Do Churches Have to File Form 940? (w/Examples) + FAQs

Most churches do not have to file Form 940. Churches that employ people, however, may fall into different rules than typical employers because of their special tax status.

The real answer depends on whether your church pays employees, what type of employees they are, and how much money the church spends on payroll. According to the IRS data on churches, approximately 70% of religious organizations have some paid staff, yet many remain unaware of their actual employment tax obligations.

📊 What You’ll Learn:

• 🔵 When churches must file Form 940 and when they get an exception
• 🔵 How clergy and staff members change your filing requirements
• 🔵 What happens if a church files the wrong form or misses deadlines
• 🔵 Real-world scenarios showing which churches need Form 940
• 🔵 Common payroll mistakes churches make and how to avoid them

Understanding Form 940 and Religious Organizations

Form 940, officially called the Employer’s Annual Federal Unemployment Tax (FUTA) Return, is used to report unemployment insurance taxes that businesses owe to the federal government. This form covers money that employers must set aside to pay for unemployment benefits when workers lose their jobs. Most employers with employees must file this form every year by January 31st if they owe federal unemployment tax.

Religious organizations occupy a unique position in the tax system. Churches have specific exemptions under federal law that separate them from traditional employers. Section 3309 of the Internal Revenue Code allows churches and certain religious organizations to exempt themselves from paying federal unemployment taxes entirely. This exemption is not automatic—churches must actively choose it by filing Form 8274 with the IRS.

The Federal Law That Creates the Exemption

The foundation of church employment tax rules comes from Internal Revenue Code Section 3309. This law gives churches the right to elect out of the federal unemployment insurance system. Once a church makes this election, the church does not pay federal unemployment taxes on wages, and therefore does not file Form 940. The consequence of this election is that when employees leave the church or lose their job, they cannot claim federal unemployment benefits for that church employment.

The election to exempt from federal unemployment taxes must be permanent once made. According to IRS guidance, a church cannot change its mind later and decide to pay into the system. This creates a long-term commitment that church leaders must carefully consider. Many churches do not realize this is an option, and others deliberately choose to pay into unemployment insurance to provide better protection for their employees.

Types of Church Employees and How They Matter

Not all people who work at churches are treated the same way under tax law. Clergy members—including pastors, priests, rabbis, and imams—are classified as self-employed for Social Security purposes, even though the church treats them as employees for income tax withholding. Because clergy are considered self-employed, they do not count toward the threshold that determines whether a church must file Form 940.

Non-clergy staff members work under different rules. These include secretaries, musicians, custodians, childcare workers, and administrative personnel. Non-clergy staff are treated like typical employees for unemployment tax purposes. If a church employs non-clergy staff and has not elected the unemployment tax exemption, the church must file Form 940 if it meets the filing threshold.

The distinction between clergy and non-clergy matters for determining filing obligations. A church with one pastor earning $80,000 per year does not need to file Form 940 based solely on clergy wages. However, if that same church also employs two secretaries earning $30,000 each, the church may need to file Form 940 depending on whether it elected the exemption. Understanding who counts as clergy versus non-clergy is the first step in determining your church’s Form 940 responsibility.

The Threshold: When Form 940 Filing Becomes Required

The key number that determines Form 940 filing is whether a church paid wages of $1,500 or more in any quarter to non-clergy employees. This threshold comes from Section 3306(a) of the Internal Revenue Code. If a church paid less than $1,500 to non-clergy employees in every single quarter of the year, Form 940 is not required. If a church paid $1,500 or more in even one quarter, Form 940 must be filed.

A quarter means a three-month period: January through March, April through June, July through September, and October through December. The $1,500 calculation includes all wages paid to non-clergy employees during that three-month window. This includes regular salaries, bonuses, stipends, housing allowances for non-clergy, and any other compensation. Fringe benefits that have no cash value, like health insurance provided to employees, do not count toward the $1,500 threshold.

The consequence of reaching this threshold is straightforward: the church becomes an employer subject to federal unemployment tax reporting requirements. This means the church must have an Employer Identification Number (EIN), must file Form 940 annually, and must make federal unemployment tax deposits. Churches that fail to meet this obligation face penalties from the IRS for late or missing filings. The penalty for not filing Form 940 when required ranges from 5% to 25% of the unpaid unemployment tax, depending on how late the filing is.

