of the states’ religious exemption varies. Therefore, religious organizations should carefully review each state’s statutory exemption to determine where they are exempt, and where they are not exempt and therefore may need to register to solicit contributions.

Overview of Charitable Solicitation Registration & Religious Exemptions

Charitable fundraising activities are primarily regulated at the state level, through the offices of the Attorney General, Departments of State, Consumer Protection and the like. Charitable solicitation regulations were established to protect the public from fraudulent fundraising and assist prospective donors in making well-informed giving decisions. Each state’s statutory framework typically requires charities to register with the state, disclose information about their finances and fundraisers, and provide certain oral or written disclosures to their prospective donors. Currently, forty-one (41) states and the District of Columbia require most organizations to register before soliciting charitable contributions in their respective jurisdictions.

Most states exempt or exclude religious organizations from their charitable solicitation registration and reporting requirements. Keep in mind, however, that each state defines the scope of its exemption for religious organizations differently. As a result, some religious organizations may be required to comply with a state’s registration requirements while others may not. Several states require that religious organizations make a written request to confirm that they are exempt from the state’s registration requirements, while others consider it a legal determination to be made by the organization, and explicitly advise that they do not provide legal advice or make a formal determination as to whether or not an organization is exempt.

For some states, the religious exemption provisions are broadly constructed, and exempt any “duly organized religious corporation, religious institution or religious society.” Other exemption provisions are more narrowly drafted, exempting only those religious organizations that are not required to file the Form 990 with the IRS, which primarily includes churches¹, their integrated auxiliaries², and ecclesiastical or denominational organizations. Churches and other non-990 filers are exempt from registering in all states unless they use the services of a professional fundraiser.

As a general matter, religious organizations that are required to file the Form 990 with the IRS will be exempt in some, but not all, states. Many religious organizations that are required to file Form 990 describe their mission as both religious and charitable as together these constitute an expression of their religious faith and values. Direct services for human needs may include the provision of food, shelter, education, and medical support to vulnerable populations. Oftentimes, they incorporate prayer and religious instruction in their programmatic work, and will require their employees to agree to an organizational statement of faith.

It is worth noting that the laws of a few states continue to include a provision in their religious exemption law which the Supreme Court has declared unconstitutional. These unenforceable provisions limit the scope of the religious exemption to only those religious organizations that are primarily supported by contributions from their members or congregation.³

Impact of Religious Exemptions on Fundraising Professionals

Even when a religious organization is exempt from registering in a state to solicit contributions, in most states, when a fundraising professional provides their services to the organization, the fundraiser must be registered with the state. In a few states, the religious organization’s exemption also extends to the fundraiser’s contract filing and reporting obligations, thereby relieving them of any such filing requirements.

Professional fundraisers (also known as commercial fundraisers or paid solicitors) that directly solicit funds on behalf of charitable organizations are required to register in up to forty-four (44) states. In addition, they must post surety bonds in each state, file copies of their fundraising contracts, and file annual financial reports relating to each fundraising campaign conducted in the state. There are ten (10) states that extend the religious organization’s exemption to their professional fundraiser’s contract filing and reporting obligations.

Fundraising counsels (also known as fundraising consultants) that help plan, manage, advise, or produce and design solicitation campaigns, but do not directly solicit or have custody or control of contributions, are also required to register in twenty-seven (27) states, file contracts, and in a few states, post bonds. There are seven (7) states that extend the religious organization’s exemption to their fundraising counsel’s contract filing and reporting obligations.

Fundraising professionals need to understand the scope of a religious organization’s registration or exemption status in those states in which they will be providing fundraising services to the organization. Not only must they comply with their corresponding filing obligations, but they must also ensure compliance with collateral obligations, such as solicitation disclosures. Thus, it would be prudent for religious organizations to ensure that they have appropriately assessed their exemptions, have documentation to support the exemption in each applicable state, be registered to solicit where required, and communicate with their fundraising professionals to ensure alignment on the impact of their status as a religious organization on both parties’ filing obligations.

Does a religious organization need to register if it solicits on the internet?

In addition to ascertaining whether a religious organization is exempt from registration based on its religious status, a separate analysis should be undertaken to determine if the organization’s solicitation activity creates a jurisdictional nexus that would trigger a state’s registration requirement. For example, a website with a donate button that is accessible to residents in all states does not necessarily create a sufficient jurisdictional nexus. In many cases, it makes sense to undertake a jurisdictional analysis based on the organization’s targeted and/or online fundraising activities before delving into the religious exemption analysis as there may only be a few states where the organization has a jurisdictional nexus based on its fundraising activities. In such cases, the organization may simply review the applicability of the religious exemption in those relevant states.

For more information on how to assess an organization’s registration requirements based on its online fundraising activities, please read this article.

What are the practical steps for religious organizations to determine their registration requirements?

