Do Nonprofits Pay Taxes? Do Nonprofit Employees Pay Taxes?

Introduction from the Author (2026)

When I wrote this concise article in 2021, it was in response to a lot of questions that kept popping up about nonprofits and taxes. Given the continuing popularity of this topic, it seems there is still some confusion, not unlike the accounting required for donations with restrictions!

The good news is that not much has changed on the tax front since then, although the IRS now identifies about 34 different types of tax-exempt organizations! As I mentioned in the original article, in general, nonprofits still don’t pay income taxes and employees must still shoulder their burden for various payroll-related taxes. There is one notable exception that I didn’t mention in the original article that often comes up in our work: nonprofits generally do not pay Federal Unemployment Taxes (aka “FUTA”).

But change is upon us. One area to keep a careful watch on that may impact taxation for nonprofits or their donors is the extreme shift in the administration of the Federal Government – where it seems everything is subject to change. Another is the advent of AI research tools that can certainly be beneficial in asking more probing questions about taxation for nonprofits and their employees that the reader may be thinking about after perusing this article.

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:

• Nonprofit ROI: How “Measuring the Good” Can Help Nonprofits Justify Investments
• The Case for Revenue-Led Budgeting 
• Your IRS Form 990 Questions Answered
• Treasurers of All-Volunteer Organizations: Eight Key Responsibilities
• An Easy-to-Use Accounting Procedures Manual Template

 

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