Do Nonprofits Pay Taxes? Do Nonprofit Employees Pay Taxes?
Tax law concerning nonprofit organizations can be complex. Blue Avocado explores where tax laws do and don’t apply.
Which tax laws may affect your nonprofit and your employees.
We often get questions from our readers about whether a nonprofit organization must pay taxes, or whether individuals working at a nonprofit must pay taxes.
While there are lots of details to get into depending on the situation, here’s a summary about nonprofits and the taxes they may or may not have to pay!
Do nonprofit organizations have to pay taxes? It depends!
Most nonprofits do not have to pay federal or state income taxes. However, here are some factors to consider when determining what taxes a nonprofit may have to pay:
Type of nonprofit.
There are 29 different types of nonprofits in the IRS tax code. And there are several types of 501(c)(3) charitable organizations, including Religious, Charitable, Educational, and Scientific! Each type of tax-exempt organization has different compliance requirements, and this includes taxation.
State and local tax requirements.
Where you are located and operate matters! For example, in California, nonprofits pay sales taxes, but charitable organizations may not need to in New York, Texas, or Colorado when buying things in the conduct of their regular charitable functions and activities. However, your organizations may need to apply for the exemption.
Property tax is another common tax that some nonprofits need to pay. Many states allow certain types of nonprofits to file for an exemption on paying property taxes. This may require an annual filing to maintain the exemption.
Hotel tax is an example of a local tax that nonprofits need to pay. Other common taxes include state unemployment and other payroll taxes.
Unrelated activities.
Your organization’s regular activities may be subject to income taxes if the activities are not deemed to be related to your mission or if the activities fall into one of many IRS definitions of “unrelated” activities. You may have heard this referred to as “Unrelated Business Income Tax” or UBIT.
There are so many more types of these activities than there used to be! Check out IRS Publication 598. Form 990-T is used to determine if any income tax is due.
Section 4965.
And in some rare occasions, a nonprofit’s activities (such as being a party to a prohibited tax shelter transaction) may be subject to excise taxes imposed by section 4965 of the IRS code. Or maybe you received a payment for indoor tanning services you provided — you’d have to pay taxes on this income quarterly!
Note that each one of these factors requires further research to determine if any taxes apply.
Do I have to pay taxes if I work for a nonprofit?
The answer to this question is YES. The income you earn by working for a nonprofit organization is subject to federal, state/local income and payroll taxes.
You might also like:
- Treasurers of All-Volunteer Organizations: Eight Key Responsibilities
- An Easy-to-Use Accounting Procedures Manual Template
- A Guide for Private Foundations: Tax Exemption and 990-PF Filing Requirements
- Why is it Hard to Give My Money Away? A Donor’s Perspective
- Nonprofit Grant Proposal Budget Calculations: A Road Map
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About the Author
Monte S. Meyers, MBA, founded Shining Star Consulting, LLC in 2006. His firm has helped many dozens of nonprofit organizations improve their financial systems and processes, pass audits, create effective budgets, develop clear policies and procedures, create useful financial reports, and develop insightful financial analysis. He has over 25 years of experience working with nonprofits in the fields of accounting, budgets, financial systems and processes, and financial reporting. He serves on the board of directors for two nonprofit organizations. For fun, he loves backpacking in Yosemite and singing the tenor part in the UC Alumni Chorus.
Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. The opinions and views expressed in this article are solely those of the authors. They do not purport to reflect or imply the opinions or views of Blue Avocado, its publisher, or affiliated organizations. Blue Avocado, its publisher, and affiliated organizations are not liable for website visitors’ use of the content on Blue Avocado nor for visitors’ decisions about using the Blue Avocado website.
Dear Mr. Meyers,
I am thinking of forming a fiscal sponsorship with a non profit such as Fractured Atlas or others (to be decided). What are the tax requirements for such an endeavor. The grants and venture capital I apply for would be used to create music demos, have readings, and produce a theatrical musical. I live in New Jersey but would look for funding in New York.
Thank you,
John Marelic
My aunt’s interested in hosting a gala to raise funds and donate them to a charity, so she’s eager to learn more about how nonprofits work. I’m glad you talked about nonprofits and their tax regulations, so I’ll make sure your article reaches my aunt. Thank you for the tips on nonprofits and how employees who work on one should pay taxes too. https://iamhouston.info/
Do you have some well developed Non Profit Foundation Policies you can share?