We recently asked church leaders about the following situation:
One of the musicians who plays regularly for your church would like to earn some extra income by giving private music lessons at the church, using the church's piano.
Music, done well, has the ability to stir a persons soul like few other elements in a Sunday morning worship service. Many pastors probably arrange the order of worship on purpose so that uplifting music is the lead-in for their sermons. But a musicians ability to move people is not based on God-given talent alone. Often it is the culmination of many years of training and practice.
So along comes a gifted musician from your church asking if they can conduct lessons at your church. Sounds like a winning situation at first. Youre glad that your churchs atmosphere is one of an oversized happy family. And this musician has performed as a volunteer for years. Why shouldnt such a dedicated servant be allowed to teach at the church and get paid? Whats the harm?
Your church has been granted special standing by the government because of the value it adds to society. This is why you are allowed to be tax-exempt. As a non-profit organization, no one is supposed to receive any private benefit from your churchs assets other than those receiving compensation for services rendered or those receiving approved benevolence assistance.
A music teacher using any of the churchs facilities or a church-owned instrument such as its piano, and receiving payment from students, would be viewed by the Internal Revenue Service (IRS) as receiving a private benefit from the church. Substantial and ongoing private benefit can result in the church losing its tax exempt status.
To avoid creating a private benefit, the church would need to charge the musician fair market rent. To determine what fair market rent would be in your community contact a local music store and ask them what they charge music teachers for studio rental, both equipped with an instrument and not equipped.
But lets say that the music teacher in question already receives compensation from your church for performing. First, we hope that youve been treating them as an employee and not as an independent contractor. Thats what the IRS requires you to do. If youd like to better understand why we say this, check out an essay we did previously by clicking HERE.
In case you havent been paying your musician as an employee weve got some good news for you. The IRS now has a program available to help you legally re-classify people as employees. You can see the essay we wrote about this program by clicking HERE.
As in the case of the volunteer musician, a paid musicians use of any of the churchs facilities or instruments to provide private lessons for which they are paid by the student would be considered a private benefit. But what if the musician was someone in an influential position such as your worship director or minister? Because of their position, the IRS would consider them an
insider at your church. Suddenly a private benefit issue becomes inurement. Inurement also applies if the musician is a family member of someone who is in an influential position at your church, such as a pastor or board member.
While inurement can also lead to a churchs loss of its tax-exemption, it more likely would result in intermediate sanctions being taken by the IRS. Such sanctions take the form of excise taxes on the insider who received the inurement AND on all the churchs board members involved in approving it.
As in the case of a volunteer musician, charging fair market rent to a paid musician would satisfy the concerns over private benefit or inurement.
But charging rent comes with a caveatunrelated business income or UBI. If rent is only charged for use of the facility and the facility is not currently debt financed, UBI may be avoided. But if use of an instrument such as a piano or organ, or even something as simple as a chair is included and/or the facility is debt financed, the income is considered UBI. There may be other income, outside of offerings, which the church receives that would be classified as UBI. If total UBI for the year totals at least $1,000, the church is required to file Form 990T with the IRS and pay taxes on the income.
We recommend that even if the total of UBI is less than $1,000 that churches file an annual Form 990T anyway because doing so puts into place a statute of limitations that doesnt exist if a 990T has not been filed.
Regardless, determining whether non-offering income can be classified as UBI is complicated. If youd like the help of a professional who is an expert in UBI, please contact us and well be glad to refer you to someone.
Another question that needs to be asked if youre charging rent for use of your facility for music lessons is, will doing so impact your property tax exemption. Prior to letting music lessons start, you will want to visit with your local taxing authority and verify whether your property tax exemption will change in any way.
Before deciding to allow a musician to give private music lessons at your church, you will want to have a conversation with your insurance agent. A clear understanding of what is covered and what is not might influence whether you proceed or not.
Your churchs insurance may already provide coverage in case someone is injured. But since generally students are children, at a minimum the church should require that the music teacher conform to your churchs child protection policies. Even better would be to require the music teacher to be covered by their own liability insurance and to provide the church with a certificate of insurance naming the church as an additional insured.
One insurance agent weve talked with and who specializes in churches also recommends that the music teacher provide the church with a hold harmless document. As added protection, some churches have even gone so far as to install security cameras in rooms where music lessons are taking place.
Since allowing musicians to be paid for holding music lessons at your church is fraught with obstacles, you may ask whether there is another option. Fortunately there is. Some churches have successfully established an on-site music program. The program operates as a ministry of the church and the music teachers are made employees of the church and are paid through the churchs payroll system.
Having a church-led music program means that it is already covered by your churchs policies and procedures, and a courtesy call to your insurance agent should put appropriate coverage in place. In the case of musicians for whom a job description already exists, adding one line to it indicating that they are expected to also teach music lessons should suffice.
Unless your church wants to provide music lessons for free, you probably will want to set up a system for billing and collecting lesson fees from the students before inaugurating your music program.
When thought and careful planning go into setting up a music program at your church your churchs children can be impacted in a positive way in a safe and nurturing environment. They will gain skills that will benefit them for the rest of their lives. Studies have even shown that children who take music lessons also experience above average gains in other academic areas as well.
A music program, like any other new venture at your church, has a better chance of ongoing success if it starts out on the right foot. If you have any questions about how to start your music program on the right foot, please contact us.
Please Note: This information is provided with the understanding that Church Administrative Professionals is not rendering professional advice or service.