Annual Filings for 501(c)3 Public Charities
An important part of maintaining an organization’s 501(c)3 tax-exempt status is correctly filing paperwork. It may be a tedious job, but it is essential for any charitable organization. Some may wonder why so much paperwork is involved in obtaining and keeping a charitable status, but it all has to do with how the government looks at tax exemption.
When you are tax-exempt, you are not paying taxes on income. If you are a (c)3 organization, your donors are also receiving a tax deduction for their donations. Because the government is giving the organization a break on paying taxes, those organizations are officially seen as federally subsidized. As such, the government has a vested interest in being sure that what happens in day-to-day operations matches the stated goals and policies of the organization, and that means completing annual paperwork. In recent years, the ability to complete filings online has increased, which means the IRS can run algorithms to identify potential fraud and misuse of funds.
When an organization does not keep up with the paperwork, they put their tax-exempt status at risk and may face penalties or other legal troubles. To stay in compliance and reduce liability, there are three main areas to cover: federal filings, state filings, and annual reviews.
Federal filing requirements
Federal filings begin with the IRS documents required to create the corporation, including those to receive an EIN (Employer Identification Number) and the 1023 or 1024 to establish tax-exempt status. Once established as a tax-exempt public charity, there are annual requirements to keep that status.
You will need to file annual tax returns at both the state and federal level. While your tax-exempt status exempts you from income taxes, you’re not exempt from payroll taxes. When setting up your staff and contractors, there are very specific rules on classifications for employees versus independent contractors. Repercussions for misclassifying an employee as an independent contractor can include the IRS seizing the personal bank accounts of the board members. Being sure you properly classify, file, and pay payroll taxes is extremely important to limit the liability of your organization and board members.
“Being sure you properly classify, file, and pay payroll taxes is extremely important to limit the liability of your organization and board members.”
Additionally, you will need to file a Form 990 every year. This form asks for detailed information on how your organization is governed, the activities that you engage in, and your financial information. It is part of the basis of your tax-exempt status, and it must be updated to include changes in your mission, bylaws, assets, board of directors, and a host of other details surrounding the work of your organization.
State filing requirements
When you create a 501(c)3, there are certain filing requirements at the state level. In addition to filing tax returns for the state where you’re located, you must file a charitable registration for every state in which you fundraise. These filing requirements vary from state to state and must be done before you solicit donations in each state. Depending on the state, you may need to file updates annually.
Remember that your status as a nonprofit only exempts you from income taxes and doesn’t include an exemption from sales tax or property tax. Sales tax exemption is a separate process and must be filed at the state level. Filing a property tax exemption with the county may release your organization from the need to pay property taxes.
Annual statements and reviews
The final category of paperwork to file is not required in every situation; however, it is still important and a good practice. Staying current with annual statements and reviews can protect the organization. We know that a well-governed organization leads to a strong organization and a lower likelihood of abuse. The IRS recognizes this and sees annual statements and reviews as indicators of good governance, and auditors like to see this documentation as well.
Some annual statements to file include documentation that the board has read and understands the board policies, conflict of interest statements, and whistleblower policies. Often auditors will request this documentation in the course of their work, and these documents show that the board understands the guidelines and how they should be operating.
Another good practice is to review and document that compensation is reasonable and there is no conflict of interest related to compensation of employees or contractors. Oftentimes this review is overlooked, and the organization simply pays what they believe they can pay. However, it’s better to review compensation annually and document any justification for pay that is under or over market value.
Organizations should also check annually that they are still operating according to their original filings, including the 1023 or 1024 forms and the first 990. If there are changes to the nature of the work, new programs that have been added, or new assets, that documentation needs to be updated. This includes basic updates like a change of address, new board members, or a switch of the registered service agent. The registered service agent is the person who would be served court summons. If this documentation is never updated, it is possible that you could miss a court date and be at fault for that. Some of these changes can be made on Form 990, while other changes may need to be submitted through a different process.
Finally, organizations should review their insurance coverage and assets annually. Your insurance coverage needs to match the scope of your operations and your assets. If something has changed in either of those areas, a change of insurance is in order. Regularly reviewing insurance coverage is the best way to keep your organization covered properly.
Annual filings, reviews, and other paperwork are an important task for every 501(c)3. While these tasks can seem tedious, they protect your organization. To demonstrate that your organization is well-governed and protect it from abuse, spend the time and resources necessary to properly complete your annual filings.
If your organization needs help completing its annual filings or has legal questions related to annual filings or reviews, reach out to the Nonprofit Solutions team to schedule a consultation.
