Nonprofits may be tax-exempt, but they may need to file tax returns and even pay taxes on certain income, including those at local, state, and federal levels. If nonprofits fail to file the forms, they may be liable for penalties and interest, making tax compliance a priority to many organizations. This article focuses on federal and California tax forms and requirements.
Below are some tax issues and forms nonprofits should pay attention to.
States and local authorities may collect sales tax on fundraising efforts, including proceeds from auctioned items. Some states allow for exemption if the nonprofit files for an exemption form before the event.
In California, sales taxes are applied to certain auction items, and the nonprofit must remit the tax using the form BOE401a2. Depending on the case, you may need to file the taxes online and pay using a regular check, e-check or another method.
Nonprofit organizations must follow the law when it comes to payroll taxes, including withholdings and paying their share of Social Security tax unless the nonprofit has its own approved retirement plan.
Nonprofits file the same payroll forms, as for-profit business do, such as the form941, Employer’s Quarterly Federal Tax Return, and form 940- Employer’s Annual Federal Unemployment Tax Return. A nonprofit distributes tax forms W-2 to employees in the beginning of the following year with summaries of salaries and withholding.
States also have their own payroll taxes. California has the formDE 1NP Registration Form for Nonprofit Employers and DE-9 Quarterly Contribution Return and Report of Wages.
Annual Information Tax Returns
Except for religious organizations and a few others, nonprofits are required to file a form within the 990 tax series a few months after year-end. Small organizations may file online the e-card 990-N, giving the IRS basic information, such as name and address of the nonprofit. Larger organizations file the forms 990 Return of Organization Exempt from Income Tax, or the 990-EZ, which are more detailed, requiring specific numbers for revenues and expenses along with information on programs and board of directors. If the nonprofit doesn’t file taxes for 3 years, its tax-exemption may be revoked, even for the smaller organization.
In addition, California has annual reporting requirements with smaller organizations filling out form FTB 199N online, and larger ones filing longer, more detailed form 199.
Unrelated Business Income Tax
There are instances where nonprofit may compete unfairly with for-profit businesses, such as a nonprofit opening a restaurant with no connection to its mission. Many exceptions apply, but if the organization is deemed to have unrelated business income, it must file form 990-T with the IRS and pay the proper tax, also known as UBIT.
Note that California requires that nonprofits with taxable income to fill out the form 109 Exempt Organizations Business Income Tax Return.
>>Be sure to double check the requirements for these forms at least once a year, since things change often and you don’t want to be out of compliance. For instance, Obamacare has requirements for businesses, including nonprofits, to provide health insurance for employees if the organization has a certain number of employees. It also may be possible for smaller nonprofits to get the Small Employer Tax Credit. Since Obamacare may change in the future, keep an eye of this and other issues.
Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award
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