[US] Tax exemption for 501(c)(3) organizations

If you are a non-profit organization and have applied, and been approved for 501(c)(3) status, the IRS considers your business exempt from federal unemployment tax (FUTA).

In this article

What is a 501(c)(3) business?

These are non-profits, associations and groups that include churches, social clubs, civic leagues, and other groups that are organized and operated exclusively for religious, charitable, educational, or other specified purposes. These organizations must meet certain other requirements under the Internal Revenue Code Section 501(c)(3).

Payments for services performed by an employee of a religious, charitable, educational or other organization described in section 501(c)(3) that are generally subject to FICA (Social Security and Medicare) taxes if the payments are $100 or more for the year, are not subject to FUTA (unemployment) taxes.

—Read more about section 501(c)(3) organizations

As a business that is FUTA exempt, you will not be liable for employer federal unemployment taxes and will not be required to file Form 940. You can read more about that here.

Steps to take in Wave

Step One: Select non-profit type of business
When you create your business in Wave, we’ll start by asking you to enter some basic information so that Wave is customized to your needs. If you are classified as 501(c)(3), it is important that you select Type of Business: Non-profits, associations & groups.

Step Two: Mark FUTA exempt
When you work through Payroll Setup, it is also important that you mark yourself as Federal Unemployment Tax (FUTA) exempt. Here's how:

  1. Click Settings > Click Tax Profile
  2. Beside Federal Unemployment Tax
  3. Select Business is exempt
Was this article helpful?
1 out of 2 found this helpful