Churches With the Unemployment Tax Exemption Election

When a church has filed Form 8274 and made the election to be exempt from federal unemployment taxes, the church does not file Form 940 regardless of how many employees it has or how much it pays them. This exemption applies only to federal unemployment taxes, not to other employment taxes like Social Security and Medicare taxes. A church with the exemption still must file Form 941 to report Social Security and Medicare taxes.

The Form 8274 election is filed with the Social Security Administration (SSA), not the IRS. A church files Form 8274 to elect out of federal unemployment insurance coverage. The form must be filed by the church itself, not through a payroll company or accountant. Once filed, the election becomes effective for future quarters and cannot be reversed. The church keeps a copy of the filed Form 8274 for its records and uses it as proof that the exemption applies if ever audited by the IRS.

Many churches benefit from this exemption because it reduces their payroll costs by eliminating federal unemployment tax payments. The downside is that employees who leave employment cannot receive federal unemployment benefits based on church wages. This trade-off works differently depending on the church’s financial situation and philosophy about employee benefits. Some churches decide the cost savings are worth this trade-off; others choose to pay into the system to protect employees.

Churches Without the Exemption Election

If a church has not filed Form 8274 and has not elected the unemployment tax exemption, the church is treated like any other employer for federal unemployment tax purposes. These churches must file Form 940 if they paid $1,500 or more to non-clergy employees in any quarter. The church’s tax status as a religious organization does not excuse the filing requirement. The church must treat Form 940 filing like any other employment tax obligation.

Churches that do not elect the exemption must make quarterly federal unemployment tax deposits. These deposits are made through the Electronic Federal Tax Payment System (EFTPS). The deposits are due the same day as Form 941 deposits: the 15th of the month following the end of the quarter. Missing these deposit deadlines can result in penalties even if the church eventually files Form 940 correctly.

The federal unemployment tax rate for 2024 is 6% of employee wages, but employers can receive a credit of up to 5.4% for state unemployment taxes paid. This means the net federal rate is usually 0.6% for employers in good standing with their state unemployment insurance program. For a church paying $100,000 in annual non-clergy wages, the federal unemployment tax would be approximately $600 per year. This cost must be factored into the church’s operating budget if the church chooses not to elect the exemption.

Three Real-World Church Scenarios

Scenario 1: The Small Rural Church

Grace Baptist Church is located in a rural area with 150 members. The church employs one pastor who earns $45,000 per year and receives a housing allowance of $12,000 per year. The church also employs a part-time secretary who works 20 hours per week at $18 per hour, earning approximately $18,720 per year.

Grace Baptist Church’s pastor is classified as clergy, so his $57,000 in total compensation does not count toward the federal unemployment tax threshold. The secretary is non-clergy staff, and her $18,720 in annual wages means the church paid well over $1,500 in at least one quarter. However, Grace Baptist Church filed Form 8274 years ago and elected the federal unemployment tax exemption. Because of this election, the church does not file Form 940, even though it has non-clergy employees. The church still files Form 941 quarterly to report Social Security and Medicare taxes on both the pastor and secretary wages.

Scenario 2: The Growing Urban Church

First Community Church serves an urban area with 800 members. The church employs a senior pastor earning $75,000, an associate pastor earning $55,000, a music director earning $40,000, a youth director earning $35,000, two administrative staff members earning $32,000 each, and a part-time custodian earning $12,000 per year.

First Community Church never filed Form 8274 and never elected the unemployment tax exemption. The church’s non-clergy employees earn a total of $151,000 annually, which means the church pays well over $1,500 in every single quarter. This church is required to file Form 940 every year by January 31st. The church must also make quarterly federal unemployment tax deposits and maintain records of all non-clergy employee wages. The church’s federal unemployment tax obligation for the year is approximately $906 (0.6% × $151,000).

Scenario 3: The Mission Organization

Gospel Outreach International is a religious nonprofit organization that runs a global mission program. The organization has 12 employees, all of whom are missionaries or mission administrators. The organization does not have traditional clergy positions. The organization pays total annual wages of $480,000 to all employees.

Gospel Outreach International is a religious organization, but it does not have clergy employees in the traditional sense. All 12 employees are classified as non-clergy for tax purposes. Because the organization has not elected the federal unemployment tax exemption and pays well over $1,500 in non-clergy wages every quarter, it must file Form 940. The organization’s federal unemployment tax obligation for the year is approximately $2,880 (0.6% × $480,000). The organization must file Form 940 by January 31st each year or face penalties.

