Money placed in a church’s offering plate generally goes to three places: keeping the building open, paying the people who run the church, and funding charitable work in the community and overseas. Federal tax law shapes each of those categories, and it also decides what churches cannot spend donations on and what you need in writing if you want to deduct your giving. So what do churches do with donations, and where does the law draw the lines?
Facilities and Everyday Operations
The single largest line item in most church budgets is the space itself. Mortgage or lease payments, utilities, property insurance, and routine upkeep run every month. Roof repairs, HVAC failures, and parking lot work show up without warning and pull from the general fund.
Administrative costs are quieter but constant. Office supplies, contribution-tracking software, website hosting, internet service, and printed bulletins all need funding. None of it is dramatic, but without it the church cannot process donations accurately or communicate with members.
Staff Pay and the Clergy Housing Allowance
Donations pay the people who run the church day to day. Lead pastors receive a salary tied to local cost-of-living and educational background; support staff such as administrative assistants and music directors are paid for their specialized roles. Most churches also cover employer-side payroll taxes and offer health insurance and retirement contributions for full-time employees.1Internal Revenue Service. Employment Taxes
Ministers are treated differently from other staff. For income tax purposes, a minister employed by a church is an employee, but for Social Security and Medicare purposes that same minister is generally covered under the self-employment system. The church does not withhold or match Social Security and Medicare taxes on ministerial pay.2Internal Revenue Service. Members of the Clergy
Ordained, commissioned, or licensed ministers can also receive a housing allowance. If the church officially designates part of the minister’s pay as housing before the payment is made, the minister excludes from income tax the lesser of three amounts: the designated amount, what was actually spent on housing, or the fair rental value of the home including furnishings and utilities.3Internal Revenue Service. Ministers Compensation and Housing Allowance The designation has to appear in an employment contract, board minutes, budget, or other official action taken before payment; informal conversations don’t count. The exclusion covers income tax only. Ministers still owe self-employment tax on the housing allowance.4Internal Revenue Service. Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers
Cash gifts from congregation members, sometimes called love offerings, are taxable. So are fees for performing weddings, baptisms, and funerals, regardless of whether the minister is employed by the church or working independently.5Internal Revenue Service. Earnings for Clergy
Outreach, Missions, and Benevolence
Many donors give because they want the money to help people, and churches route those dollars through local programs and international projects alike. Local work includes food pantries, homeless services, and addiction recovery groups. Global projects, often channeled through denominational networks, fund medical clinics, clean water initiatives, and schools.
Most churches also maintain a benevolence fund for emergencies inside the congregation. Small grants might cover a rent shortfall, a utility bill, or an urgent medical expense. Churches typically require a brief application or conversation before releasing benevolence money so the help reaches genuine need.
Restricted and Designated Gifts
When you give money for a specific purpose, such as a building project or a particular mission trip, the church is legally obligated to spend it on that purpose. Once the church accepts a gift with a stipulation attached, the restriction is permanent. Leadership cannot redirect the money to cover general expenses during a budget shortfall. The only way to lift the restriction is written permission from the original donor.
Misusing restricted funds can trigger donor lawsuits and, in serious cases, loss of tax-exempt status. Most states have adopted some version of a uniform law on institutional management of restricted gifts, with enforcement typically falling to the state attorney general’s office. Commingling restricted donations with unrestricted ones is a common bookkeeping error that creates real legal exposure.
What Churches Are Not Allowed to Spend Donations On
Churches that meet the requirements of the tax code are automatically considered tax-exempt under Section 501(c)(3). They don’t need to file Form 1023 to apply, and donors can claim charitable deductions for gifts even when the church has never sought a formal IRS determination letter.6Internal Revenue Service. Churches, Integrated Auxiliaries, and Conventions or Associations of Churches That status comes with limits on how donated money can be used:
- No part of church income may benefit any private individual beyond reasonable compensation for services. This is the private inurement prohibition.7Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
- Churches cannot endorse candidates, donate to political campaigns, or distribute statements for or against anyone running for public office.7Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
- A church cannot devote a substantial portion of its activities to influencing legislation.
- Funds must go toward religious, charitable, or educational activities.7Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
Violating any of these rules can lead to revocation of tax-exempt status, which also eliminates donors’ ability to deduct their contributions.8Office of the Law Revision Counsel. 26 USC 508 – Special Rules With Respect to Section 501(c)(3) Organizations
Overpaying Insiders
When a pastor or other insider receives compensation above what is reasonable for the services provided, the IRS treats the overpayment as an excess benefit transaction. The person who received the excess owes a tax equal to 25 percent of that amount. If the overpayment is not corrected within the allowed period, the tax jumps to 200 percent. Board members or other managers who knowingly approved the transaction face a separate 10 percent tax.9Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions These penalties fall on individuals, not on the church itself, which is why compensation decisions should be documented with comparability data showing pay is in line with similar positions at similar organizations.
Business Income That Isn’t Religious
Churches can earn money from activities unrelated to their religious mission, such as renting facilities to a business or operating a commercial parking lot. That income may be taxable even though the church itself is exempt. Rental income from real property is generally excluded, but the exclusion falls away if the church provides substantial services to the renter, if the rent is tied to the tenant’s profits, or if the property was purchased with borrowed money.10Internal Revenue Service. Exclusion of Rent From Real Property From Unrelated Business Taxable Income Any church with $1,000 or more in gross unrelated business income has to file Form 990-T and pay tax on that income, even though churches are otherwise exempt from annual return filing.11Internal Revenue Service. Unrelated Business Income Tax
What You Need to Deduct Your Donation
Gifts to a church that qualifies under Section 501(c)(3) are tax-deductible, but only for donors who itemize on Schedule A. If you take the standard deduction, your church contributions don’t reduce your tax bill. For itemizers, cash donations to churches and other public charities can generally be deducted up to 60 percent of adjusted gross income, with lower limits for certain property donations.12Internal Revenue Service. Charitable Contribution Deductions
For any single contribution of $250 or more, you cannot claim a deduction without a written acknowledgment from the church. It has to include the amount of cash given (or a description of donated property), a statement about whether the church provided any goods or services in return, and if so, a good-faith estimate of their value. You need this document in hand by the time you file your return for that year.13Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
When the church receives a donation over $75 and provides something in return, such as a dinner or a book, it must give the donor a written statement noting that the deductible amount is limited to the excess over the value received, along with a good-faith estimate of that value. Intangible religious benefits like admission to a worship service are an exception and don’t reduce the deductible amount.14Office of the Law Revision Counsel. 26 USC 6115 – Disclosure Related to Quid Pro Quo Contributions Many churches send annual contribution statements in January, which is good practice but not technically required for donations under $250.
How to Tell If Your Church Handles Money Well
Churches are excepted from the annual Form 990 information return that most tax-exempt organizations must file.15Internal Revenue Service. Filing Requirements for Churches and Religious Organizations There is no publicly available financial disclosure the way there is for other nonprofits, and no outside party is automatically checking the numbers. That puts more weight on internal accountability.
A functioning board or finance committee reviews monthly expenditures against the approved budget and requires multiple approvals for large purchases. Two unrelated people count the offering. Annual financial reports go out to the congregation. Some larger churches hire outside firms for independent audits, which costs money but adds a level of verification that internal review cannot match.
If you want a sense of whether your donations are being handled responsibly, look at whether the church shares financial information voluntarily, whether the governing board includes people who are not on the pastoral staff, and whether there are written policies covering expense approvals, credit card use, and conflict-of-interest disclosures. Those signals matter more here than at most nonprofits, because the usual public paper trail simply isn’t there.