Non-Profits 101: Overcoming Obstacles to Tax-Exempt Status

4/18/2018 - By Caroline Y. Beasley, CPA

In my last blog, I discussed the basics of receiving and maintaining tax-exempt status. Yet, many new non-profits encounter common mistakes and errors that complicate these efforts. Two areas where obstacles are most commonly encountered are payroll and fundraising.

Avoiding Payroll Pitfalls

Payroll tax implications are a common obstacle the start-up may need to consider. Most non-profits have volunteers, but larger entities have employees who run the operations. Federal income tax withholdings and Social Security and Medicare taxes (FICA) are generally withheld from an employee's wages. The employers' part of these taxes are also required payments.

Basic requirements include filing quarterly and annual payroll tax returns to the IRS (and respective states), along with issuing annual Forms W2 to employees. If volunteers or others are given money other than by wages and the total value of those payments is over $600 during the year, the non-profit will be required to issue a 1099-MISC to that individual. This is similar to how a for-profit entity would report payroll wages and taxes. However, here is the difference. If the non-profit is exempt from income tax as a Section 501(c)(3) entity, they are also exempt from federal unemployment tax.

Ministers and clergy have different payroll taxation rules. They could be deemed as either an employee of the organization or a self-employed person. Either designation will subject them to FICA or the Self-Employed Contribution Act (SECA). Even if the Minister is an employee, they could be subject to both FICA and SECA depending on the type of services performed. Keep in mind though, they can never be subject to both on the same type of income.

For example, a Minister performs baptisms or marriages for a fee separate from their salary. The salaried wages are subject to FICA and the additional services are subject to SECA. Exceptions to paying FICA and SECA for Ministers exist , if they meet certain requirements to file exemption forms with the IRS.

Raising Funds Right

Another potential complication with start-up non-profits includes the concept of fundraising. What is considered taxable and what is not? What state-level issues will the organization run into while fundraising? We often see non-profits selling merchandise and goods to consumers as a fundraiser for specific events. But, they do not consider the implications of receiving money for those goods. Each state has their own regulations on what is considered taxable and nontaxable.

This could also be called unrelated business income (UBI). UBI may come into play if the non-profit doesn’t specifically state in their bylaws that as part of their overall function they sell items to customers and use those funds to support their mission. Even still, the revenue made from those sales could require state and/or local sales tax payments. Gross income of more than $1,000 from UBI requires filing Form 990-T, Exempt Organization Business Income Tax Return.

To keep your tax-exempt status, you must have best practices for recordkeeping and complying with all IRS and state policies. Does your non-profit need help navigating obstacles standing between you and tax-exempt status? If so, please email me or contact a member of our Tax Consulting team today! We look forward to helping you during your time of need as you have done for so many others.

About the Author | Caroline Y. Beasley, CPA
Caroline is a senior in the Tax & Accounting Services Department of Saltmarsh, Cleaveland & Gund. She began her career in public accounting in 2010. Prior to joining Saltmarsh in July 2016, Caroline worked with an international firm performing a variety of tax and accounting functions for corporations and partnerships, as well as assisting with auditing income tax provisions.

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