Religious schools generally do not pay federal income tax on tuition, donations, or other revenue tied to their educational and religious mission, provided they qualify as tax-exempt under Section 501(c)(3) of the Internal Revenue Code.1Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. But the answer to whether religious schools pay taxes is not a flat no. These schools still owe federal tax on income from activities unrelated to their mission, they generally pay employment taxes on their staff, and property and sales tax exemptions depend entirely on state and local rules.
What the Federal Income Tax Exemption Covers
A religious school recognized under 501(c)(3) pays no federal income tax on revenue tied to its educational and religious mission. Tuition, student fees, and charitable donations all fall within that exemption. The status also makes contributions tax-deductible for donors, which is why gift-dependent schools guard it closely.2Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
Churches, integrated auxiliaries of churches, and conventions or associations of churches are treated as tax-exempt automatically and do not have to file Form 1023 to be recognized.3Internal Revenue Service. Instructions for Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) A religious school that operates as an integrated part of a church can fall within that exception. Independent religious schools typically apply using Form 1023 and work from the resulting determination letter.
Property and Sales Taxes Are Decided by States
Federal 501(c)(3) status does not automatically exempt a religious school from property or sales taxes. Those are state and local taxes, governed by state law. Every state offers some form of property tax exemption for religious and educational nonprofits in practice, but the school usually has to apply separately with the county or municipal assessor’s office and show that the property is used for exempt purposes. Property used for an unrelated commercial activity may remain taxable.
Many states also exempt qualifying nonprofits from paying sales tax on purchases made for educational use. Some states issue an exemption certificate the school presents at checkout; others require the school to pay the tax and file for a refund. The federal determination letter is almost always part of the paperwork at the state level.
When Religious Schools Owe Federal Tax: Unrelated Business Income
Even with 501(c)(3) status, a religious school owes federal tax on income from activities not substantially related to its educational or religious mission. The IRS calls this the Unrelated Business Income Tax, and it exists so that tax-exempt organizations do not use their status to undercut for-profit competitors.4Internal Revenue Service. Unrelated Business Income Tax
An activity triggers UBIT when three conditions line up: it is a trade or business, it is regularly carried on, and it is not substantially related to the school’s exempt purpose. Renting out facilities for commercial events, running a restaurant open to the public, and selling merchandise unrelated to the mission are common examples. If the school earns $1,000 or more in gross income from these activities, it files Form 990-T and pays tax on the net profit at the 21% corporate rate.4Internal Revenue Service. Unrelated Business Income Tax
Several exceptions keep ordinary school operations out of UBIT territory. The convenience exception under Section 513(a)(2) excludes any trade or business carried on primarily for the convenience of the school’s students, officers, or employees.5Office of the Law Revision Counsel. 26 U.S. Code 513 – Unrelated Trade or Business School cafeterias and campus bookstores typically fall within it. A bookstore selling textbooks and supplies to enrolled students is operating for their convenience and does not generate UBIT, even though it looks like retail from the outside.6Internal Revenue Service. The Marketing of Goods and Services by Institutions of Higher Learning – UBIT Implications
The volunteer labor exception under Section 513(a)(1) excludes any trade or business where substantially all the work is done without compensation.7Internal Revenue Service. Volunteer Labor Exclusion From Unrelated Trade or Business A school fundraiser staffed almost entirely by parent volunteers falls within it, regardless of what is being sold.
Employment Taxes
Employment taxes are the area where tax-exempt clearly does not mean tax-free. The rules depend on whether an employee is lay staff, an ordained minister, or a student, and on whether the school is controlled by a church.
Lay Staff
For non-minister staff at a typical religious school, the school pays its share of Social Security and Medicare (FICA) taxes just like any other employer. The combined employer rate is 7.65% of wages (6.2% for Social Security and 1.45% for Medicare), plus the employee’s matching share withheld from paychecks. Federal unemployment tax (FUTA) also applies in most cases.
The Church-Controlled FICA Election
Religious schools that are controlled, operated, or principally supported by a church have a unique option. These schools can elect exemption from employer FICA taxes by filing Form 8274, but only if the school is opposed for religious reasons to paying Social Security and Medicare taxes.8Internal Revenue Service. Elective FICA Exemption – Churches and Church-Controlled Organizations The election has to be filed before the first quarterly employment tax return would otherwise be due. When a school makes the election, its employees become responsible for their own Social Security and Medicare taxes through self-employment tax.
