Do nonprofits pay taxes? The easy answer is no—typically, they file a Form 990 informational return instead.
However, some exceptions complicate that answer. In this article, we’ll answer the most common questions about nonprofit taxes and outline everything nonprofits need to know about taxes.
Table of Contents
Are Nonprofits Tax Exempt?
Yes, by definition, nonprofits have tax-exempt status.
However, organizations must go through a process to obtain 501(c)(3) status, and once qualified, there are still several taxes nonprofits pay:
- Nonprofits are responsible for payroll tax.
- Employees at nonprofits are responsible for income tax.
- Revenue from “unrelated business income” is still subject to taxes.
Nonprofit Tax Exempt Form: Application for Recognition of Exemption
Most tax-exempt nonprofits will fall under the 501(c)(3) designation, though other designations exist for specific types of organizations.
Applying for tax-exempt status isn’t the easiest process. While there’s only one form, the instructions are twelve pages long, and the legal language is complicated. If you’d like assurance that your submission is correct, book a consultation with indinero’s accounting services team.
See here for a PDF copy of the 501(c)(3) application and here to access the electronic IRS submission portal.
501(c)(3) Requirements
The key to tax exemption is obtaining 501(c)(3) status. Since the IRS casts a wide net regarding eligible organizations, it’s easier to begin with disqualifying criteria than list the many qualifying activities.
Disqualifying Criteria
Even if you meet every other requirement, these criteria will disqualify you for tax-exempt status:
- Operating for the benefit of private interests
- Having shareholders
- Seeking to influence legislation or participating in campaigns for or against political candidates
Eligible Organizations and Activities
The US government grants 501(c)(3) status based on the purpose of the applying organization. Some of those qualifying purposes include:
- Religion
- Education
- Science
- Literacy
- Public Safety
- Sports Competition
- Preventing Cruelty to Animals or Children
- Charity
The term “charity” can encompass quite a few activities:
- Relief of the poor, distressed, or underprivileged
- Erecting or maintaining public buildings
- Lessening the burdens of government
- Calming neighborhood tensions
- Eliminating discrimination
- Defending human rights
- Combatting juvenile delinquency
Most Commonly Asked Non Profit Tax Questions
In our nearly fifteen years of experience, we’ve discovered that a handful of questions are especially common.
Before we answer, remember that a blanket exception applies to every answer: if revenue is from “unrelated business income,” your non profit is responsible for taxes just the same as any business. Additionally, you must have obtained 501(c)(3) status to qualify for these exemptions.
What Is Unrelated Business Income?
As mentioned above, “unrelated business income” does not qualify for tax-exempt status. But what exactly is it?
The IRS defines “unrelated business income” as revenue unrelated to the nonprofit’s purpose. Examples include income from advertising, rental properties, or investment income.
Even if you earn unrelated business income, your organization won’t lose 501(c)(3) status, but these activities will be taxed like regular businesses.
The specific IRS language around unrelated business income leaves substantial space for interpretation. If you’re unsure if some of your income falls under this category, book a free consultation with indinero’s accounting services team for guidance.
Related: The Nonprofit Statement of Financial Position: What You Need to Know
Do Non-Profits Pay Sales Tax?
No. Nonprofits are exempt from paying sales tax made for exempt purposes. However, rules can vary due to state and local laws.
Do Nonprofits Pay Property Tax?
No. Exempt organizations are not responsible for property taxes on buildings and land they own, provided it’s used for charitable purposes.
Do Nonprofit Employees Pay Taxes?
Yes, even though the organization they work for is tax exempt, employees are still subject to federal, state, and local income tax, social security, and Medicare taxes.
Do Nonprofits Pay Payroll Taxes?
Yes. Non profits are responsible for their portion of social security, medicare, and unemployment tax. Additionally, they’re responsible for withholding and remitting the appropriate amounts to federal, state, and local authorities.
Do Nonprofits Pay Taxes on Donations?
No. They are not generally required to pay taxes on donations they receive. Additionally, donations are tax-deductible for donors.
Do Nonprofits File Taxes?
Yes, though not in the way for-profit businesses do. Instead of filing and paying taxes as companies would, they file a Form 990 informational return. Revenue and expenses are still reported to the IRS, but no payment is required.
When Are Nonprofit Taxes Due?
Taxes for nonprofits don’t align with traditional business timelines. Their filing deadline is the fifteenth day of the fifth month following the end of your accounting period. For example, a calendar year taxpayer would have a May 15 due date.
If you suspect you’ll have to file late, use Form 8868 to request an automatic six-month extension.
What Are the Penalties for Noncompliance?
There are quite a few; it’s best to avoid these by filing promptly and accurately.
- Responsible persons may be subject to a $20 per day penalty, up to the lesser of $10,000 or 5% of the organization’s gross annual receipts.
- Responsible persons of organizations with over $1,067,000 in receipts pay $105 per day up to the lesser of $53,000 or 5% of annual revenue.
Conclusion
While nonprofits with 501(c)(3) status enjoy various tax exemptions, they still file informational returns and are responsible for payroll taxes and income from unrelated business activity. Additionally, their employees remain responsible for income taxes.
For help with your nonprofit’s finances, contact indinero’s accounting services team today.
