501(c)(3) and 501(c)(4) are tax designations assigned to qualifying organizations by the Internal Revenue Service. These very similar terms can sometimes be confusing. But if you’re part of a charitable organization, both of these designations might be important to know. As your organization grows, successfully applying to the IRS for one of these statuses can help you save money by becoming exempt from federal taxes.
In this article we’ll help you understand the key differences between 501(c)(3) and 501(c)(4) so that you’ll have a better idea of which category your organization falls under. Then, if you so choose, you can pursue that status and become better equipped to forward your cause.
What is a 501(c)(3)?
If an organization is “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes” under IRS code, it can qualify for 501(c)(3) exempt status. In other words, it is exempt from paying federal tax.
501(c)(3) organizations must be nonprofits quite literally: they cannot earn money for individuals or shareholders. They also cannot attempt to take part in political campaigns or influence legislation via lobbying or other activities (more on that later).
501(c)(3) status is a powerful tool in a nonprofit’s toolkit. The money saved by not needing to pay federal taxes can be put back into the organization and its work to benefit the community.
Some examples of 501(c)(3) nonprofit organizations are:
- Religious organizations like the Muslim American Society
- Private foundations like Mackenzie Scott’s Yield Giving
- Social welfare organizations like Habitat for Humanity
What is a 501(c)(4)?
There are lots of types of organizations that don’t focus on making money but aren’t necessarily working solely for the benefit of others. These are broadly defined as “social welfare organizations” and fall under the 501(c)(4) designation. Some examples of social welfare organizations include civic leagues, local employee organizations, and some homeowners associations and volunteer fire companies. These organizations are not-for-profits, not businesses, and thus can apply for exemption from federal income taxation.
Here are some examples of 501(c)(4) organizations:
- The AARP is a social welfare organization, which are 501(c)(4) exempt
- The Chicago Teachers Union Foundation is a local employee organization
- Rotary International is an example of a 501(c)(4) civic league
What’s the Difference Between 501(c)(3) and 501(c)(4)?
So how are 501(c)(3) organizations different from 501(c)(4) organizations? The main difference is that donations made to a 501(c)(3) can be deducted from the donor’s taxes, while donations made to a 501(c)(4) cannot. 501(c)(4) organizations also don’t have to file an annual report with the IRS. While 501(c)(4) organizations often do some work for the good of their communities, their primary purpose is usually to benefit members in some way, either monetarily or through political lobbying. And though 501(c)(3) organizations are dedicated to a cause, they cannot show bias in political campaigns or education, or other political or legislative activities.
501(c)(3) vs. 501(c)(4) Comparison:
501(c)(3) Organizations | 501(c)(4) Organizations | |
Donations to them are tax deductible | Yes | No |
Must file annual report to IRS | Yes | No |
Can lobby and support a political agenda | No | Yes |
Neither 501(c)(3) nor 501(c)(4) organizations make money for an individual or shareholders, yet they serve different purposes and thus are subject to different taxation. You might sometimes read or hear the term “not-for-profit” used for 501(c)(4) organizations, while 501(c)(3) organizations are “true” nonprofits. You might even hear nonprofit and not-for-profit used interchangeably.
Note that there are some exceptions to the rule that donations to 501(c)(4) are not deductible: certain fire and rescue squads and veterans organizations can sometimes be deducted from the donor’s taxes. Any organization should be able to tell you if your donation will be tax deductible.
More 501(c) Codes
There are actually many other 501(c) codes, all the way up to 501(c)(29), in fact. These are all technically different types of nonprofits, in the eyes of tax law. Many might be meant to benefit their members rather than the greater good, as with 501(c)(3) organizations, but they are not businesses, and therefore can apply for federal tax exemption.
Final Thoughts
Now that you know the difference between a 501(c)(3) and 501(c)(4) you can choose which to pursue, if either. If you’re organization is growing and becoming more formalized, you’ll now have an idea of what you might qualify for. You and your board should be able to recognize whether your organization falls into the 501(c)(3) or 501(c)(4) category. If you’re still not sure, there a lots of IRS resources available to you online. Additionally, many state bar associations, attorneys general offices, and secretaries of state will have guidance for you locally.
FAQs
How do you become a 501(c)(3) organization?
The IRS has a convenient questionnaire that will help you find out if you qualify for 501(c)(3) status and how to apply. It begins by asking if your organization is a trust, corporation, or association (you must be organized as one of these three in order to move forward with your application), has an EIN, if you have an exact copy of your organizing documents (for example, your articles of incorporation, if you’re a corporation), and other questions as well as links to explanations of terms and other helpful information.
Once you have everything you need in order, you will fill out Form 1023, or Form 1023-EZ. If you’re approved by the IRS, you might receive your 501(c)(3) confirmation in as little as four weeks.
How much is a 501(c)(3) application?
You’ll need to be prepared to pay a fee for your application. This can vary depending on the size of your organization from as little as $275 to $600 plus the cost of an attorney.
