Nonprofit organizations play a significant role in the US economy. In 2022, there were 1.97 million nonprofits operating in the US, including 1.48 million 501(c)(3) tax-exempt organizations, according to the IRS.
The nonprofit sector accounted for 10.2% of all private-sector workers in 2017, the most recent year data is available from the Bureau of Labor Statistics. Most nonprofit jobs — 66.7% — are in healthcare and social assistance, followed by 16.2% in educational services.
What is a nonprofit?
Nonprofits are organizations that are exempt from paying federal income taxes because they don’t pass profits along to shareholders or individuals, according to the IRS. The most common types of nonprofits in the US are “501(c)(3)” organizations, a reference to the section of the Internal Revenue Code that grants tax-exempt status to charitable organizations, churches and religious organizations, and private foundations.
Charitable organizations
The IRS defines charitable organizations as those that dedicate their work and assets to charitable, religious, educational, scientific, and other causes that benefit the public. Most charitable organizations must apply for tax-exempt status from the IRS and file annual reports on their income and expenses. This group includes large and small charities, private schools and colleges, museums, arts organizations, research institutes, amateur sports leagues, and more. Donors to these organizations can claim charitable deductions on their tax bills.
Churches and religious organizations
Churches and religious organizations of all religions and denominations also get tax-exempt status under section 501(c)(3), according to the IRS. They don’t have to apply for recognition by the IRS (the agency automatically grants tax-exempt status to organizations in this category), nor must they file annual reports to maintain their status. Still, many do follow these procedures to provide assurance that the organization’s activities are tax-exempt and donations are tax-deductible.
Private foundations
Private foundations are charitable entities primarily funded by a small number of donors, according to the IRS. Those donors can include individuals, families, small groups of individuals, or corporations. Donors typically contribute large sums of money as an endowment, and investment income is distributed as grants to other nonprofits and individuals for charitable purposes. Foundations are subject to more rules and regulations than charitable organizations and must pay taxes on investment income.
Also, 501(c)(3) organizations cannot direct earnings to private shareholders or individuals. They’re also not allowed to engage in political activity, including influencing legislation or supporting candidates for federal, state, or local office.
What are other types of tax-exempt organizations?
Seventy-five percent of all tax-exempt organizations in the US are 501(c)(3) nonprofits . The Internal Revenue Code includes more than 20 other categories of tax-exempt organizations under section 501(c).
Additionally, political organizations — including political parties, political committees, political action committees (PACs), and so-called super PACs — are tax-exempt. These political groups are often called “527s” because they receive tax-exempt status under Section 527 of the Internal Revenue Code, rather than Section 501. These were the most common types of tax-exempt organizations in fiscal year 2022:
