Do Nonprofits and Churches Pay Payroll Taxes?

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Businesses can be categorized as nonprofits or for-profits. When it comes to payroll taxes, for-profit businesses have it pretty straightforward. For-profits pay payroll taxes. But for some nonprofit organizations, it’s not as simple. Do nonprofits pay payroll taxes?

Do nonprofits pay payroll taxes?

Payroll taxes are amounts withheld from your employees’ wages and paid to tax agencies. Payroll taxes for tax-exempt organizations work a little differently than non-exempt businesses.

Some nonprofits are exempt from paying certain payroll taxes. Read on to learn about nonprofit organizations, tax-exempt nonprofits, and nonprofit payroll taxes.

Short answer:

Most 501(c)(3) organizations are exempt from federal unemployment tax (FUTA)
They still must withhold federal income tax and FICA (Social Security and Medicare) from employee wages and pay the employer share of FICA.
State unemployment (SUTA) rules vary; many states exempt 501(c)(3)s or let them reimburse benefits instead of paying contributions.
Churches follow these rules plus special clergy rules: ministers are typically treated as self-employed for Social Security/Medicare (SECA), while non-minister staff are subject to regular FICA withholding and matching.

What is a nonprofit?

A nonprofit organization is an organization whose goal isn’t to turn a profit. Instead, nonprofits offer some sort of service like charity, education, or religion. Some common nonprofits that might come to mind are the American Red Cross, Make-A-Wish Foundation, and St. Jude Children’s Research Hospital.

Some nonprofits are charities like the ones listed above. A charitable organization, according to the IRS, works to help the poor, defend human rights, advance education or science, and maintain monuments, among others. Other nonprofits are not charities, like museums and libraries.

Some nonprofits are tax-exempt, meaning they do not have to pay federal corporate income tax. To be tax-exempt, you must qualify in the eyes of the IRS.

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What qualifies a nonprofit for tax exemption?

Tax-exempt nonprofits are 501(c)(3) organizations. There are many terms and conditions that come with gaining 501(c)(3) status.

501(c)(3) organizations

501(c)(3) organizations are split into two major categories: public charities and private foundations. Typically, public charities receive money from the public while private foundations receive money from an individual, family, or corporation.

Public charities make up the majority of 501(c)(3) organizations. In most cases, public charities give funds or services directly to causes rather than through grants. One major public charity is The United Way.

Many private foundations put their money into grants. These foundations give the grants to applicants with a worthy cause. One famous example of a private foundation is the Bill & Melinda Gates Foundation.

If your organization falls under any of the following categories, you might qualify for 501(c)(3) status:

Arts, culture, and humanities (e.g., museums)
Education and research (e.g., private elementary schools)
Environmental and animals (e.g., wildlife organizations)
Health services (e.g., public clinics)
Human services (e.g., youth programs)
International and foreign affairs (e.g., overseas relief)
Public and societal benefit (e.g., civil rights organizations)
Religion (e.g., houses of worship)
Mutual/membership benefit (e.g., associations)

How to apply for 501(c)(3) status

If your nonprofit falls under one of the above categories, you can apply for 501(c)(3) status. You need to apply through the IRS.

In most cases, a nonprofit must apply for 501(c)(3) status by the end of the 27th month after they were legally formed.

You must have an employer identification number (EIN) before you apply for 501(c)(3) status. An EIN is nine digits long and used for business identification. Complete Form SS-4 to get an EIN.

To apply for 501(c)(3) status, fill out Form 1023, Application for Recognition of Exemption. The user fee for Form 1023 is $600.

Form 1023 is an extensive form, but the IRS also offers Form 1023-EZ for eligible nonprofits. To find out if you’re eligible, you must complete the Form 1023-EZ Eligibility Worksheet. Form 1023-EZ requires a $275 user fee.

Submit applications and user fees electronically through Pay.gov.

You will receive a determination letter from the IRS saying whether you have been given 501(c)(3) status. Keep the letter on file for as long as your organization exists.

Maintaining 501(c)(3) status

There is a lot that goes into obtaining 501(c)(3) status. Once you receive the status, you have to be diligent with your accounting records. If the IRS discovers that some of your organization’s income is benefiting someone who contributes money (e.g., a donor), you might face an excise tax.

File an annual information return to maintain your status. The form you file depends on the amount of your gross receipts. If your organization’s gross receipts are $50,000 or less, you file Form 990-N. If your gross receipts are over $50,000, file Form 990. For more information, visit the IRS website.

A 501(c)(3) is also subject to public inspection. Anyone can request to see a 501(c)(3) organization’s annual returns.

Individuals or businesses that donate $250 or more to a 501(c)(3) organization can get a deduction on their federal income tax return. For these cases, you must give the donor a written acknowledgment.

If a 501(c)(3) fails to file a required Form 990-series return or notice for three consecutive years, its tax-exempt status is automatically revoked. Reinstatement requires reapplication and user fees.

Payroll taxes without exemptions

You withhold the following taxes from your employees’ paychecks if your business or organization is not tax exempt:

Federal income tax
FICA tax (Social Security taxes and Medicare taxes)
State and local taxes

Employers match the employee’s contribution to FICA tax. Also, employers must pay Federal Unemployment Tax Act tax (FUTA) and State Unemployment Tax Act tax (SUTA).

