Jul 12 / Dynamo Jakk

Understanding the Differences: Free Churches vs. State Churches in Tax-Exempt Status

The relationship between churches and the government has long been a topic of concern for believers. This article aims to provide an in-depth exploration of the distinctions between Free Churches, which are automatically tax-exempt under 508(c)(1)(A), and State Churches, which have voluntarily waived certain rights to obtain federal recognition for "Tax-Exempt Status" under 501(c)(3). Understanding these differences is crucial for believers who seek to navigate the legal landscape while preserving their freedom of speech and spiritual influence.

The Complexity of the Tax Code:

Many people assume that the Tax Code laws are straightforward and rigid. However, the reality is that the Tax Code is replete with exceptions and nuanced requirements. For instance, while all 501(c)(3) organizations are typically required to file a tax return, churches are exempted from this requirement. Similarly, while all 501(c)(3) organizations can be audited like for-profit corporations, churches enjoy certain exceptions. Surprisingly, there is no explicit definition of "church" in the Tax Code or treasury regulations, nor has the U.S. Supreme Court provided a definitive definition. Nowhere in Section 501(c)(3) is the term "church" explicitly mentioned. The IRS has developed its own definition and guidelines for churches to be described as 501(c)(3) organizations, despite the absence of statutory authority.

Special Rules for Churches:

The Tax Code contains additional exceptions and special rules specifically tailored to churches. For example, churches can operate retirement plans that do not need to comply with general requirements. Church ministers have the option to opt out of Social Security requirements for self-employment tax, and they are exempt from federal unemployment taxes. Furthermore, church ministers are entitled to a housing allowance without being subjected to income tax. These exceptions and privileges are unique to churches and are not available to other types of 501(c)(3) organizations.

Constitutional Rights of Faith-Based Organizations:

Churches, integrated auxiliaries, and associations of churches, collectively referred to as Faith-Based Organizations (FBOs), enjoy rights that other non-profit organizations do not possess. The First Amendment guarantees the rights of "Free" exercise of religion and "Freedom" of speech. These dual rights are exclusive to FBO non-profits. Any law or rule that infringes upon these rights would be deemed unconstitutional. FBOs have the freedom to speak openly about social and political issues without jeopardizing their tax-exempt status. However, most voluntarily waive this constitutional right when they apply for and receive a "Letter of Determination" as a 501(c)(3) organization.

The Waiver of Rights by 501(c)(3) FBOs:

All 501(c)(3) FBOs have chosen to waive certain rights. Just like individuals can waive their rights in legal proceedings, FBOs can waive their rights as well. In order to qualify for tax-exempt status, FBOs are required to waive their free expression of religion and free speech. Additionally, the IRS holds sole discretion to revoke an FBO's tax-exempt status based on any violation of the restrictions imposed by 501(c)(3).

The Impact of 501(c)(3):

In 1954, the inclusion of churches under the IRS tax code's 501(c)(3) section brought significant changes to the church-government relationship. However, it led to a misconception that in order to have tax exemption, churches needed to file with the IRS for "Tax Exempt Status," which is not true. It's important to understand that being tax exempt and having "Tax Exempt Status" are two distinct concepts.

The Loss of Influence:

Restrictions imposed by 501(c)(3) status have hindered the Church's ability to influence political decisions on spiritual matters such as freedom of religion, freedom of speech, and moral issues. By voluntarily remaining silent on these topics, 501(c)(3) churches inadvertently allowed secular influences to shape public education, compromising truth and eroding our foundational values.

The Role of Public Schools:

The repercussions of this loss of influence are deeply felt within the education system. It is alarming to witness the teaching of evolution as an unquestionable fact, while deliberately omitting any references to God or a Divine Creator in the curriculum. These actions demonstrate a dangerous departure from truth, eroding the very foundations upon which our society was built. Equally concerning is the promotion of inappropriate sexual education, which undermines the values and faith of our children, distorting their understanding of morality and virtue. We must recognize the urgency of reclaiming our influence to safeguard the minds and hearts of future generations.

Reclaiming Influence:

To regain spiritual influence, the Church must break the bond with the government and submit solely to the jurisdiction of the author and creator of its existence. This can be achieved by refraining from incorporating at the state level and pursuing 501(c)(3) status. By maintaining independence from governmental control, churches can freely speak out on political and spiritual matters, remaining true to their beliefs regardless of the prevailing political atmosphere.

Section 508(c)(1)(A) - The Free Church:

Section 508(c)(1)(A) of the IRS code explicitly states that churches, their integrated auxiliaries, and conventions or associations of churches are a mandatory exception to section 501(c)(3). Free Churches automatically qualify for tax-exempt status without the need to notify or apply to the government under section 501(c)(3). They enjoy the same tax-exempt benefits as 501(c)(3) organizations, but without the partnership with the government.

Understanding IRS Publications:

Both IRS Publication 526 (Charitable Contributions) and Publication 557 (Tax-Exempt Status for Your Organization) affirm that churches are qualified organizations and do not require application for tax-exempt status. Churches, conventions or associations of churches, and other religious organizations are already recognized as qualified entities, without the need for notification or application to the IRS.


It is essential for believers to grasp the distinctions between Free Churches and State Churches. By choosing to remain separate from the state and avoiding partnerships that compromise their freedom, churches can uphold their voice and spiritual influence on matters aligned with their beliefs. Understanding the differences empowers believers to make informed decisions, preserving the church's integrity and the freedom to proclaim the truth.

Enroll now in our comprehensive course on how to establish a tax-exempt 508(c)(1)(A) faith-based ministry. Gain the knowledge and guidance you need to navigate the legal process with confidence. Don't miss this opportunity to preserve your freedom and make a lasting impact. Join the course today and embark on the path to establishing a successful tax-exempt ministry!"

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Disclaimer: The information provided in this article is for informational purposes only and should not be considered legal advice. For legal advice, it is recommended to consult with legal and tax professionals who can provide guidance specific to your church's situation.

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