Filing Taxes for Your Chapter
In the United States, governments generate operating income through taxation. The Internal Revenue Service (IRS) is responsible for collecting federal taxes. For a corporation, this is usually a percentage of your profit, unless the IRS classifies you as tax-exempt. States, counties, cities, townships, and other local governments can also tax. You need to remember that even though your corporation is tax-exempt at the federal level, you may still have a tax liability at a local level.
Corporate Federal Income Tax
The Fraternity is organized as a 501 (c) 7 non-profit corporation and is recognized by the IRS as tax-exempt. We are allowed to list your chapter corporation as a subordinate group, which means that you will also be exempt from FEDERAL taxes, but NOT filing a tax return. Annually, our finance office compiles a list of our subordinate groups for the IRS. We report your Federal Employer Identification Number (FEIN), which is the number that you were assigned when you originally registered your corporation with the IRS. We will continue to list that FEIN as a subordinate group until your chapter closes.
Even with federal tax-exempt status, you WILL still need to file with the IRS annually. The filing deadline is the 15th day of the 5th month after the close of your fiscal year. For TKE, our fiscal year runs June 1 to May 31, so we MUST file before October 15. Most chapters use the same fiscal year as the Fraternity.
If your gross income is less than $50,000 you may file a 990-N (E-Postcard). The general rule is that tax-exempt corporations that have more than $50,000 in gross income are required to file Form 990 before the filing deadline. You may be able to file Form 990-EZ instead of Form 990 if your gross receipts for the year are under $100,000 and your total assets at the end of the year are under $250,000. You may also be required to file Form 990-T if you receive more than $1,000 from non-members. The penalties for not filing, or filing an incomplete return, can be stiff: $20 per day, up to the lesser of $10,000 or 5% of gross receipts.
Social Security and Medicare
The Federal Insurance Contributions Act (FICA) requires that a percent of the income you earn as an individual be paid into Social Security and Medicare. If your corporation pays employees, you are responsible for making sure those employees pay FICA. You calculate the FICA due for each employee, take half from their pay, and match the other half at your expense. Both halves must be transmitted regularly to the IRS, who imposes penalties for non-payment and late payment.
Individual Federal Income Tax
If your corporation pays employees, you must withhold a portion of their pay and transmit it to the IRS as payment for their federal income tax. The amount of this withholding is determined by Form W-4, which must be completed by each employee. Generally, you are not required to withhold federal income taxes for people who are involved in domestic services, like cooks, maids, housemothers, houseboys, janitors, or waiters. However, the employee is still subject to federal income tax. You also do not withhold federal income tax for independent contractors. The IRS will penalize you for non-payment, or late payment, of this withholding.
A corporation that is considered an employer is subject to Federal Unemployment Tax (FUTA). Additionally, each state has enacted an unemployment tax statute, which requires separate reporting obligations. Typically, unemployment taxes paid to a state are considered a credit against FUTA.
State Income Taxes
Just because your corporation is tax-exempt with the IRS, you may still be considered a taxable corporation by your state. If so, you will have to file by the deadline and pay taxes on your profit. Each state has a department, usually part of the Secretary of State, that is responsible for corporations. Check with this department to see that you are an active, tax-exempt corporation. But know that even if you are an active, tax-exempt state corporation, you may be required to file a report each year with the state department that collects taxes.
Other State Taxes
Most states charge a sales tax on the purchase of goods and services. As a tax-exempt state corporation, you may not be required to pay this sales tax for purchases used by your corporation. Many states have limited this exemption to organizations classified by the IRS as charitable or educational. In these cases, your chapter likely does not qualify. But, if you do qualify for this exemption, your state will issue your corporation a certificate that you can present to a merchant when you purchase goods or services.
If you are an employer, you will be required to file and pay state unemployment tax. The state department responsible for this tax is usually the department of labor. The money you pay for state unemployment tax is often considered a credit against any federal unemployment tax that may be due.
Although it is classified as a fee and not a tax, most states charge an annual fee to maintain registration as a corporation. This fee is usually due to the department of corporations.
Local governments (counties, cities, townships, school boards, water districts, mosquito control districts, etc.) are usually funded by Ad Valorem tax, which is a tax assessed to the property owner, based on the fair-market value of the property. Typically the property appraiser sets the value and the controller collects the tax, though this varies from state to state. If you have a mortgage, the property tax is often paid to your mortgage company, who sends the tax to the government for you.