Nonprofit payroll taxes with exemptions

Are nonprofits exempt from FUTA? If your nonprofit has 501(c)(3) status, you are exempt from the following tax:

FUTA

Tax-exempt organizations are still required to withhold, file, and remit employee payroll taxes. The only payroll tax you are not obligated to pay with 501(c)(3) status is FUTA.

Many states also offer unemployment tax exemptions or reimbursement options for 501(c)(3)s. Check your state’s rules to determine whether you must pay SUTA, can elect to reimburse unemployment benefits, or are exempt.

Payroll taxes for churches (special rules)

Churches generally follow the same nonprofit payroll rules, with additional clergy-specific treatment:

Non-minister employees (e.g., office staff, custodians): Withhold federal income tax per Form W-4; withhold and match FICA; report quarterly on Form 941; issue Form W-2.
Ministers/clergy: Typically treated as employees for income tax but self-employed for Social Security/Medicare. Do not withhold or match FICA for ministers; ministers generally pay SECA on their own Schedule SE. Ministers can request voluntary federal income tax withholding with Form W-4; report on Form 941.
FUTA: Churches are exempt from FUTA.
Employer FICA exemption election: A church that is opposed for religious reasons to Social Security can file Form 8274 to elect exemption from the employer share of FICA for non-minister employees. If elected, affected employees are treated as self-employed for Social Security/Medicare and are responsible for SECA. This election has specific timing and consequence rules. Review IRS guidance before filing.
Housing allowance: A properly designated minister housing allowance is excluded from federal income tax but is generally included in SECA calculations.
State unemployment: Many states exempt churches and most 501(c)(3)s from SUTA automatically; others require an application or allow a reimbursement option. Confirm your state’s requirements.

Quick compliance checklist for nonprofits and churches

Collect Forms W-4 from all employees; for ministers, consider voluntary withholding if desired.
Determine worker status correctly (minister vs. non-minister; employee vs. contractor).
Withhold federal income and FICA tax from non-minister employees; match employer FICA.
Do not pay FUTA if you are a 501(c)(3) (including churches).
Verify state unemployment obligations or exemptions; choose contribution vs. reimbursement if available.
File quarterly Form 941 and deposit taxes on your required schedule; issue Forms W-2 by January 31.
Keep 501(c)(3) determination letter and file annual Form 990-series return to maintain exemption.

Payroll solutions for nonprofits and churches

Whether you employ a small church staff or a nonprofit team, Patriot Software helps you:

Set up clergy and non-clergy pay types (including housing allowances)
Automate withholdings for non-minister staff and support minister-specific treatments
File and deposit federal, state, and local payroll taxes accurately with Full Service Payroll

Key definitions

FICA (Federal Insurance Contributions Act): Social Security and Medicare taxes split between employee and employer.
FUTA (Federal Unemployment Tax Act): Funds federal/state unemployment systems; 501(c)(3)s are exempt.
SUTA (State Unemployment Tax Act): State-specific rules; many 501(c)(3)s are exempt or may reimburse.
SECA (Self-Employment Contributions Act): Social Security and Medicare for self-employed individuals; often applies to ministers.

FAQs: Nonprofit and church payroll taxes

Do churches have to pay payroll taxes?

Yes. Churches must withhold federal income tax and FICA for non-minister employees and pay the employer share of FICA. Churches are exempt from FUTA. Ministers generally pay SECA and are not subject to FICA withholding.

What payroll taxes are 501(c)(3) organizations exempt from?

501(c)(3)s are exempt from FUTA. They still withhold federal income tax and FICA from employee wages and pay the employer share of FICA. State unemployment rules vary.

Are ministers employees or self-employed for tax purposes?

For federal income tax, ministers are typically treated as employees of the church. For Social Security and Medicare, they are usually treated as self-employed and pay SECA. Churches generally do not withhold FICA tax from ministers.

Can a church opt out of the employer portion of FICA?

A church with religious objections may file Form 8274 to elect exemption from the employer FICA share for non-minister employees. If elected, those employees are treated as self-employed for Social Security and Medicare and owe SECA. This decision has strict rules. Consult IRS guidance or a tax pro.

Do nonprofits and churches file Form 941?

Generally yes. File quarterly Form 941 to report federal income tax withholding and FICA. Ministers’ SECA is not reported on Form 941. Very small employers may have different filing rules; see IRS instructions.

Do nonprofits have to pay state unemployment taxes?

It depends on the state. Many states exempt 501(c)(3)s (including churches) or allow a reimbursement option. Check your state agency for specifics.

Are ministers’ housing allowances subject to payroll tax?

A qualified housing allowance is excluded from federal income tax but is typically included in ministers’ SECA (self-employment) tax calculation.

Need help organizing your payroll information? Patriot’s nonprofit payroll software offers free setup and support. Run your payroll in three easy steps, and never lose track of important employment records. Try it for free today.

This article has been updated from its original publication date of December 19, 2016.

This is not intended as legal advice; for more information, please click here.