Illinois companies designated as non-profit organizations, or charitable organizations, have successfully applied for and obtained the federal  501(c)(3) status. This means that these companies are not legally obligated to pay certain federal, state or local taxes.

For this reason, they are often referred to as tax-exempt organizations. However, this delineation does not exempt these companies from all tax requirements. Understanding what taxes must be paid, how and when is important for any non-profit business in order to retain a 501(c)(3) classification.

What taxes are required to be paid by non-profit companies?

According to the Internal Revenue Service’s website, there are three forms of taxes that non-profit companies must pay even when holding non-exempt tax status:

• Federal unemployment tax—this tax is required to be paid directly by companies and is never deducted from employees’ paychecks. It funds federal assistance for unemployed persons.
• Federal income tax—this is deducted directly from employees’ paychecks and must always be paid by any business.
• Social security and Medicare taxes—as with federal income taxes, these monies are taken directly from employee compensation and they fund the corresponding government programs.

Organizations that fail to properly pay these required taxes could jeopardize their non-profit and tax-exempt status. These situations can have serious ramifications.

What taxes are non-profit organizations exempted from paying?

As explained by Investopedia, non-profit companies are exempted from paying taxes on any income that directly contributes to their missions. These include sales taxes and property taxes. The IRS website clarifies also that no individual shall personally benefit from the earnings of a charitable organization. If this happens, the organization could be in violation of the non-profit requirements. Records must be set up and tracked appropriately to ensure all reporting clearly supports the charitable mission.

What constitutes an approved charitable mission?

In order to receive 501(c)(3) classifications, companies’ purposes should be focused on specific missions. Those involving education, religion, charitable works, animal and child cruelty prevention and more are examples of missions that would be deemed acceptable for a non-profit, tax-exempt status.

The importance of legal assistance when forming a non-profit

Because the requirements for achieving—and keeping—non-profit status are highly specific, a business looking to become tax exempt can benefit from working with a lawyer experienced in this area.  Understanding the ongoing requirements for the filing of annual reports and tax returns, for example, can prevent penalties or even the loss of a non-profit designation.