Ministers and Ordained Faculty
Ministers who work at religious schools occupy an unusual spot in the tax code. For Social Security and Medicare, all ministerial earnings are treated as self-employment income, even when the minister is on the school’s payroll as a W-2 employee. The minister pays self-employment tax (SECA) on those earnings rather than splitting FICA with the employer.9Internal Revenue Service. Publication 517 (2025) – Social Security and Other Information for Members of the Clergy and Religious Workers For income tax and retirement plan purposes, the same person is treated as a regular employee. This dual status catches many religious schools off guard.
Ordained teachers and administrators may also qualify for the housing allowance under Section 107, which lets a minister of the gospel exclude from gross income either the rental value of a provided home or an allowance used to rent or furnish one.10Office of the Law Revision Counsel. 26 U.S. Code 107 – Rental Value of Parsonages Qualifying is not automatic. The IRS applies a balancing test that looks at whether the individual conducts worship services, administers sacraments, and serves as a spiritual leader. An ordained person whose duties look essentially identical to those at a secular school generally will not qualify.11Internal Revenue Service. Members of the Clergy
Student Employees
Under Section 3121(b)(10), services performed by a student who is enrolled and regularly attending classes at a school are exempt from FICA when the work is incidental to the course of study.12Internal Revenue Service. Student FICA Exception The student generally needs to carry at least a half-time load. One important caveat: if the student receives benefits like vacation time, sick leave, or a retirement plan, the IRS considers them a professional employee ineligible for the exception, regardless of enrollment.
What Can Cost a Religious School Its Exemption
Being exempt is not permanent on its own. A religious school can lose 501(c)(3) status for how it operates, and for how it files.
Private Inurement
None of the school’s net earnings can benefit any private individual. School revenue must serve the educational and religious mission rather than enriching founders, board members, administrators, or their families.13Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations Reasonable compensation for services is fine; sweetheart deals and excessive pay are not. When someone in a position of influence receives an excessive benefit, the IRS can impose excise taxes under Section 4958 on the person who received it, and in serious cases revoke the school’s exemption outright.14Internal Revenue Service. Exempt Organizations Technical Guide TG 3-8 – Disqualifying and Non-Exempt Activities, Inurement and Private Benefit
Political Campaigns and Lobbying
Section 501(c)(3) organizations face an absolute ban on participating or intervening in any political campaign for or against a candidate for public office.15Internal Revenue Service. Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations Endorsements, campaign contributions, and statements for or against a candidate all count. Nonpartisan voter education, like a forum where all candidates are represented equally, is allowed.
Lobbying is a separate restriction. A religious school can engage in some lobbying, but it cannot be a substantial part of the school’s activities.1Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. The IRS has never defined substantial under this default test. Eligible schools can make the 501(h) election to swap the vague test for specific dollar limits under Section 4911.16Office of the Law Revision Counsel. 26 U.S. Code 4911 – Tax on Excess Expenditures to Influence Legislation
Racial Nondiscrimination
Every private school claiming 501(c)(3) status must adopt and publicize a racially nondiscriminatory admissions policy. The school must admit students of any race to all programs and activities and may not discriminate by race in admissions, scholarships, or any school-administered program.17Internal Revenue Service. Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax The policy has to be displayed on the school’s primary website in a way visitors would reasonably notice. The school must certify compliance every year, either on Schedule E of Form 990 or 990-EZ, or on Form 5578 for schools that do not file a Form 990, due by the 15th day of the fifth month after the end of the accounting period (May 15 for calendar-year filers). A school without such a policy does not qualify for exemption at all.18Internal Revenue Service. Revenue Ruling 71-447 – Racial Nondiscrimination Policy for Private Schools
Automatic Revocation for Missed Filings
Any exempt organization required to file an annual return (Form 990, 990-EZ, or the 990-N e-Postcard) that fails to do so for three consecutive years automatically loses its tax-exempt status. There is no warning letter, no grace period, and no appeal. Revocation takes effect on the due date of the third missed return.19Internal Revenue Service. Automatic Revocation of Exemption Churches and some church-affiliated organizations are excepted from the annual filing requirement in the first place, which also keeps them out of this trap.20Internal Revenue Service. Filing Requirements for Churches and Religious Organizations
Once status is revoked, the school owes federal income tax, donors can no longer deduct their gifts, and the only path back is to reapply from scratch, even for a school that was originally exempt without needing to apply.19Internal Revenue Service. Automatic Revocation of Exemption For a school that lives on tax-deductible donations, that can be financially devastating.