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.
What is a nonprofit?
A nonprofit organization is exactly what it sounds like — 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.
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 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. If your organization has $10,000 or less in annual gross receipts, you pay a $400 user fee to apply. And if you have over $10,000 in annual gross receipts, you pay a user fee of $850.
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.
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 (i.e. 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 acknowledgement.
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
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:
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.
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