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Exemptions from Federal Payroll Taxes

Some types of businesses, such as non-profits. can claim exemptions from some federal taxes.

  • Non-profit organizations classified under Section 501(c)(3) are exempt from paying Federal income and FUTA taxes for the business, but not FICA Taxes. These organizations must still withhold Federal income and FICA taxes from their employees. For more information on the requirements for 501(c)(3) exemption, see this IRS guide to Charitable Organizations.
  • Non-profit organizations classified under other parts of Section 501(c) are exempt from FUTA taxes, but not Federal Income or FICA taxes. These organizations must also withhold Federal income and FICA taxes from their employees. Examples include social clubs, employee benefit funds, and veterans organizations. For more information, see this IRS guide to Other Non-Profits.
  • Political organizations who perform exempt functions, i.e., to influence the election of a candidate, may be exempt from FUTA taxes under IRS Section 527.
  • Schools, railroads, and government agencies can claim exemption from liability for Social Security and Medicare taxes.

Exempt organizations must still file Forms 941 or 944.

All claims for exemption should be supported by documentation. The IRS will automatically revoke an organization's tax exempt status the organization fails to file a required return or notice for three consecutive years.

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