Many nonprofit organizations are exempt from income tax.
Although they do not have to pay income tax themselves, they must
still withhold income tax from the pay of their employees. However,
there are special social security, Medicare, and Federal unemployment
(FUTA) tax rules that apply to the wages they pay their employees.
Section 501(c)(3) organizations.
Nonprofit organizations that are exempt from income tax under
section 501(c)(3) of the Internal Revenue Code include any community
chest, fund, or foundation organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary
or educational purposes, fostering national or international amateur
sports competition, or for the prevention of cruelty to children or
animals. These organizations are usually corporations and are exempt
from income tax under section 501(a).
Social security and Medicare taxes.
Wages paid to employees of section 501(c)(3) organizations are
subject to social security and Medicare taxes unless one of the
following situations applies:
- The organization pays an employee less than $100 in a
- The organization is a church or church-controlled
organization opposed for religious reasons to the payment of social
security and Medicare taxes and has filed Form 8274,
Certification by Churches and Qualified Church-Controlled
Organizations Electing Exemption From Employer Social Security and
Medicare Taxes, to elect exemption from social security and Medicare
taxes. The organization must have filed for exemption before the first
date on which a quarterly employment tax return (Form 941) would
otherwise be due.
An employee of a church or church-controlled organization that is
exempt from social security and Medicare taxes must pay
self-employment tax if the employee is paid $108.28 or more in a year.
However, an employee who is a member of a qualified religious sect can
apply for an exemption from the self-employment tax by filing
Form 4029, Application for Exemption From Social Security
and Medicare Taxes and Waiver of Benefits. See Members of
recognized religious sects opposed to insurance in section 4.
Federal unemployment tax.
An organization that is exempt from income tax under section
501(c)(3) of the Internal Revenue Code is also exempt from the Federal
unemployment (FUTA) tax. This exemption cannot be waived.
An organization wholly owned by a state or its political
subdivision should contact the appropriate state official for
information about reporting and getting social security and Medicare
coverage for its employees.
Other than section 501(c)(3) organizations.
Nonprofit organizations that are not section 501(c)(3)
organizations may also be exempt from income tax under section 501(a)
or section 521. However, these organizations are not exempt from
withholding income, social security, or Medicare tax from their
employees' pay, or from paying FUTA tax. Two special rules for social
security, Medicare, and FUTA taxes apply.
- If an employee is paid less than $100 during a calendar
year, his or her wages are not subject to social security and Medicare
- If an employee is paid less than $50 in a calendar quarter,
his or her wages are not subject to FUTA tax for the quarter.
The above rules do not apply to employees who work for pension
plans and other similar organizations described in section 401(a).
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