Religious organizations are recognized with a 501(c)(3) status by the Internal Revenue Service (IRS). Organizations that wish to receive this status must complete some required paperwork and file it with the IRS. Once you have received this status, your group will be listed on the IRS website, where you can search for charities. To avoid being on the revoked status list, there are some things you should know.
Groups that have received this status are generally exempt from paying taxes. This exempt status does not limit their requirements for knowing and following the IRS rules. The details within each rule may require you to pay taxes. Having a high level of knowledge about how the IRS views your organization will help you to make good decisions. It will also ensure that you file the necessary paperwork on time. Gathering this information will give you the tools to educate everyone who works or volunteers for your group about essential topics. If your group has just received their status or is unsure what the rules are, this guide will get you started.
Record keeping must be done to maintain a good status.
Your organization likely invested a good deal of time into earning the 501(c)(3) status from the IRS. Receiving that status may exempt you from certain taxes, but it does not exempt you from keeping good records. In the event of an audit, it is crucial that you can provide an IRS agent with all documentation about your organization. This can sometimes seem challenging for nonprofits already operating with a limited number of staff. These records must be maintained to ensure you can keep your 501(c)(3) status. What type of records should you keep?
- The first thing is to have all of your financials in order. If you do not have staff in-house for this job, consider outsourcing this to a bookkeeper or accounting firm. It does not matter how these records are kept, but all monies coming into and out of the organization should be tracked in detail.
- To validate your status, an IRS agent may ask you for documents detailing your organization. This could include any bylaws, meeting minutes, property records, and a general overview of the group.
There are income tax rules to follow for employees.
Many non-profit organizations have much of their work done by a strong force of volunteer workers. However, there is generally a staff of people internally that oversee the business’s daily operations. These internal workers will be on the payroll of the organization, and each one may have different rules regarding the taxes required.
- If the people working for you are employees, you will be responsible for withholding income and FICA taxes from them. You will also need a mechanism to report this income to the IRS every quarter. Smaller organizations may be permitted to file annually.
- Ordained, licensed, or commissioned ministers are not required to have income or FICA taxes withheld from them.
- Housing allowances for ministers may be excluded from their gross income but will not be an allowed deductible.
- Churches that have religious reasons not to pay Social Security and Medicare taxes may be exempt but must file the necessary documents at the correct time.
Reimbursements for employee expenses may or may not be taxable.
Every business has expenses for their employees to carry out their daily work. Expenses could be from mileage reimbursement while delivering care packages to seniors. An employee may be meeting with a close organization to collaborate over dinner. There may be a conference that will benefit the organization that requires airfare and hotels. All of these are examples of eligible business expenses for employees. However, the IRS has specific rules for how these must be classified.
- Accountable Plan – This type of reimbursement requires the employee to maintain detailed records for all expenses. Each expense must contain the details of how it relates to the business’s operations. When the organization uses this plan, these expenses are deductible on the employee’s tax return.
- Non-accountable Plan – In this situation, an organization gives an employee an expense allotment. This could be paid out weekly, monthly, or annually. If the employee receives this money without the requirement of keeping records, the money is considered income. It must be claimed as such on their tax return, and the expenses cannot be deducted.
Hiring a Professional
As with anything within the IRS documentation, there are many exceptions to every rule. The rules also periodically change, so having access to a strong accounting firm will help you to manage these changes. Working with an experienced CPA firm, like Hayes & Associates, will ensure your charitable organization is always on top of any changes to the rule. They will also guide you through filing requirements and deadlines.