Church & Non-Profit Explained (Part 3)

Federal Taxes fall into two categories:

  1. Federal Income Tax
  2. Federal Unemployment Tax

Federal Income Tax

As discussed in the previous section, churches that operate according to IRS 501(c)(3) guidelines are exempt from federal income taxes. As such, “net income” disclosed on the church’s “Profit & Loss Statement” is not subject to federal tax. These churches are referred to as “non-profit”, “tax-exempt” and / or “charitable” institutions. This is in contrast to “for-profit” companies which must pay federal income tax on “net income”.

Federal Unemployment Tax

Federal Unemployment Tax is a nominal tax that the federal government levies upon employers (not employees) to finance unemployment claims. As mentioned several times now, churches that operate according to IRS 501(c)(3) guidelines are exempt from federal taxes and that includes federal unemployment taxes.

State Taxes fall into three categories:

  1. State Income Tax
  2. State Sales and Use Tax
  3. State Unemployment Tax

State Income Tax

State income tax is similar to federal income tax in that a tax is levied on the net earnings from the company’s operations, and in this case, it’s levied by the state rather than the federal government. Some, but not all, states exempt churches from state income tax. A filing with those eligible states is required in order to obtain the exemption. The Secretary of State and the Attorney General offices of your state will provide you guidance on their state tax laws including how to file for exemption. We can assist you as well.

State Sales and Use Tax

State sales and use tax involved two tax applications: 1) taxes on goods and services purchased by the church, and 2) taxes on goods and services sold by the church to it’s members and others.
Regarding the former: many, but not all, states provide sales tax exemptions for goods and services purchased by non-profit organizations (for example, Florida and Tennessee provide sales tax exemption but Georgia does not). For those states that do provide sales tax exemption, the states require you to apply for and obtain a Consumer Certificate of Exemption or Letter of Exemption, which sometimes includes a serial number. This number is often called a Tax-Exempt Number” (and should not be confused with your federal EIN). These Consumer Certificates of Exemption and/or a Letters of Exemption are necessary when making purchases on behalf of the church. In order to identify the entity as exempt from sales tax, vendors request these Certificates or Letters. They are usually not granted by the state until the church is operational, i.e., can prove consistent worship services.
Regarding the later: some states exempt churches from either having to pay or collect sates tax on items sold by the church.

In both cases, you will need to research the sales tax legislation in your state. There are presently five states with no sales tax law ? Alaska, Delaware, Montana, New Hampshire and Oregon. We can assist you in identifying the state sales tax legislation particular to your state and completing the procedures needed to qualify.

State Unemployment Tax

Similar to Federal Income Tax, State Unemployment Tax is a tax levied on employers (not employees) to finance unemployment claims. With the exception of Oregon and New York, churches operating as 501(c)(3) organizations are exempt from paying state unemployment taxes.

Sanford
North Point Community Church

2 Comments

  1. Andrew
    Posted June 12, 2009 at 11:56 am | Permalink

    Aren’t you forgetting Federal Employment Taxes (FICA)?

    Andrew

  2. Terry Ehlmann
    Posted August 25, 2009 at 8:32 am | Permalink

    can a non-profit organization pay in anyway to insure their employees will be able to collect unemployement in case of downsizing?

    Just because the state does not require you to pay, shouldn’t you be able to?

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