Do Nonprofit Organizations Pay 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 organization that engages in activities for both public and private interest without pursuing the goal of commercial or monetary profit. To be exempt from federal taxes, nonprofit organizations have to meet certain rules.

Key criteria that nonprofits must meet to be tax exempt include:

1. Be organized and operated exclusively for charitable, scientific, religious, or public safety purposes.
2. Collect income and turn over the entire amount (minus expenses) to organizations or individuals who are lawfully recognized as legitimate charities.

Nonprofit Benefits of Being Nontaxable

Nonprofits, which can include private foundations and churches, are able to more readily raise money as a non-taxable organization. Individuals and other organizations are more likely to contribute nontaxable nonprofits because they can reduce their own tax liability.

Other Nonprofit Tax Exemptions

Nonprofits are also exempt from paying sales tax and property tax. While the income of a nonprofit organization may not be subject to federal taxes, nonprofit organizations do pay employee taxes (Social Security and Medicare) just like any for-profit company.

Special Considerations

If a nonprofit organization engages in activities that are unrelated to its basic purpose, they are required to pay income taxes on that money. For example, if the nonprofit organization ABC was formed to provide shelter for people experiencing homelessness and it makes some money selling bicycles, that income may be eligible for income tax purposes. With the tax benefits, however, comes greater inflexibility for nonprofits, which are subject to greater oversight.