Assess whether registration is necessary or not based on a jurisdictional analysis, taking into account both traditional forms of fundraising (e.g., direct mail, telemarketing, events) and online fundraising activities.
Review with your legal counsel whether your organization qualifies for the religious exemption in the relevant states.
Apply for religious exemptions where applicable and appropriate.
Follow the exemption application procedures in the states that have such procedures in place.
For states that take a “self-determination” approach, and will not formally confirm an organization’s qualification for the state’s religious exemption, it may nevertheless be prudent to submit a letter, putting the states on notice of the organization’s position that it is statutorily exempt from registering as a religious organization.
Register in all applicable states where: (1) a registration requirement exists; (2) the organization is soliciting (and the state has jurisdiction over their solicitation activity); and (3) the organization does not qualify for the religious exemption. Note that charitable solicitation registration must be renewed annually in each applicable state.

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Due to Constitutional concerns the term “church” may be found, but is not defined, in the Internal Revenue Code (IRC). To determine whether a religious organization is a church for federal tax purposes, the IRS reviews a set of fourteen (14) characteristics, together with any other relevant facts and circumstances, including whether the organization has an established place of worship, a congregation, and regular religious services.[2]  No single characteristic is controlling nor is there a particular number of characteristics that will guarantee that the organization is a “true” church.

The subjective nature of the IRS’s “facts and circumstances” test for distinguishing churches from other religious organizations makes it challenging to draw a definitive line between churches and religious organizations for federal tax purposes. That said, religious organizations that are not churches generally are not places where a congregation regularly worships and attends religious services. Instead, they may be non-denominational ministries organized to study or advance religion or organizations with a mission that stems from a religious text or sincerely held and deeply-rooted religious belief.

The following is a discussion of several federal and state laws that provide different treatment to churches when compared to the broader category of religious or faith-based organizations.

Recognition of Federal Tax-Exempt Status

In order to be exempt from federal income tax, religious organizations and churches must be organized and operated exclusively for religious purposes and comply with the IRC’s prohibition on private inurement and political campaign activity as well as its limitation on lobbying activities.

Religious organizations must submit an application for recognition of exemption (Form 1023) to the IRS.

Churches, on the other hand, are automatically recognized as exempt and are not required to submit an application to the IRS. Even so, some churches choose to apply since an IRS determination letter can make it easier to apply for exemptions from state taxes or registration requirements and provide assurance to donors that contributions to the church are tax-deductible.

Lobbying and the 501(h) Election

An organization, including a religious organization or a church, may not qualify for exemption from federal income tax if a substantial part of its activities is attempting to influence legislation (i.e., lobbying).  Generally, whether an organization’s attempts to influence legislation constitute a substantial part of its activities (and therefore jeopardizes its tax-exempt status) is determined by a “facts and circumstances” test, by which the IRS considers a number of factors including the time and expenditures devoted to lobbying (“the substantial part test”).

Religious organizations have the option to elect the “expenditure test” rather than the substantial part test. Under the expenditure test, the extent of a religious organization’s lobbying activity won’t jeopardize its tax-exempt status, provided its expenditures, related to the activity, do not normally exceed an amount specified in IRC Section 4911. Ultimately, the expenditure test provides more clarity regarding how much lobbying an organization is permitted to engage in before jeopardizing its tax-exempt status. Churches, by contrast, are not eligible to elect the expenditure test. 

Annual Information Return

Religious organizations must file an annual information return (Form 990, Form 990-EZ or Form 990-N e-Postcard) with the IRS providing information to the IRS and to the public about the organization’s finances and activities for the year.[3] Churches are exempt from this requirement[4] though some churches choose to file an annual information return in order to increase transparency.

Federal and State Unemployment Tax

Churches and religious organizations are not required to pay federal unemployment taxes because services provided to 501(c)(3) organizations are generally exempt from the definition of “employment” under the Federal Unemployment Tax Act.[5] States collect unemployment insurance tax under their own unemployment tax acts and the requirements to file vary by state. Some religious organizations may be required to pay state unemployment tax, whereas, churches are generally exempt from paying state unemployment tax. Some churches voluntarily elect to pay such taxes so that employees terminated without good cause will be eligible to collect unemployment benefits.

Social Security & Medicare Taxes

Churches and religious organizations are generally required to collect, pay and report employment taxes under the Federal Insurance Compensation Act (FICA) for their employees. A church that opposes payment of Social Security and Medicare taxes for religious reasons can elect exemption from the payment of the employer’s share of FICA taxes by filing Form 8274. The church must file Form 8274 before the first date on which the church is required to file its first quarterly employment tax return (Form 941). If the church so elects, employees will, like ministers, be responsible to pay Social Security and Medicare taxes on their salary under the Self-Employment Contributions Act (SECA).

Ministers[6] are subject to unique rules when it comes to employment taxes. Although a minister is considered an employee under the common law rules, payments for services as a minister are considered income from self-employment.[7] Therefore, a minister, unless exempt, pays social security and Medicare taxes on his salary and housing allowance under SECA and is not subject to FICA taxes or income tax withholding. SECA employment tax payments are typically made in quarterly estimates, using coupons or vouchers. Churches are not permitted to pay the SECA tax for their ministers, but many churches assist ministers by providing them a “Social Security Allowance” of at least 50% of the SECA tax. This allowance is often approximately equal to the amount of FICA tax a church would pay if the minister were treated as an employee for purposes of employment taxes.

