Tax-Exempt Status: What Does It Really Mean for Your Nonprofit?
When a nonprofit earns 501(c)(3) tax-exempt status from the IRS, it can feel a bit like planting a long-awaited seed and finally seeing that first sprout. It’s a major milestone, one worth celebrating! But the term “tax-exempt” is often misunderstood, and many assume it means freedom from all taxes. If only nonprofit compliance were as simple as watering a tomato plant! Let’s dig into what tax-exempt status actually covers, and what it doesn’t. Federal Income Tax: Yes, You’re Exempt! If your organization has 501(c)(3) status, you do not have to pay federal income taxes on revenue related to your charitable mission. This is the core benefit of tax-exempt status and the one most people are familiar with. We will write more about unrelated business income tax (“UBIT”) at a later date; if the income is unrelated and actual business income (e.g a bakery versus a bake sale) you will be subject to income taxes, with some exceptions. Stay tuned! What About Payroll Taxes? Contrary to some misconceptions, even though nonprofits are exempt from income taxes, all employers (including nonprofits) must pay payroll taxes to the IRS and the State of Oregon. There are no exemptions here. If you
