A 501(c)(3) organization is a type of non-profit organization that is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. These organizations are considered to be charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals organizations.
To qualify for 501(c)(3) status, an organization must be organized and operated exclusively for one or more of the above-mentioned purposes, and none of its earnings may inure to the benefit of any private individual or shareholder. Additionally, the organization cannot participate in political campaigns or lobbying activities.
Donations to a 501(c)(3) organization are tax-deductible for the donor, which can be an incentive for individuals and businesses to make contributions. Organizations that are designated as 501(c)(3) by the IRS must also file annual information return or notice with the IRS, such as Form 990, 990-EZ or 990-N, depending on the size of the organization.
What is the Requirements of a 501(c)(3) Organization
To qualify for 501(c)(3) status, an organization must be organized and operated exclusively for charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals purposes. It cannot serve any private interests, such as those of its creator, creator’s family, shareholders, or other designated individuals and cannot distribute any of its earnings to benefit them.
Additionally, a 501(c)(3) organization cannot engage in substantial lobbying activities or participate in political campaign activities, and its employees must be paid reasonable compensation that is commensurate with their job responsibilities.
To maintain its tax-exempt status under Section 501(c)(3), an organization must adhere to its stated purpose as reported to the IRS. For example, if an organization’s mission is to provide access to college education for underprivileged individuals, it must continue to operate within this mission. If it chooses to engage in a different activity, such as providing relief to poverty-stricken countries, it must first notify the IRS of this change in operations to avoid losing its tax-exempt status.
While some unrelated business income is permitted for a 501(c)(3) organization, the majority of its efforts must be focused on its exempt purpose as a non-profit organization. Income from unrelated business activities, such as sales of merchandise or rental properties, must be limited or the organization may lose its 501(c)(3) status. The IRS does not specify a specific percentage, but the law firm of Hurwit & Associates estimates that it should be between 15% and 30%.
Even though 501(c)(3) organizations are exempt from federal income tax, they are still required to withhold federal income tax from their employees’ paychecks and pay Social Security and Medicare taxes. They are however, not obligated to pay federal unemployment taxes.
Advantages and Disadvantages of a 501(c)(3) Organization
The 501(c)(3) status offers a variety of benefits for both the designated organizations and the individuals they serve. These organizations are exempt from paying federal income and unemployment taxes, and donors can claim tax deductions for their contributions.
501(c)(3) organizations are also eligible for government and private grants, as long as their mission aligns with the grant’s purpose and they demonstrate a need for the funds. Additionally, these organizations may receive discounts from retailers, free advertising through public service announcements, and donations of food and supplies from other non-profit organizations.
While the creation of a 501(c)(3) organization may be the dream of its founder, once established, it belongs to the public and serves a mission-driven purpose. To maintain its favorable tax treatment, it must operate within the legal guidelines for 501(c)(3) organizations.
Due to its public service nature, a 501(c)(3) organization must operate with transparency, and its finances, including salaries, are available for public review.
501(c)(3) Organization Examples
The American Red Cross, founded in 1881 and officially chartered by Congress in 1900, is one of the oldest non-profit organizations in the United States. Its mission is to prevent and alleviate human suffering in the face of emergencies by utilizing the support of volunteers and donations. Since its inception, the organization has focused on serving members of the armed forces and providing aid during disasters.
Operating in 191 countries, the Red Cross has the largest network of volunteers in the world. As a 501(c)(3) organization, it is divided into three divisions: National Red Cross and Red Crescent Societies, International Federation of Red Cross and Red Crescent Societies, and International Committee of the Red Cross.
The National Red Cross and Red Crescent Societies, which include the American Red Cross, work to relieve global human suffering by supporting subordinate organizations to provide disaster relief, education, and other related services within their respective countries. The International Federation of Red Cross and Red Crescent Societies provides global humanitarian aid during peacetime, such as assisting refugees. The International Committee of the Red Cross provides humanitarian relief for people affected by war or other armed conflicts.
Donations to the Red Cross are tax-deductible for individuals who itemize their deductions. Taxpayers who use the standard deduction may still claim up to $600 of their 501(c)(3) contributions as a tax deduction in 2021.
501(c)(3) Organization FAQs
How to Start a 501(c)(3)?
To establish a 501(c)(3) organization, you must first define the type of organization and its purpose or mission. Before selecting a name, make sure that it is available by searching for it. If it is available, register it with your state. If not, secure the name when filing the articles of incorporation. The articles of incorporation must be filed with the state in which it will be organized and in accordance with the state’s rules for non-profit organizations. After filing, apply for the 501(c)(3) IRS exemption (Form 1023) and state tax exemption for non-profit organizations. Then, create your organization’s bylaws, which outline how the organization will be structured and governed, and appoint and meet with your board of directors.
How Much Does it Cost to Start a 501(c)(3)?
The costs associated with creating a 501(c)(3) vary depending on the needs of the organization. However, some costs can be estimated. For example, filing the articles of incorporation with the state typically costs around $100. The IRS Form 1023 filing fee is $600, but for organizations that expect less than $50,000 in annual earnings, Form 1023 EZ can be filed for $275.
How Long Does it Take to Get a 501(c)(3) Determination Letter?
A determination letter is sent after applying for the 501(c)(3) exemption. The IRS will only say that “applications are processed as quickly as possible” and “are processed in the order received by the IRS.” However, the agency provides a list of 10 tips that can shorten the process. Depending on the type of form filed, it can take as little as two to four weeks (if filing Form 1023-EZ) or up to a year (if filing Form 1023).
Do You Need to Be a Corporation to Get a 501(c)(3)?
According to the IRS, to qualify for the 501(c)(3) status, the organization must be formed “as a trust, a corporation, or an association.”
What is the Difference Between a 501(c)(3) and a 501(c)(4)?
A 501(c)(3) organization is a non-profit organization established exclusively for charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals. These organizations are mostly prohibited from engaging in lobbying activities. On the other hand, a 501(c)(4) organization is a non-profit social welfare group that is allowed to engage in lobbying activities.