IRS Audits

In general, the IRS is authorized to conduct examinations of tax-exempt organizations, including religious organizations, in order to ascertain whether they are in compliance with all applicable requirements of the IRC. However, the authority of the IRS to audit churches is restricted. It is important to note that these restrictions do not apply to integrated auxiliaries of churches. The IRS may only initiate a church examination if an appropriate high-level Treasury Department official reasonably believes, based on a written statement of the facts and circumstances, that the church, (1) may not qualify for federal tax-exemption, or (2), may not be paying tax on an unrelated business or other taxable activity. This restriction does not apply to all inquiries or examinations. For example, the IRS can still make a routine request for information. In addition, restrictions on church inquiries do not apply to criminal investigations or investigations of the tax liability of a person connected with the church (such as a donor or minister).

Affordable Care Act

Generally, religious organizations and churches are subject to the provisions of the Affordable Care Act. However, churches and religious organizations with a sincere religious objection to establishing or maintaining a health insurance plan that provides coverage for contraceptive services are exempt from the Affordable Care Act’s mandate that employers provide access to health insurance to employees that covers women’s preventative services.[8] 

State Taxes and Registration Requirements

Generally, churches are subject to the same rules for state property tax and sales and use tax as religious organizations. Many states exempt churches and religious organizations from payment of property tax on land owned by the organization and used for religious purposes. Whether this exemption is available and the requirements for eligibility vary by a state. For example, in New York real property owned by a nonprofit corporation organized or conducted exclusively for religious purposes and used exclusively for carrying out the organization’s religious purpose is wholly exempt from taxation and, for certain purposes, from special ad valorem taxes.[9]

In addition, some states have broad sales and use tax exemptions applicable to churches and religious organizations. For example, in New York, organizations established and operated exclusively for religious purposes are exempt from sales and use tax.[10] Other states, however, only exempt certain purchases or sales made by churches or religious organizations. For example, Mississippi requires churches and religious organizations to collect and pay tax on purchases and sales except on purchases of electricity, gases, other fuels and potable water used on property primarily used for religious or educational purposes.[11]

Finally, some states have a broad exemption from the requirement to register to solicit charitable contributions for churches and religious organizations while others only exempt churches and their integrated auxiliaries. For example, New York exempts all corporations organized under the Religious Corporations Law, other religious organizations, and charities and organizations operated, supervised, or controlled by or in connection with a religious organization.[12] By contrast, West Virginia exempts only churches, synagogues, associations or conventions of churches, religious orders or religious organizations that are an integral part of a church which qualify as tax exempt under IRC 501(c)(3) and are exempt from filing an annual information return with the IRS.[13]

[1] “Church” includes similar institutions of all faiths, including temples, mosques, synagogues, etc. Also, unless otherwise stated, for purposes of this article, “church” includes “integrated auxiliaries” and a “conventions or associations of churches.” An “integrated auxiliary” of a church is a public charity affiliated with a church and that receives financial support primarily from internal church sources as opposed to public or government sources. Common examples are men’s and women’s organizations, seminaries, mission societies and youth groups.

[2] The full list of characteristics includes (1) a distinct legal existence; (2) a recognized creed and form of worship; (3) a definite and distinct ecclesiastical government; (4) a formal code of doctrine and discipline; (5) a distinct religious history; (6) a membership not associated with any other church or denomination; (7) ordained ministers ministering to its congregation; (8) ordained ministers selected after completing prescribed studies; (9) a literature of its own; (10) established places of worship; (11) regular congregations; (12) regular religious services; (13) schools for the preparation of its ministers; (14) and schools for the religious instruction of the young. The organization must demonstrate that, on balance, it has the characteristics of a church. In making its determination, the IRS does not evaluate the content of a church’s professed beliefs as long as those beliefs are sincerely held and not illegal or against public policy.

[3] 26 U.S.C. 6033(a)(1).

[4] 26 U.S.C. 6033(a)(3)(A)(i).

[5] 26 U.S.C. 3306(c)(8).

[6] This term includes members of clergy of all religions and denominations (e.g., priests, rabbis, imams, etc.).

[7] 26 U.S.C. 1402(c), 3121(b)(8)

[8] 82 Fed. Reg. 47812 (2017). See also, Little Sisters of the Poor Saints Peter Saints Peter and Paul Home v. Pennsylvania, Doc. No. 19-431 (U.S. July 8, 2020) (court held the Departments of Health and Human Services, Labor, and the Treasury had the authority under the ACA to promulgate the religious and moral exemptions, and they promulgated those exemptions consistent with the manner required under the Administrative Procedure Act).

[9] RPTL §420-A.

[10] N.Y. Tax Law §1116(a)(4).

[11] Miss. Code Ann. §27-65-19(1)(a)(ii).

[12] N.Y. Executive Law §172-a(1).

[13] W. Va. Code, § 29-19-6(5).

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