When you started your 501(c)(3) nonprofit, one of the main benefits your organization received was an exemption from paying federal taxes. Depending on your location, the exemption may also apply to state taxes. While your nonprofit likely doesn’t have the same sense of dread come tax season that for-profit organizations or individuals do, this doesn’t mean you can sit back and relax, either.
Nonprofits like yours are still required to prepare tax forms each year to maintain your tax-exempt status and ensure your organization is handling funds properly. In addition to filing a Form 990 for your nonprofit, you’ll also need to issue the correct tax forms to your employees to remain compliant with federal and state regulations.
To help you get started, in this guide, we’ll explain three things every nonprofit should understand before filing taxes. Here’s what we’ll cover:
- Form 990 Filing
- Nonprofit Employment Tax Forms
- Tax Season and Nonprofit Audits
Although this guide is primarily focused on federal filing, each state has its own regulations surrounding nonprofit taxes as well. For example, nonprofits in Montana aren’t required to file a separate annual tax form with the state, as is the case in New York, which requires a Form CHAR500. However, there are additional filings required in Montana related to payroll taxes, property tax exemption, and your annual report. The IRS website links out to recent requirements for each state, so you can always stay up-to-date on which forms your nonprofit needs to file.
1. Form 990 Filing
The IRS Form 990 is the most important tax form your nonprofit files annually. Upon registering your nonprofit, you filed Form 1023 with the IRS to establish your organization as tax exempt. Filing Form 990 each year allows you to maintain that tax-exempt status.
Your Form 990 also serves a secondary (but still important!) purpose: ensuring transparency and accountability with stakeholders. Once you file the form, it becomes publicly available, and many nonprofits choose to include this information in their annual reports. This way, prospective donors, sponsors, and grantmakers can see that your nonprofit allocates revenue appropriately and isn’t fraudulent before deciding to invest in your mission.
Which Form Should My Organization File?
Depending on your organization’s annual gross receipts and total assets, there are four types of Form 990 you could file. Jitasa’s guide to filing Form 990 breaks down the four types as follows:
- Form 990-N. Also known as the Form 990 e-postcard, your nonprofit can file this form if your annual gross receipts total less than $50,000. There is no printout available for Form 990-N—instead, your organization would fill out an eight-question digital form directly on the IRS website.
- Form 990-EZ. To file this form, your nonprofit’s annual gross receipts should total between $50,000 and $200,000 and your total assets must be less than $500,000. A condensed version of the full Form 990, the Form 990-EZ is about four pages long when printed, not including additional schedules.
- Form 990 Full. Your nonprofit must complete the full version of Form 990—about twelve printed pages—if your annual gross receipts exceed $200,000 or your total assets are at least $500,000.
- Form 990-PF. All organizations classified as private foundations are required to file Form 990-PF, regardless of gross receipts or total assets.
Understanding the differences among the four types of Form 990 can save your organization significant time and energy. Nonprofits eligible for the Form 990-EZ could file the full Form 990, but why would they, when choosing the full version would require eight pages’ worth of additional work for their team?
If you’re unsure which form is best for your organization, consider asking an accountant who has experience with nonprofit tax filing. Additionally, while it’s possible to complete your Form 990 internally, working with a nonprofit accountant helps ensure all documentation and information is recorded properly.
When Is the Filing Deadline?
The deadline to file your Form 990 is the 15th day of the fifth month after your nonprofit’s fiscal year ends. If your fiscal year follows the calendar year, your Form 990 is due May 15. If your fiscal year were to run from July to June, your deadline would be November 15.
Failing to file Form 990 by your nonprofit’s deadline will incur a fee for each day the form is late. If you fail to file altogether for three consecutive years, your tax exemption is in danger of being revoked, which would require your organization to reapply for 501(c)(3) status.
If you need additional time to complete the full Form 990, Form 990-EZ, or Form 990-PF, your organization can apply for an extension of up to six months by filing Form 8868. The Form 990-N isn’t eligible for an extension, so nonprofits using that version should plan ahead to ensure it’s done on time.
2. Nonprofit Employment Tax Forms
In addition to filing an annual tax return for your nonprofit, you’ll need to issue tax forms to your staff. These forms are not only required for your organization to remain compliant with federal and state employment regulations, but they also help your employees with their individual tax filing each year.
Some key employment tax forms to know include the:
- Form W-2, Wage and Tax Statement. You’ll fill out this form for each employee to track their annual wages and taxes withheld from their paychecks. There are six total copies of the W-2: two for your organization to file with the federal government and your state, two for the employee to file with their federal and state tax returns respectively, one for your records, and one for the employee’s records.
- Form 1099, Miscellaneous Income. If your nonprofit hired contractors to work on specialized projects in the past year (for example, if you worked with an external developer to revamp your nonprofit’s website), you may need to provide them with a Form 1099 to account for their income. Issuing a 1099 is required when you’ve made payments for services to someone who is not your employee—either an individual, partnership, vendor, or estate—amounting to $600 or more during the year.
- Form W-9, Request for Taxpayer Identification Number and Certification: In order to issue a 1099, you’ll first need to collect the contractor’s tax information using a W-9. It’s recommended that you request information via the W-9 at the onset of your organization’s relationship with a contractor so you have the information you need to fill out their Form 1099 when the time comes.
Handling tax forms related to your organization’s employees is usually the responsibility of your nonprofit human resources team or financial professionals. No matter who is responsible for issuing these forms, it’s beneficial to understand which ones are necessary as you consider your nonprofit’s staffing options and policies.
3. Tax Season and Nonprofit Audits
Because your nonprofit is exempt from paying federal taxes, the IRS has no reason to audit you. However, some nonprofits are required to conduct independent financial audits for one of several reasons:
- They receive more than $750,000 in federal funding each year.
- A grant application includes an audit as one of the requirements for securing funding.
- Their state requires nonprofits that bring in a certain amount of revenue (often $500,000 or more) to undergo audits.
- It’s written into the organization’s bylaws that regular audits should be conducted.
Even if your organization isn’t required to conduct audits, you might find it helpful to undergo one to find opportunities to improve your financial management strategy.
If you conduct an audit for any reason, your organization will first need to select the right external auditor for your situation and budget. Then, to prepare for the audit, you’ll need to reconcile your bank accounts, review all balances and transactions, and ensure all of your financial information is complete. Your nonprofit should also ensure your financial data is as hygienic as possible, which NPOInfo defines as resolving any issues related to ambiguous, duplicate, inconsistent, misplaced, or missing information.
These preparation steps can often take several weeks or months to complete, plus you’ll need to allow time for the audit itself and to complete any next steps coming out of it. It’s best to undergo an audit before completing your Form 990 so you can start implementing the auditor’s recommendations and record the changes you’ve made in your tax return. Therefore, your nonprofit should plan ahead to complete the audit well in advance of the Form 990 deadline and request an extension if possible.
Although nonprofits like yours are exempt from paying taxes, filing tax returns still requires a lot of time and effort for your organization. However, if you’re familiar with the Form 990 and the major employment tax forms, as well as how audits can affect your tax returns, you’ll be prepared for tax season. Consider working with a nonprofit accountant to better understand your organization’s tax filing requirements and ensure all of your forms are completed accurately. You can visit MNA’s Partners for Good Directory to find an accountant that specializes in nonprofits.
Guest Author: Jon Osterburg
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.