Can You Pay Salaries if You Run a Nonprofit?
There are 28 types of nonprofit organizations organized under section 501(c) of the tax law. Each type of organization varies in tax-benefits for those who contribute and the organization itself. The differences come from the purpose of the organization. However, all nonprofits have one thing in common--they all pay employment tax, which means they all can have salaried employees. The IRS may limit the amount of salary paid to an employee who maintains substantial influence over the organization.
Other People Are Reading
-
501(c)(3) Organizations
-
Non-profit organizations incorporated under section 501(c)(3) must operate exclusively to serve an exempt purpose, such as one that is charitable, educational, scientific, religious, literary, promotes amateur sports or prevents child or animal cruelty. When defining charitable purpose, the IRS notes it includes organizations that offer aid to those living in underprivileged conditions, the poor or the distressed. The term can also include organizations devoted to eliminating prejudice, lessening the burdens of government or improving the community. In no way should an organization be for the benefit of one of the founders. The benefit of a 501(c)(3) status is the organization doesn't pay tax and receives tax-deductible contributions.
Other Nonprofit Organizations
-
While you can deduct donations to 501(c)(3) nonprofit organizations, there are also other types of non-profit organizations where donations are not deductible. These types of non-profit organizations may have some taxable income but if the purpose of the income is to promote social welfare, the funds remain tax-free. Some American Legion Posts, a 501(c)(19) nonprofit, are examples of nonprofit organizations with bar and restaurant facilities available to members and the public. The disposition of the income, after paying all expenses, including salaries, determines whether the profits are taxable or not.
-
Requirement for Nonprofits with Employees
-
Any nonprofit may have employees. Before an organization hires any employees, it must have an employer identification number. The nonprofit organization must pay the employer's half of Social Security and Medicare tax. The nonprofit must also withhold taxes from the employee’s paycheck.
Limitations
-
If a tax-exempt organization operates simply for the benefit of the founders, rather than for the benefit of charitable operations, it loses its tax-exempt status. For instance, if Joe Smith started a club for underprivileged youth but, as the donations increased, so did his salary, leaving nothing for the children, the IRS could potentially question the actual purpose of the organization. This is true of "Internet ministers" who pay to be ordained strictly to avoid taxation.
-
References
Resources
- Photo Credit Thinkstock/Comstock/Getty Images
