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Nonprofit Compliance Basics

Compliance Graphic

After incorporating in your state and setting up your nonprofit’s 501(c)(3) status with the IRS, the biggest regulatory concern that you’ll have is maintaining ongoing compliance with the law.  The regulatory filings required for both state and federal entities are used to determine whether your nonprofit has followed the necessary rules to qualify as a charity and to maintain your tax-exempt status.  A key point to remember about compliance is that good recordkeeping will be the foundation of your success in this area.


In this brief article, I’m going to cover at a high level the primary compliance concerns, starting at the federal level, then moving to the requirements of the state.

Federal Compliance

IRS Form 990

Every year, all 501(c)(3) organizations are required to file some version of IRS Form 990 with the Internal Revenue Service. Small public charities, those with under $50,000 in gross revenue, can file a brief, electronic return called Form 990-N. For all others, a much more detailed return is required (Form 990-EZ, 990, 990-PF, and/or 990-T).

Form 990 collects information about the nonprofit’s income and expenses, as well as program accomplishments, board members, and answers to numerous operational and board compliance questions. The form is not simply a statement of numbers similar to a private or for-profit tax return. There are a lot of subjective and narrative details required about the operation of the nonprofit. I recommend following the link above for our more detailed article on Form 990.

Failure to file a Form 990 in a timely annual fashion can result in significant penalties (up to $20/day for late filing fees). Failure to file a Form 990 for three consecutive years results in an automatic revocation of 501(c)(3) status.

Other Federal Considerations

In addition to filing the Form 990, a nonprofit that has employees is also subject to regulations affecting the workplace. These filings can include payroll and tax reporting on an annual and/or quarterly basis. These filing requirements are essentially similar to what is required in for-profit companies, but not exactly the same. Some of the common filings include Form 941, Form W2, and possibly Form 1099-NEC, 1099-MISC.

One of the things most businesses are very used to paying each year is federal unemployment taxes. The good news for 501(c)(3) organizations is that they are exempt for FUTA taxes, but usually not state unemployment responsibilities.

State Compliance

Charitable Solicitations Registration

Managing state filing requirements, especially for nonprofits operating nationally, can be an onerous process. The vast majority of states require nonprofits to register with the Division of Charities prior to soliciting donations. Nonprofits fundraising in multiple states must also register in each of those states, and renew that registration on an annual basis.

Certificate of Authority

Similarly, nonprofits whose corporate headquarters are in one state, but will have an ongoing physical presence in another, must usually register as a foreign entity in the other state by requesting a Certificate of Authority. There is considerable variability between states with regard to each state’s nonprofit requirements, so recordkeeping with regard to activities in each state is of utmost importance.

Annual Corporate Report

In addition to compliance filings, nonprofits are also required to file business operations documents related to state-specific workplace rules. You must file a corporate annual report for your state of incorporation, plus each state in which your nonprofit has a Certificate of Authority.

Employment-Related Filings

You may be responsible for employment tax, workers compensation, and unemployment tax to state regulators. At the state level, employment-related regulations often differ from the requirements of for-profit companies.

Good Recordkeeping Practices Are a Must!

Implicit in all of this, as we said at the top of the article, is good recordkeeping.  For most of these compliance concerns, an accurate and complete set of financial books and records are essential in being able to accurately report these things. We’ve written plenty on the topics of both recordkeeping and bookkeeping, plus produced numerous videos on the subject for our YouTube channel.  Make sure and check all those out for more details.

The Board's Responsibility in This

A nonprofit’s board of directors is legally accountable for ensuring that the nonprofit’s federal and state compliance records are up to date. Whether prepared by a professional or an employee, the important thing is for the records to be detailed and accurate. Usually the board member responsible for keeping track of this activity is the Treasurer, but the entire governance team is ultimately accountable.

All of the information necessary for the Form 990 and other compliance filings should be available if your organization has made detailed recordkeeping an operational priority. For more information on recordkeeping, check out our blog post on best practices, as well as our information on fiduciary duties of board members.


As I said in the outset of this post, we are only covering the highlights in this article.  Consider it the view of compliance from 30,000 feet.  For more of a drill-down, we’ve provided extensive linking in this article to far more detailed coverage of the topics.

Don’t risk your nonprofit’s mission by being lax about compliance.  Staying on top of the things required of you is a key component in maintaining a healthy and successful organization.

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 7 Comments

  1. Hi Mr. McRay, I’m involved with a Washington State public school affiliated sports booster team that is a 501C3 and I’m wondering if there are rules/laws about money being spent on offsite locale parties. For example, if the JV team decides to do an overnight and wants to use money for food and entertainment, is that legal? Technically, the players are members of the booster club and I also worry about the ethics of using “charity” money for private parties. Please let me know if I’m worried about nothing or if I should be speaking up! Thanks so much.

    1. Maybe, or maybe not. Since these types of booster clubs are usually established to support youth sports groups, any legitimate expense for the group is likely OK. That can include food and entertainment, within reason. The bigger issue may be appearances. If donors see these activities as excessive and, consequently, not a good use of donated money, it may make it harder to raise future support.

  2. If a non-profit is established to provide financial assistance for cancer patients and the founder/President/Board member has cancer, can they be a recipient of that financial assistance as well as the public?

    1. The situation, as presented, is an obvious conflict of interest. That said, if the board of directors were to approve such assistance, without the input or influence of the President, it may be considered sufficiently at arms-length.

  3. I have a question? I work for a non prophet organization it is a shelter for domestic violence. When I started working as a shelter worker they told me we have paid holidays, we after I take the job I find out yes they have paid holidays for everyone that works there except the shelter workers, they only get paid for the holiday if you work it, you get paid for 16 that day if you work , but if you are scheduled off you don’t get paid. My days off are Monday and Tuesday if the holiday falls on my off day I am just out of luck no extra paid day off. I really don’t see how that is right. It’s like we the office works get steak today but you shelter works are less than us you only get chicken. When I asked the director about this she said it was a decision the board made.

  4. We are a small 501(c)(3) non-profit company that has a fund that purchases and lends out medical equipment to a school district’s employees and retirees. Each year we, operates a yearly raffle to purchase the medical equipment to lend out. Our solicitation says purchase tickets to provide medical equipment at $1.00 per ticket. Complying with the Secretary of State, we set up a separate “raffle checking account” to deposit the money from the ticket purchases. Many of our retirees buy a book of tickets, and write checks for over the price of the tickets they purchase, indicating to use the overage as needed for the fund. When the final accounting of all the deposits received is complete, we have kept track of ticket-purchase money and overage money separately. We then move the non-ticket purchase money out of the raffle checking account into the regular fund account. The Sec of State is now saying they don’t understand why we move the money for non-ticket donations out of the raffle account (set up specifically to buy equipment) into the fund it serves. How do we explain this, and is it correct what we’re doing?

    1. I’m guessing the reason the Sec of State is challenging you is that, generally, raffles are governed by charity gaming laws. Since the law necessitates a separate checking account, using the account for what amounts to donation purposes may be a violation. If you are unable to resolve this with the state, you may simply wish to deposit monies donated above the cost of the tickets directly into your operating account, thereby avoiding any co-mingling confusion.

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