Do nonprofits pay taxes? In short, the answer is both yes and no.
For the most part, nonprofits and churches are exempt from the majority of taxes that for-profit businesses are responsible for. However, they aren’t completely free of tax liability. There are some instances when nonprofits and churches are still required to pay taxes.
Taxes Nonprofits DON’T Pay
Nonprofits and churches do not have to pay federal income tax, nor do they have to pay any state or local income tax. That said, you’ll want to check your local rules in case they differ from federal ones. Additionally, nonprofits and churches are exempt from paying all property taxes.
By not collecting these taxes, more funds are able to be deployed toward the mission. In most cases, it’s a win-win for the government and the nonprofit or church. The government creates a better society for its people, while the nonprofit or church is able to put more resources toward their cause.
Taxes Nonprofits DO Pay
Nonprofits and churches aren’t completely off of Uncle Sam’s hook. They must pay payroll tax, all sales and use tax, and unrelated business income.
Employees collecting a payroll check from a nonprofit or church are just as liable as the rest of us making a living. Not only will the employee pay their share of taxes, the organization is also liable for the accompanying payroll taxes involved. But volunteers and contractors are not on payroll and do not accrue payroll tax. So use them as much as you can.
Unrelated Business Income
Let’s say you have a fundraising event, and you want to market it with some t-shirts that you sell for $10 each. That’s OK, and the income is not taxable. The key phrase here is fundraising event. In other words, you will need to record the transactions of the sales to a specific fund related to your cause. In this case, it could be for a new building or equipment used to achieve your mission. Luckily, there is fund accounting software made specifically for nonprofits and for churches that will allow you to easily do this.
However, if your sales of t-shirts are used to fund expenses like office supplies or payroll, that income could be taxable because it’s unrelated directly to the mission your nonprofit is supporting. Other examples include thrift stores or coffee shops owned and run by nonprofits. Some of these businesses could be liable for taxes depending on the volume and purpose of the transactions. It can be a pretty gray area, so you should consult with a local CPA or tax professional. Learn more about unrelated business income from IRS Publication 598.