Nonprofit Taxes

Nonprofit organizations are exempt from federal income taxes under subsection 501(c) of the Internal Revenue Service (IRS) tax code. A nonprofit organization is an entity that engages in activities for both public and private interest without pursuing the goal of commercial or monetary profit. Nonprofit organizations have to meet certain rules to be exempt from federal taxes.

How Nonprofit Tax Status Works

In addition to not paying federal taxes, nonprofits are also exempt from paying sales tax and property tax. However, the tax-free status does not relieve them of the responsibility of ensuring employee's payroll taxes (Social Security and Medicare) are submitted.

Organizations must meet several requirements to achieve tax-free status. Some of the key criteria that nonprofits must meet to be tax-exempt include:

• Be organized and operated exclusively for charitable, scientific, religious, or public safety purposes
• Collect income and turn over the entire amount (minus expenses) to organizations or individuals who are lawfully recognized as legitimate charities
• Written articles of organization, legally registered and incorporated within the state it operates in
• Nonprofits, which can include private foundations and churches, are able to more readily raise money as a non-taxable organization.