501c3 Compliance Tips

Justin Avellar
May 14
3 min read

501c3 organizations can drive real impact with their federal tax exemption. In our first post, we explained what a 501c3 was. In our second post on 501c3s, we described how to apply for 501c3 status. With numerous regulations that 501c3s face, we decided to discuss compliance requirements in this post.

What is Compliance?

Compliance means that your organization acts in accordance with the law. Compliance requirements may differ depending on your state, funding, and contracts you've entered into.

Restricted Activities

Private Purposes

501c3 organizations must be organized and operated exclusively for charitable purposes. The IRS considers the following purposes 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.

This means that 501c3 organizations cannot serve private interests by using any earnings or assets towards private purposes. Further, none of its earnings can inure private shareholders or individuals. If a 501c3 organization does serve private interests, then the IRS may destroy the federal tax exemption — even if the nonprofit does further charitable purposes.

Political Activities

501c3 organizations must also not engage in activities that benefit shareholders or influence legislation. Lobbying, propaganda, and other legislative activities can only occur in a limited capacity.

State and Federal Requirements

Form 990

501c3 organizations must file Form 990 with the Internal Revenue Service every year. Organizations completing Form 990 provide information about its income and expenses, program accomplishments, and various compliance matters. If your organization is a public charity with under $50,000 in gross revenue, you can file Form 990-N, instead – a brief, electronic return.

Organizations that do not file Form 990 according to the IRS’ deadline may face significant penalties, such as $20/day for late filing or revocation of 501(c)(3) status should the organization not file for three consecutive years.

Employment Law

501c3 organizations that have employees must do payroll and tax reporting on an annual or quarterly basis. 501c3 organizations are exempt from federal unemployment taxes. However, each state has unemployment responsibilities, and 501c3 organizations are not exempt from those. We will discuss this point further below in this post.

State Requirements

Foreign Entity Registration

If you plan to have a presence in multiple states, you must generally register as a foreign entity in the state that is not your headquarters.

Charitable Solicitations Registration

Most states, including the state of Washington, require nonprofits to register with the appropriate division of charities before soliciting donations. 501c3 organizations in Washington are required to register with the Secretary of State.

If you plan to operate your 501c3 nationally, you must register with the division of charities in each state you plan to solicit funds as well as renew that registration on an annual basis.

Corporate Report

501c3s are required to provide an annual corporate report for their state of incorporation as well as any state where they are registered to do business

Employment Law

If your organization employs people, you are subject to various employment laws, such as anti-discrimination laws, meals and breaks, overtime and pay, protected leave, and occupational health and safety.

Taxes

While 501c3 organizations are exempt from federal tax, they are not exempt from state tax. In Washington state, 501c3s are taxed like any other business. Therefore, 501c3 organizations must pay:

Business and occupation tax on gross revenues generated from regular business activities they conduct; and
Sales tax on all goods and retail services they purchase as consumers, such as supplies, lodging, equipment, and construction services.

501c3 organizations organizations must also collect and remit retail sales tax on their sales of goods and retail services.

The Board

The 501c3’s organization board of directors must ensure that both federal and state compliance records are detailed, accurate and up to date.

Conclusion

501c3 status provides a multitude of benefits to your organization; however, organizations looking to take advantage of this exemption must comply with a complex set of requirements

The information provided on this blog is not legal advice and should not be relied upon as legal advice. Anyone reviewing this post should use it as only a first step in understanding nonprofit compliance. You should consider consulting with a lawyer when obtaining and complying with 501(c)(3) status.