Churches in the United States are tax exempt for two reinforcing reasons: the First Amendment bars government from entangling itself with religion, and Congress has judged since the founding era that religious organizations deliver enough public benefit to justify keeping them off the tax rolls. The exemption runs on two tracks. Federally, Section 501(c)(3) of the Internal Revenue Code exempts churches from income tax. Locally, every state and the District of Columbia exempts religious property from property tax. Neither exemption is unlimited, and the boundaries matter as much as the rule.
The Constitutional Reason: Keeping Government Out of Religion
The constitutional argument rests on the Establishment Clause and the Free Exercise Clause. In Walz v. Tax Commission of the City of New York (1970), the Supreme Court held that exempting religious organizations from tax creates only “minimal and remote involvement between church and state,” while taxing them would produce exactly the kind of entanglement the First Amendment forbids. Exemption is not endorsement. It is distance.
The older principle behind that reasoning comes from McCulloch v. Maryland (1819), where Chief Justice John Marshall wrote that “the power to tax involves the power to destroy.” A government that can tax a church can set the rate high enough to close it, or audit disfavored denominations more aggressively than favored ones. Removing the tax lever removes that risk.
The Court reinforced the same idea recently. In June 2025, in Catholic Charities Bureau v. Wisconsin Labor and Industry Review Commission, the justices unanimously struck down Wisconsin’s denial of an unemployment tax exemption to a Catholic charity that did not, in the state’s view, operate “primarily for religious purposes.” The problem, the Court held, was that the state’s test forced government to distinguish between religions based on theological choices such as whether to proselytize or serve only co-religionists. Deciding which groups are religious enough is precisely the judgment the First Amendment keeps out of government hands.
The Statutory Reason: Section 501(c)(3)
Constitutional theory sets the outer boundary, but the working exemption is a creature of statute. Section 501(c)(3) exempts organizations that operate exclusively for religious, charitable, scientific, educational, or certain other purposes, as long as no part of their earnings benefits a private individual and they stay out of political campaigns.1Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc
Churches get treatment inside 501(c)(3) that no other kind of nonprofit gets. Most exempt organizations must apply for recognition by filing Form 1023, a process that takes months and demands detailed financial disclosures. Section 508(c)(1)(A) exempts churches, their integrated auxiliaries, and conventions or associations of churches from that application requirement entirely: they are recognized automatically.2Office of the Law Revision Counsel. 26 USC 508 – Special Rules With Respect to Section 501(c)(3) Organizations Some churches file anyway to give donors extra certainty about deductibility, but the law does not require it.
Churches are also exempt from the annual Form 990 that most 501(c)(3) organizations must file and make public. Hospitals, universities, and secular charities all publish detailed returns each year. Churches generally do not.3Internal Revenue Service. Filing Requirements for Churches and Religious Organizations The public window into a church’s finances is narrower than for any comparable exempt institution.
The Public Benefit Reason
Alongside the constitutional argument, Congress has always treated the exemption as a bargain. Churches run soup kitchens, homeless shelters, disaster relief, addiction recovery programs, youth mentoring, and community education. That work reduces demand on public services. Taxing churches would shrink their operating budgets, close programs, and push the demand onto the public sector. Whether the trade is favorable dollar-for-dollar is debatable, but every Congress since the founding era has concluded it is.
The same reasoning drives the parallel property tax exemption. Every state and the District of Columbia exempts religious property used for worship and related religious purposes.4Legal Information Institute. Tax Exemptions of Religious Property A sanctuary, fellowship hall, and parking lot used for services all qualify. The exemption stops where commercial use starts. A church that owns a strip mall and rents it to commercial tenants owes property tax on that strip mall, no matter how the rental income is spent. Land held for investment or sitting idle usually fails the active-religious-use test that most states require.
Where the Exemption Ends
“Tax exempt” is not the same as “pays no taxes.” Three limits catch people off guard.
