What Taxes is a Tax-Exempt Organization Responsible For?

business person adding the numbers on a calculatorTax-exempt organizations are exempted from paying income tax and federal unemployment tax… but they might have other tax liabilities that they’re responsible for.

Not Exempt from All Taxes

Here’s a list of taxes a tax-exempt organization still has to watch for:

  • FICA taxes. If the organization has employees, the organization will be responsible for paying the employer half of FICA taxes. The organization also has to deal with employee withholdings and getting those withholdings deposited with the government, filing quarterly reports, etc.
  • State unemployment taxes*. In most states, tax-exempt organizations need to pay into the state unemployment fund. (*-See the note below.)
  • Sales tax. Different states have different laws regarding sales tax and tax-exempt organizations. In Iowa, some tax-exempt organizations are exempt from paying sales tax on purchases. Those organizations are: government agencies (federal, state and local); private nonprofit schools located in Iowa; nonprofit hospitals and hospices; nonprofit private museums.

(*-NOTE: Technically, in most states, an organization can opt out of paying state unemployment tax, but then the organization becomes responsible for reimbursing the state if an employee ever draws unemployment benefits.)

Further Reading

  • Iowa Department of Revenue has a handy PowerPoint presentation about the sales tax responsibilities of tax-exempt organizations, which you can find here.
  • I wrote about the differences between the terms “non-profit” and “tax-exempt” in this post.