In the USA there are more than 1.5 million different charities working every day to raise money and support different causes.
Along with the large charities which you probably will have become familiar with through television ad campaigns, there are a number of smaller charities across the country too.
Large charities can raise millions of dollars every single year, and this might leave you wondering if charities are required to pay tax upon the money that they raise.
In this guide, we’ll be taking a look at how charity finances work and whether, or not, charities are required to pay taxes on the money they raise. We’ll also take a look at non-profits and find out if they are required to pay tax on their income too.
So, if you want to find out more, keep on reading!
What Is A Charity?
First things first, let’s establish exactly what a charity is. A charity, also known as a charitable organization, is a group whose primary objectives are philanthropy and social well-being.
Across the world, the definition of a charity is different, but generally it is agreed that charities are set up to help others.
Different charities are designed to help different causes. Money is raised by charities through a variety of different fundraising methods, and then this money is donated to help the cause which the charity was set up to support.
There are lots of different causes which a charity might be set up to support. This could include animal shelters, poverty relief, and charities which are set up to help fund research into life-threatening and terminal illnesses. But these are just a few examples.
The majority of charities are set up to improve the quality of life for those impacted by the cause. Animal shelters work to improve an animal’s quality of life by improving their health and finding them a new home.
Likewise, medical research charities work to find cures and ways to improve the quality of life for those suffering with a specific illness. But do charities pay taxes? Let’s find out.
Do Charities Pay Taxes?
In one word, no, charities are not required to pay taxes. Charities are known as non-profit organizations, so there is no requirement for taxes to be paid on funds raised because there isn’t any profit being made on this money.
Instead, the money is used to fund charitable exercises and activities, so the IRS does not require taxes to be paid on any “income”.
However, a large amount of charities do employ staff, and these staff will be paid a wage for the work that they do for the organization.
A lot of charities will primarily consist of volunteers, but almost all charities have at least a couple of staff members, and these people will receive a salary.
Even though these individuals work for a charity, they will be required to pay tax on their income because it is an income. So while charities do not pay taxes, individuals who work for charities will be expected to.
The fact that staff who work for charities have to pay taxes is something that confuses a lot of people into thinking that charities are required to pay tax. But the charity itself will not be required to pay tax on any money that is raised.
The only taxes that will be paid in association with charities is tax paid on the income of individuals who are employed by the charity.
What Is The Difference Between A Charity And A Non-Profit?
When you hear people talk about charities, you will often hear the term “non-profit” thrown around too. As we mentioned earlier, charities are actually a type of non-profit organization, but can the terms “charity” and “non-profit” be used interchangeably?
Let’s find out.
Charities and non-profit organizations are very similar to one another. Charities can be non-profit organizations, but they are not necessarily always the same.
The main difference between the two is that nonprofits use income to support their mission, whereas charities almost always use their income to improve life in different communities. The purpose is essentially the same, but the mission is a little different.
In other parts of the world, the difference between charities and non-profits organizations is a little more simple. For example, in the UK a charitable organization must be registered with Companies House to be considered a charity.
Once registered, charities will be given a number which they must display on all their fundraising things. In contrast, non-profit organizations can work the same as charities, they simply aren’t registered, and so they are treated differently for tax purposes.
What Is A Tax Exempt Non-Profit?
In the USA, you will often use the term “tax exempt non-profit” used in relation to charities, so let’s take a look at exactly what this term means.
As you would expect, a tax exempt non-profit is simply a non-profit organization that has actively sought tax exemption from the IRS. This tax exempt status officially declares that the organization doesn’t have to pay any tax upon any income that it raises.
In order to apply for this tax exemption, the non-profit organization has to apply directly to the IRS. The IRS will go through their information and see if the non-profit organization fits all the criteria to qualify for this tax exemption.
But once approved, that organization will not be expected to pay tax.
Based on this definition, a charity qualifies as a tax exempt non-profit organization as they are not required to pay tax on income. Instead the income that the charity raises can be used to fund the charity’s cause.
In short, no, charities do not pay any taxes on income that is raised through fundraising activities. Charities are a type of non-profit organization and as a result they are tax exempt.
This means that they will not be required to pay any taxes to the IRS once they apply for tax exemption.