Unrelated Business Income
When a church earns money from a trade or business it conducts regularly and that isn’t substantially related to its religious mission, the income is subject to unrelated business income tax, or UBIT.5Internal Revenue Service. Unrelated Business Income Tax A bookstore selling Bibles and devotional materials is related. A church parking lot renting spaces to weekday commuters probably is not.
Some activities are excluded even when they look commercial. If substantially all the labor is performed by unpaid volunteers, if the business exists mainly for the convenience of members, or if the goods being sold were donated (a thrift store stocked entirely with contributions is the classic example), the income isn’t taxable.6Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business Any church with $1,000 or more in gross unrelated business income must file Form 990-T and pay tax at standard corporate rates on the net.5Internal Revenue Service. Unrelated Business Income Tax
Payroll Taxes on Employees
A church’s own income may be exempt, but its employees’ wages are not. Churches withhold federal income tax from paychecks and pay Social Security and Medicare taxes: 6.2% for Social Security on wages up to $184,500 in 2026, plus 1.45% for Medicare, matched by the employer.7Social Security Administration. Contribution and Benefit Base A church with a sincere religious objection to Social Security and Medicare can file Form 8274 to opt out of those taxes for its employees. Churches are fully exempt from Federal Unemployment Tax (FUTA), which saves roughly 6% on the first $7,000 of each employee’s wages.8Internal Revenue Service. Employer’s Supplemental Tax Guide (Publication 15-A)
Ministers sit in a hybrid position. For income tax purposes a minister is an employee. For Social Security and Medicare purposes the same minister is self-employed, meaning the minister pays the full 15.3% self-employment tax rather than splitting it with the church.
Political Campaigns
The most visible string attached to 501(c)(3) status is the Johnson Amendment, enacted in 1954. It prohibits every 501(c)(3) organization, churches included, from participating in or opposing any candidate’s campaign for public office.9Internal Revenue Service. Charities, Churches and Politics A pastor can preach about moral issues, poverty, or war. A pastor cannot tell the congregation to vote for or against a named candidate.
Churches can lobby on legislation and ballot measures to a limited degree. The legal standard is the “substantial part” test: lobbying becomes a problem only when it grows into a substantial part of the organization’s overall activities, measured by time and money.10Internal Revenue Service. Measuring Lobbying – Substantial Part Test
Penalties for crossing into campaign activity are layered. Section 4955 imposes an initial excise tax of 10% of the political expenditure on the organization, plus a separate 2.5% tax (capped at $5,000) on any manager who knowingly approved it. If the violation is not corrected within the taxable period, a second-tier tax of 100% of the expenditure hits the organization, and managers who refuse to agree to the correction face a 50% tax capped at $10,000.11Office of the Law Revision Counsel. 26 USC 4955 – Taxes on Political Expenditures of Section 501(c)(3) Organizations The IRS can also revoke 501(c)(3) status outright, which would make the church taxable on all its income and cut off tax-deductible donations.
Enforcement has been light. The IRS has not initiated a church tax inquiry related to political activity since 2009, and a 2017 executive order directed the Treasury Department not to take adverse action against houses of worship for speech on moral or political issues from a religious perspective when similar speech by others has not been treated as campaign intervention. The statute remains on the books; the gap between the rule and its enforcement is wide.
Separately, church funds cannot flow to officers, directors, or their families as unjustified compensation or insider deals. This inurement prohibition sits alongside the campaign ban as a condition of keeping the exemption. Reasonable salaries and standard benefits are fine. Using church accounts to buy personal real estate is not.12Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations
So the short answer to why churches don’t pay taxes has two parts. The Constitution puts tax authority over religion off limits because the power to tax is the power to destroy, and Congress has judged the public work churches do worth more than the revenue it forgoes. The longer answer is that the exemption is narrower than it looks: it covers income from religious activity and property used for worship, and it stops at commercial ventures, employee wages, and campaign politics.