If I Work for a Nonprofit, Do I Pay Taxes?

The question, “If I work for a nonprofit, do I pay taxes?” comes up quite often when discussing nonprofit organizations. While employees of nonprofits must pay income taxes, these organizations benefit from other tax exemptions. Read on as we define a nonprofit organization, explain the taxes and exemptions involved, and explore the benefits of working for a nonprofit.

What Is a Nonprofit Organization, According to the IRS?

Before we dive deeper into the question, “If I work for a nonprofit, do I pay taxes?” let’s discuss what a nonprofit organization is, exactly.

The Internal Revenue Service (IRS) classifies organizations as nonprofit when these groups provide services or functions that benefit the public or a specific group of people. Many nonprofits fall under the 501(c)(3) designation under tax code 501(c). These include organizations in the following categories:

• Charity
• Education
• Religion
• Science
• Public safety testing
• Literacy
• Amateur sports competition (national or international)
• Cruelty prevention for children or animals

Nonprofit organizations that fall under other tax code sections include social welfare organizations, labor unions, agricultural organizations, and business leagues, to name a few. Specific tax law depends on which tax code section the nonprofit falls under, but most organizations are 501(c)(3).

What Is the Difference Between Nonprofit and Not-for-Profit?

The IRS separates nonprofit organizations into two main categories: nonprofit and not-for-profit. Nonprofit organizations serve the public, and not-for-profit organizations serve a particular group of people. For this article, we will refer to both types as nonprofit organizations.

What Does Tax-Exempt Mean?

Qualifying nonprofits benefit from tax-exempt status, wherein they don’t pay federal income taxes on profits they generate through activities related mainly to their missions. To gain tax-exempt status, a nonprofit must operate strictly in accordance with its purpose and be a corporation, trust, or unincorporated association.

Some examples of nonprofits that qualify for tax-exempt status include:

• Schools
• Hospitals
• Child care organizations
• Parent-teacher associations

Some examples of groups that don’t qualify for tax-exempt status include:

• Individuals
• Partnerships
• Organizations with governmental power

How Does a Nonprofit Organization Become Tax-Exempt?

To attain tax-exempt status, 501(c)(3) nonprofits must file Form 1023. The IRS automatically considers certain types of nonprofits as tax-exempt, so there’s no need to file this form for:

• Churches, synagogues, mosques, or temples
• Church auxiliaries or associations
• Organizations with less than $5,000 in annual gross receipts

Visit the IRS official website to learn more about how nonprofit organizations become tax-exempt.

Can a Nonprofit Lose Its Tax-Exempt Status?

To maintain tax-exempt status, nonprofit organizations must keep their activities related to their missions. For example, if a tax-exempt corporation engages in political campaigns or illegal activities, it may lose its status.

The IRS may also revoke tax-exempt status if it suspects a nonprofit of abusing related privileges. For example, nonprofit directors, officers, and employees may not use funds collected by the organization for personal benefit. To avoid losing tax exemptions, charitable organizations and other nonprofits must keep detailed records of all transactions and donations, including providing donors with receipts.

Other circumstances that result in loss of tax exemptions include:

• Conducting activities for non-exempt purposes
• Primarily operating in ways not supporting the exempt purpose
• Participating in unlimited legislative activities

Nonprofit Organization Taxes: An Overview

The IRS offers tax-exempt status to nonprofit organizations because nonprofits provide goods or services for socially valuable purposes. These organizations offer resources to communities in need, medical services available to the public, education, religious guidance, and other goods and services.

Do Nonprofit Organizations Pay Corporate Income Taxes?

The specific tax requirements for nonprofit organizations depend somewhat on whether or not it has tax exemptions.

Nonprofit organizations without tax-exempt status pay corporate income taxes, but even tax-exempt organizations must pay state sales and use taxes and state unemployment insurance (SUI).

All nonprofits must also pay taxes on unrelated business income. The IRS defines unrelated trade or business as activities the organization regularly engages in that don’t significantly relate to the nonprofit’s purpose. For example, if a nonprofit organization makes frequent profits from an unrelated commercial use of its facilities, it must pay taxes on that income.

If I Work for a Nonprofit, Do I Pay Taxes?

Yes, even tax-exempt nonprofit organizations must pay the usual payroll taxes for employees. These taxes include federal income tax withholdings (FITW), Social security and Medicare (FICA), and federal unemployment taxes (FUTA).

When you begin working for a nonprofit organization, you will fill out a Form W-4 and pay income taxes just as you would working for any other type of organization or business.

What About Independent Contractors Working for Nonprofits?

The same is true for independent contractors working for nonprofits because these workers remain responsible for paying self-employment taxes. The IRS defines an independent contractor as a person who controls the nature of the work being done according to a payer’s desired result.

Why Work for a Nonprofit?

Although working for a nonprofit doesn’t mean you won’t pay income taxes, many other benefits exist. Employees of nonprofit organizations often feel fulfilled by their work because they believe in the organization’s purpose. They often engage more fully with their work and have more opportunities for growth within the organization.

Nonprofit Employee Incentives Programs

Many nonprofits lack the funds to offer the same incentives as for-profit businesses. Still, if you run a nonprofit, you should consider the benefits of these programs to improve employee retention. When employees feel appreciated and cared for, they don’t mind going the extra mile for their employers.

Consider the following employee incentives your nonprofit could afford to offer its employees:

• PTO: Many nonprofit organizations offer competitive PTO time compared to for-profit employers.
• Benefits: A solid benefits package offering helps with recruitment and retention. Benefits packages may include PTO, 401K matching, and insurance policies for health, life, and dental.
• Travel opportunities: Many organizations in the nonprofit sector offer goods and services to communities around the world, giving employees full of wanderlust the chance to travel.
• Career development: Many nonprofit employees boast broad skillsets, so nonprofits often incorporate countless opportunities for career development.

Prohibited Incentives

Nonprofit employees cannot collect specific incentives due to the way nonprofit organizations function and the requirements for remaining tax-exempt. For example, nonprofit employees don’t get commissions and bonuses because no single person or group may benefit from funds that a nonprofit raises.

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