Mistakes Churches Commonly Make With Form 940

Counting Clergy Wages Toward the $1,500 Threshold

Many church accountants and bookkeepers mistakenly include clergy wages when calculating whether the church meets the $1,500 quarterly threshold. Clergy wages simply do not count, regardless of how much the pastor earns. A church with a pastor earning $100,000 per year and one secretary earning $15,000 per year only counts the $15,000 toward the threshold. This mistake causes churches to incorrectly believe they must file Form 940 when they actually do not, or vice versa. The consequence is either unnecessary filings (wasting time and money) or missed filings (creating penalties).

Filing Form 8274 Incorrectly or Not at All

Churches that want the unemployment tax exemption must file Form 8274 with the Social Security Administration. Some churches attempt to file this form with the IRS instead, which means the exemption is never actually recorded. Other churches file incomplete forms or file forms that are not signed by the correct church authority. The consequence is that the church believes it has the exemption when it actually does not. Years later, when the church is audited, the IRS discovers the improper filing and assesses back taxes, penalties, and interest.

Not Maintaining Proper Employee Classification Records

Churches often fail to document which employees are classified as clergy and which are non-clergy. This becomes a problem if the IRS audits the church’s employment tax records. Without clear documentation, the IRS may reclassify employees differently, resulting in additional tax assessments. A music director might be classified as non-clergy by the church but as clergy by the IRS if the director performs ministerial functions. The consequence of this disagreement is that the church must pay back unemployment taxes, penalties, and interest on wages the church thought were exempt.

Missing Form 940 Filing Deadlines

Churches that must file Form 940 frequently miss the January 31st deadline. Some churches do not realize that Form 940 is required, and others underestimate the time needed to prepare the form. Missing the deadline triggers an automatic penalty of 5% per month, up to 25% of the unpaid unemployment tax. A church that owes $1,000 in federal unemployment tax and files 90 days late will owe an additional $250 penalty (25% × $1,000). This penalty can be reduced or waived if the church has reasonable cause, but the church must request a waiver from the IRS.

Failing to Report Quarterly Federal Unemployment Tax Deposits

Churches that do not elect the exemption must make quarterly deposits of federal unemployment tax. Some churches report the unemployment tax only once per year on Form 940 and never make the required quarterly deposits. This violates the deposit rules and creates penalties for late deposits. The IRS imposes penalties starting at 2% for deposits made 1-5 days late and increasing to 15% for deposits made 16 or more days late. Churches can avoid this mistake by setting up automatic quarterly deposits through EFTPS or by scheduling deposits in their accounting software.

Distinguishing Church Employment Categories

Understanding how different church employees are classified is the foundation of determining Form 940 filing requirements. The IRS provides guidance through Publication 517, which explains the tax treatment of church employees. Ministers and clergy are treated differently from other religious workers, which affects both income tax withholding and employment tax obligations.

Ordained Ministers and Clergy

An ordained minister or clergy member, such as a pastor, priest, rabbi, or imam, is classified as self-employed for Social Security and Medicare tax purposes. This means the church does not pay the employer portion of Social Security tax, and the clergy member pays both the employee and employer portions (a total of 15.3%). However, the church must still withhold income tax from the clergy member’s wages and must file Form 941 to report the withholding. Clergy wages do not count toward the $1,500 threshold for Form 940 filing because clergy are self-employed, not employees for unemployment purposes.

Commissioned Ministers and Religious Workers

Some churches employ commissioned ministers who are not fully ordained but serve ministerial functions. The classification of these workers depends on how much their role involves ministerial work versus secular work. If a commissioned minister spends the majority of time performing ministerial functions like preaching, teaching, or leading services, the minister may be classified as clergy. If the commissioned minister spends most of their time on secular administrative work, the worker is classified as non-clergy. The IRS examines the actual job duties, not just the job title, when making this determination.

Non-Clergy Church Staff

Secretaries, bookkeepers, musicians (who do not lead services), custodians, childcare workers, and administrative personnel are classified as non-clergy. These employees are treated like employees of any other employer for unemployment tax purposes. Their wages count toward the $1,500 quarterly threshold. If the church has not elected the exemption, the church must report non-clergy employee wages on Form 940. The consequence of misclassifying non-clergy workers as clergy is that the church fails to report required wages and faces penalties if audited.

