The IRS Form 501(c)(3) is the cornerstone of achieving tax-exempt status for charitable/nonprofit organizations. This form is essential for organizations that operate for religious, charitable, scientific, literary, or educational purposes, among others. Obtaining 501(c)(3) status not only exempts your organization from federal income tax but also enhances your credibility and enables you to receive tax-deductible contributions.

Key Features:

Tax Exemption: Gain exemption from federal income tax.Credibility: Enhance your organization's legitimacy and appeal to donors.Funding Opportunities: Qualify for grants and tax-deductible donations.Eligibility Requirements:Operate exclusively for exempt purposes.Ensure no earnings benefit private individuals or shareholders.Avoid political campaigns and substantial legislative activities.Application Process:Determine your organization's eligibility.Gather necessary documents, including organizing documents and financial data.Complete and submit the appropriate form (1023 or 1023-EZ) to the IRS.

Organizations must be considered “charitable” by the IRS to receive a 501(c)(3) classification. According to the IRS, a charitable organization is established for one of the below purposes :

Charitable

Religious

Educational

Scientific

Literary

Testing for Public Safety

Fostering of national or international amateur sports

Prevention of cruelty to animals and children

A 501(c)(3) may not be organized or operated for any private interests. All, except for those with the purpose of testing for public safety, may receive tax-deductible contributions.

The two primary types of 501(c)(3) organizations are:

Public Charities vs. Private Foundations

Public Charities:

Purpose: Serve public interests, not private.Funding:

Must obtain 33% of funding from small donors, government, or other public charities.Prohibitions:

No political campaign participation.

No unreasonable benefits to insiders.

No lobbying activities.

Board Requirements: Must have a diversified board (over 50% unrelated).

Filing Requirements: Must file Form 990 or 990-EZ annually; Form 990-T if they have $1,000+ in unrelated business income.

Private Foundations:

Purpose: Typically raise funds and award grants to public charities; may conduct exempt activities directly.

Funding: Usually have a single major funding source.

Prohibitions:Limited private benefits allowed.

No unreasonable benefits to insiders.

Excise tax on net investment income reported on Form 990-PF.

No political campaign participation.

Significant excise tax on lobbying expenses.

Who Needs 501(c)(3) Status?

Requirement:

Necessary for nonprofits seeking tax-deductible donations and federal tax exemptions.

Note: Nonprofit founders should consult an attorney and accountant for guidance on compliance requirements.

Business that plans on hiring employees, you will need to register for payroll taxes.

Payroll taxes are a legal requirement for hiring and paying employees in the United States.

All small businesses must track and report all payroll taxes to avoid government audits and fines.

Federal and State Registration Payroll taxes are incurred at the state and federal level.

Employers must register for the appropriate tax accounts in order to hire employees, to process payroll, and to file returns.

Understand State Requirements.

While the process of registering for payroll taxes isn’t overly difficult, knowing what to register for can be overwhelming to new small business owners.

Different states have different requirements and processing policies.

Registering for sales and use tax is mandatory for both for-profit businesses and nonprofit organizations. Local governments impose penalties on companies that fail to comply with the proper collection, reporting, and payment of sales and use tax.

In jurisdictions where sales and use tax applies, sellers must obtain a Sales Tax ID Number (or Seller’s Permit). This involves applying to the Department of Revenue after registering the business and obtaining an EIN number.