The "Big Four" Taxes on California Churches
By Raul Rivera
Updated November 26th, 2012
The state of California has been increasing its tax compliance efforts in an attempt to raise tax revenues. Because of these increased efforts by the state, we urge churches in California to become educated about the four big brutal tax rules and registrations that are unique to California. They are the Franchise Tax, the Guest Speaker Tax, the Fundraisers Tax, and Excise Taxes: Below is a quick description of each.
Franchise Tax: Every church or ministry that incorporates in the state of California has to pay a minimum tax of $800.00 per year unless the church or ministry files for an exemption. The exemption is not automatic! StartCHURCH receives phone calls all of the time from churches in California who have received a letter or bill from the state declaring that they owe the taxes. They get these notices because they never filed for the exemption. In order to apply for the exemption, you need to file Form FTB-3500 or FTB-3500A. If you have recently incorporated (within the last 4 years), and have not filed for the exemption, we encourage you to do it immediately.
If you like, we can prepare the application for you, and represent your ministry before the Franchise Tax Board until you get approved for the exemption. Once approved, the exemption is permanent. You will not need to apply again or renew it each year.
Withholding on Out of State Guest Speakers: Did you know that the state of California requires all churches and ministries to withhold 7% of all honorariums over $1,500.00 paid to guest speakers that live outside the state? For example: Church ABC in Riverside, CA invites Minister XYZ twice a year to speak at the church on a Sunday morning. The church takes up a special offering of $900.00 for the minister, and 4 months later another one for $900.00. Because the total of all honorariums are over $1,500.00, the state of California requires the church to withhold 7% of the total of all honorariums and report to the state on form 592-B the amount of earnings and the amount of withholdings. This can be difficult for some churches because they do not always know if they will hit the %1,500.00 mark on guest speakers that come more than once a year. As of January 1st, 2010 the limit was lowered to $600.00. Therefore, it may be safer to automatically withhold the 7%. The penalty for not withholding is at least 10% of the entire honorarium. This is a penalty against the church.
Fundraisers Sales Tax: Many churches in California conduct bake sales or have fundraisers that sell donated items for the purposes of helping the church or ministry further its exempt purpose. Unlike most states, all churches and ministries in California are required to collect sales tax on their sales and forward them to the state. Churches who violate this law are subject to losing their tax-exempt status as well as their property tax exemption if they own their own building. If the church does not charge the sales tax, it will have to pay it from its profits.
Excise taxes: If a church in California purchases something from an out-of-state vendor, the church is usually not charged sales tax because the vendor is from another state. However, in California tax code 165.0014 excise taxes are to be imposed upon churches and religious organizations that purchase tangible personal property from out-of-state sellers for use in California. For example: Church ABC buys a $1,500.00 computer from a company in the state of Washington. The company ships the computer from its Washington location and therefore does not charge sales tax. When the church gets the computer and begins to use it, it is required to report the purchase and pay an excise tax equal to the regular California sales tax.
Because of the significant drop in revenues, the state is currently increasing its collection efforts and it will look under every leaf to find organizations that, either by ignorance or on purpose, are not complying with the taxes. Be encouraged: though the state of California is increasing its collection efforts, it is still a great state in which to pastor a church.
We are coming to Los Angeles and Irvine
This December, we will be in California teaching churches and ministries how to set up the ultimate church structure, which is strategically formulated to defend from the onslaught of government hostility the vision God has placed in your church. We believe that this conference will lift the lid off your ministry.