State Unemployment Insurance Complications

Many people focus only on federal Form 940 and forget about state unemployment insurance requirements. State unemployment insurance is separate from federal unemployment insurance, and most states require employers to register for state unemployment insurance. A church that elects the federal unemployment tax exemption via Form 8274 does not automatically get an exemption from state unemployment insurance.

State rules vary widely across the country. Some states grant religious organizations automatic exemptions from state unemployment insurance, while others require churches to meet specific criteria. Some states allow churches to elect out of state unemployment insurance similar to the federal election. Other states do not allow any exemption. The consequence of ignoring state unemployment insurance is that churches can face significant penalties and back-tax assessments from state authorities.

A church in New York that elects the federal exemption might still be required to pay state unemployment insurance taxes. A church in Texas that elects the federal exemption might also get a state exemption automatically. Churches with employees in multiple states face even more complexity because each state has different rules. A church with a main office in California and a satellite office in Oregon must understand both states’ unemployment insurance requirements. Failing to comply with state requirements can result in penalties that are just as severe as federal penalties.

When Churches Must File Form 941 Instead of (or In Addition to) Form 940

Form 941, the Employer’s Quarterly Federal Tax Return, reports Social Security and Medicare taxes withheld from employee wages. Every church that pays any employees anything must file Form 941 or Form 944 to report these taxes. The requirement to file Form 941 is completely separate from the requirement to file Form 940. A church that does not file Form 940 because it elected the federal unemployment exemption still must file Form 941 quarterly.

Form 941 is filed for each quarter of the year by the 15th of the month following the quarter end. This means Form 941 for the first quarter is due by April 30th, for the second quarter by July 31st, for the third quarter by October 31st, and for the fourth quarter by January 31st. Churches that fail to file Form 941 when required face penalties of 5% to 25% of unpaid taxes, similar to Form 940 penalties. Some churches file Form 940 correctly but miss Form 941 deadlines, which creates different problems and penalties.

The Do’s and Don’ts of Church Employment Tax Compliance

Do’s:

• Do classify employees correctly. Spend time understanding whether each employee is clergy or non-clergy, because this determines your filing obligations. An incorrect classification can create years of compliance problems and back-tax liability.
• Do file Form 8274 if you want the unemployment tax exemption. Complete the form accurately, file it with the Social Security Administration (not the IRS), and keep a copy for your records. Make sure the church board approves the decision to elect the exemption before filing.
• Do file Form 940 on time if required. Mark January 31st on your calendar every year and prepare the form well in advance. Missing this deadline creates penalties that add up quickly, especially for churches with significant payroll.
• Do make quarterly federal unemployment tax deposits on time. Set up automatic deposits through EFTPS to avoid missed deadlines. Do not wait until January to deposit federal unemployment taxes for all four quarters of the previous year.
• Do maintain accurate payroll records for at least three years. Keep copies of Forms 940 and 941 that you have filed, along with supporting payroll documentation. These records are essential if the IRS ever audits your church.

Don’ts:

• Don’t assume clergy wages count toward the $1,500 threshold. Even if your pastor earns $200,000 per year, those wages do not count for federal unemployment tax purposes. Only non-clergy wages count toward determining whether Form 940 is required.
• Don’t confuse the federal unemployment tax exemption with income tax exemption. A church’s tax-exempt status for income tax purposes does not automatically exempt the church from unemployment taxes. The exemption must be specifically elected through Form 8274.
• Don’t file Forms 940 and 941 with the same agency. Form 941 is filed with the IRS, while Form 8274 (the unemployment exemption election) is filed with the Social Security Administration. Sending Form 8274 to the IRS will not record your exemption.
• Don’t ignore state unemployment insurance requirements. Federal compliance is not enough; you must also comply with state rules, which vary widely by location. Some churches that are exempt from federal unemployment tax still must pay state unemployment tax.
• Don’t skip the process of classifying employees. Do not assume that all church workers are clergy or that all church workers are non-clergy. Consult IRS Publication 517 and document your classification rationale for each employee.

Pros and Cons of Electing the Federal Unemployment Tax Exemption

Related Employment Tax Forms and How They Connect

Churches filing employment taxes must understand how multiple forms work together. Form 941, the Employer’s Quarterly Federal Tax Return, reports Social Security and Medicare taxes. Form 940 reports federal unemployment taxes. Both forms use the same wage information, but they report different taxes on different schedules.

