Employment Law 101: Tax-Exempt Status for Nonprofits

Instead, enter “Exempt—Form 4029” on the dotted line next to Schedule 2 (Form 1040), line 4. This is an income tax deduction only, which is claimed on Schedule 1 (Form 1040), line 15. This deduction doesn’t include taxes imposed by section 1401(b)(2), pursuant to section 164(f)(2) of the Internal Revenue Code. If you are a theological student serving a required internship as a part-time or assistant pastor, you can’t exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. The church allows Rev. Baker to use a parsonage that has an annual fair rental value of $24,000. The church pays them an annual salary of $67,000, of which $7,500 is designated for utility costs.

You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. However, the exclusion can’t be more than the reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment.

Payroll Taxes: How They Apply to Your Nonprofit (and How They Differ for Churches)

Rev. Moss had net earnings from self-employment in 2022 and 2024 that were $400 or more each year, and part of the self-employment earnings in each of those years was for their services as a minister. Thus, Rev. Moss must file their application for exemption by the due date, including extensions, for their 2024 income tax return. However, if Rev. Moss doesn’t receive IRS approval for an exemption by April 15, 2025, their SE tax for 2024 is due by that date.

Employment Taxes and Nonprofits

However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you can’t exclude from your income a housing allowance or the value of a home that the college provides to you. However, a minister’s surviving spouse can’t exclude the rental value unless the rental value is for ministerial services they perform or performed. If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you can’t apply. However, if you pay your benefits back, you may be considered for exemption. Contact your local SSA office to find out the amount you must pay back. Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services.

Publication 517 – Main Contents

• However, the IRS must classify a non-profit organization as a 501(c)(3) to be exempt from paying FUTA taxes.
• Political organizationsA party, committee, association, fund or other organization organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.
• File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true.
• It’s important for anorganization to be clear about what exemptions it qualifies for, and when itmust take steps to comply.

This publication, revised annually, contains basic information employers need to collect information needed to determine and pay their and employees’ employment tax liability, file correct tax returns and withhold federal taxes. While churches generally withhold federal income taxes from employee wages, the IRS does not require churches to withhold income taxes or Social Security and Medicare taxes from licensed ministers. You should check with your tax preparer and/or foreign government or international organization employer to find out if you are eligible for any tax exemptions. Nonprofits are required to withhold federal income tax from employee paychecks as well as the employee portion of Medicare and Social Security taxes. Most nonprofits must also pay SUI taxes and complete an annual Form 940 filing.

Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to employment taxes for exempt organizations the teachings of Christian Science. State law specifically exempts Christian Science practitioners from licensing requirements. Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. 517 is a set of worksheets that you can use to figure the amount of your taxable ministerial income and allowable deductions. Are manual payroll processes draining your time and increasing the risk of compliance errors?

All of these forms must be filed electronically via Pay.gov, and you must include payment of a user fee. Under a 457(f) plan, if the substantial risk of forfeiture provision lapses on the involuntary termination, the 457(f) payment would be included in the parachute payment calculation. Nontaxable compensation such as the value of health insurance and life insurance would also be included as parachute payments.

Benefits Insights

11“A disregarded entity owned solely by a section 501(c)(3) organization will not be subject to FUTA tax on wages it pays its employees.” Preamble to T.D. After viewing each of the interactive presentations below, your organizational leadership will understand the benefits, limitations and expectations for exempt organizations. If a tax-exempt organization (EO) has employees, the EO is responsible for Federal Income Tax Withholding and Social Security and Medicare taxes.

Guidelines for Paying State Unemployment Insurance (SUI) Taxes for Nonprofits

• An organization not classified as a 501(c)(3) must pay FUTA taxes and report them annually on Form 940, Employer’s Quarterly Federal Tax.
• An employee usually has income tax withheld from their wages or salary.
• If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan.
• Payments of U.S. tax must be remitted to the IRS in U.S. dollars.
• Use Schedule SE (Form 1040), to figure your net earnings and SE tax.

You must follow tax laws, pay employees fairly, and keep accurate records. Your responsibilities are significant, and they require your full attention. Is your nonprofit organization struggling with tedious payroll processes?

The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive communications, including notices and letters, in English until they are translated to your preferred language. If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away. If either situation applies to you, you can deduct your contributions to a 403(b) plan as explained next.

If you contribute to a traditional IRA, your contribution may be deductible. However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you don’t have any other income subject to SE tax, don’t file Schedule SE (Form 1040).

However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax, later. Many of the forms used by organizations with tax exempt status must be filed electronically, and some also require payment of a user fee. This can be confusing because there are multiple e-filing platforms and some of the rules regarding e-filing recently changed. This page highlights some of the typical filing requirements of 501(c) organizations, with a focus on electronic filing. Generally speaking, a related organization includes any organization that controls, or is controlled by, the ATEO or is a supporting organization of the ATEO. The regulations provide detailed guidance on what constitutes control for these purposes.

Private foundations typically receive support from a few individuals or investments, while public charities rely more on donations from the general public or government grants. Separately, if you are starting a 501(c)(4) organization, you must submit a Form 8976, Notice of Intent to Operate Under Section 501(c)(4), within 60 days of the organization being established. You must submit the form electronically using the IRS Online Registration System and pay a $50 fee. No special software is needed; you just need an email address to activate a login id and password. In this primer, learn how payroll clearing accounts improve operations, streamline payroll, and can improve your financial efficiency.