Essentials to Nonprofit Tax Compliance

Starting a nonprofit organization can be a complex process that involves several steps. One of the most crucial steps is to submit Form 1023 to the IRS to register for 501(c)(3) status, which grants tax-exempt status. However, it is important to note that maintaining this status requires that all funding is reinvested back into the organization. To ensure compliance, nonprofits must file tax returns and distribute additional forms for employee income taxes annually.

An article from Wild Apricot highlights three critical aspects of nonprofit tax compliance:

1. Keep Detailed Financial Records:

Maintaining comprehensive financial records is crucial for accurate tax reporting. Essential documents include past tax filings (Form 1023 and IRS status declaration), financial statements (income statement, balance sheet, cash flow statement, and functional expense report), and transaction records. Nonprofits should ensure clean financial data, checking for any ambiguous, duplicate, inconsistent, misplaced, or missing information.

2. File Your Form 990 Correctly and on Time:

The IRS Form 990, the annual nonprofit tax return, comes in different versions based on annual gross receipts. The guide details four versions: Form 990-N for small nonprofits, Form 990-EZ for mid-sized nonprofits, Form 990 for large nonprofits, and Form 990-PF for private foundations. Filing deadlines vary but generally fall on the 15th day of the fifth month after the organization’s fiscal year ends. Late filings incur fines.

3. Understand the Different Employment Tax Forms:

Nonprofits, as employers, need to file various employment tax forms. Form W-3 reports staff members’ total compensation and income tax withholdings, while Form W-2 is distributed to individual employees. Form W-9 collects tax identification information from contractors, and Form 1099 reports miscellaneous income to the IRS. The deadline for filing Form W-3 and issuing W-2s and 1099s is January 31 of the following year.

While the article provides valuable tips, it emphasizes that working with a nonprofit accountant is the best way to ensure compliance with all tax reporting requirements. Accountants can offer guidance and assistance, especially in complex situations, drawing on their experience to address nonprofit-specific challenges.