Form 941-X is used to correct errors on previously filed Form 941s. Churches that discover they misreported Social Security or Medicare taxes must file Form 941-X to request a correction. Form 940-X is used to correct errors on previously filed Form 940s. If a church discovers it did not file Form 940 when required, the church can file Form 940-X to report the wages retroactively and request penalty relief.

Form W-2, the Wage and Tax Statement, is issued to each employee and reports the wages, federal income tax withheld, and Social Security and Medicare taxes. Churches must file Form W-2 for all employees, regardless of whether Form 940 is required. Form 8274, the Exemption Election by Churches, is filed with the Social Security Administration to elect the federal unemployment tax exemption. This form creates the legal foundation for not filing Form 940.

Key Entities in Church Employment Tax Administration

The IRS enforces federal employment tax requirements and audits church payroll practices. The IRS has specialized teams that work with tax-exempt organizations and understands the unique issues churches face. However, the IRS still expects churches to follow employment tax laws like any other employer.

The Social Security Administration (SSA) receives Form 8274 filings and maintains records of churches that have elected the federal unemployment tax exemption. The SSA is the correct agency to contact with questions about the exemption election process. Many churches contact the IRS with questions that should go to the SSA, which creates confusion and delays.

State unemployment insurance agencies administer state unemployment insurance programs and enforce state unemployment tax requirements. Each state has its own rules, and state agencies do not always coordinate with federal requirements. A church must research state requirements separately from federal requirements.

Payroll service providers help churches manage employment taxes and filings. Many payroll providers understand the unique aspects of church employment taxation and can help churches navigate Form 940 decisions. However, not all payroll providers specialize in churches, so churches should verify that their service provider understands church-specific tax rules.

FAQs

Does my church have to file Form 940 if we have only a pastor and no other employees?

No. Clergy wages do not count toward the Form 940 threshold. Your church only needs to file Form 940 if you have non-clergy employees and have not elected the unemployment tax exemption and paid $1,500 or more in non-clergy wages in at least one quarter.

If we elect the federal unemployment tax exemption through Form 8274, do we still have to file Form 941?

Yes. Form 8274 only exempts you from federal unemployment tax (Form 940). Your church still must file Form 941 quarterly to report Social Security and Medicare taxes, which apply to both clergy and non-clergy employees.

What if our church pays a part-time worship leader $200 per week?

It depends. If the worship leader is classified as clergy, those wages do not count toward the $1,500 threshold. If the worship leader is classified as non-clergy, you must add that wage to all other non-clergy wages to determine whether you exceed $1,500 in any quarter.

Can a church reverse its election to be exempt from federal unemployment taxes?

No. Once your church files Form 8274 and elects the exemption, the election is permanent and cannot be reversed. Your church must carefully consider this decision before filing.

If our church operates in multiple states, do we follow federal requirements or state requirements?

Both. Your church must comply with both federal requirements and the requirements of every state in which it operates. Some states have different rules than others, so you must research each state’s specific requirements separately.

What penalty does our church face if we miss the Form 940 filing deadline?

A penalty of 5% per month (up to 25%) of unpaid federal unemployment tax applies. For $1,000 in unpaid tax, missing the deadline by three months creates a $150 penalty. Late filing penalties can be reduced or waived if you have reasonable cause.

Are church employees who work from home treated differently for Form 940 purposes?

No. Whether employees work from home or in the church building does not affect Form 940 classification or filing requirements. The location of work does not change whether someone is clergy or non-clergy.

If we cannot afford to pay federal unemployment taxes, can we ask for an exemption?

No. Form 8274 exemptions are not based on financial hardship. Churches can file Form 8274 only if they are organized exclusively for religious purposes and meet the statutory requirements for exemption.

Must our church file Form 940 if we employ independent contractors instead of employees?

No. Independent contractors are not employees, so they do not count toward the $1,500 threshold. However, make sure workers are actually independent contractors; misclassifying employees as contractors can create serious penalties.

When we hire a new employee mid-year, how do we count their wages toward the $1,500 threshold?

Count all wages paid during the calendar quarter in which you hire them. If you hire someone in June and pay them $500, and you pay other non-clergy employees $1,100 in that same quarter, you meet the $1,500 threshold and must file Form 940 (unless exempt).