People matter. If you’re formalizing a mission into a nonprofit, tax-exempt recognition is more than a checkbox, it’s what helps you accept deductible donations, qualify for grants, and operate with confidence. This guide walks you through formation, choosing the right IRS form (1023 vs. 1023-EZ or 1024/1024-A), filing steps, timelines, and what to do after approval, including people-centric payroll/HR tips so compliance doesn’t fall on one exhausted administrator.
Quick reference (official sources): IRS Publication 557 for exemption rules, How to apply for 501(c)(3) (Form 1023/1023-EZ via Pay.gov), EIN application, and the Tax-Exempt Organization Search (TEOS) to verify status.
Content
- First things first: what “tax-exempt” means (and doesn’t)
- Step 1: Form your nonprofit and get an EIN
- Step 2: Choose the correct application path
- Step 3: Prepare what the IRS expects to see
- Step 4: File online and pay the user fee
- Step 5: Understand timing, retroactivity, and while-you-wait rules
- After approval: operate like a public-facing organization
- People-first payroll & HR: small nonprofit realities
- Worked example: picking the right path
- Smart compliance checklist
- Frequently Asked Questions
First things first: what “tax-exempt” means (and doesn’t)
When the IRS recognizes your organization as exempt under the Code (for example, 501(c)(3) for charitable, educational, or religious purposes), the nonprofit is exempt from federal income tax on related activities. Recognition is federal; states may require separate registrations for charitable solicitation and may have their own sales/property-tax rules. Start with your state charity regulator (for example, the Maryland Secretary of State for solicitations).
Automatic exceptions: Certain groups don’t have to apply to be treated as 501(c)(3), including churches and very small public charities with normally ≤ $5,000 in annual gross receipts, although many still apply for a determination letter to reassure funders.
Step 1: Form your nonprofit and get an EIN
- Incorporate (or form your entity) with purpose and dissolution language that meets 501(c)(3) standards (so assets go to another charity upon dissolution). Publication 557 explains the organizing-document requirements.
- Get an EIN (free, online, immediate) directly from the IRS, not through third-party “helpers.” You’ll need it for banking, filings, and your application.
Step 2: Choose the correct application path
- 501(c)(3) organizations apply on Form 1023 (standard) or Form 1023-EZ (streamlined for eligible smaller orgs). Both are filed electronically via Pay.gov.
- Other 501(c) categories use Form 1024 (most types) or Form 1024-A (for 501(c)(4) social-welfare orgs). These are also e-filed on Pay.gov.
1023-EZ eligibility (at a glance): The IRS requires completing the 1023-EZ Eligibility Worksheet; if you answer “Yes” to any exclusion question, you must file the full Form 1023. Always rely on the current instructions (rev. dates change).
Special note for 501(c)(4): Most must also file Form 8976 (Notice of Intent to Operate) within 60 days of formation, separate from Form 1024-A. It’s a quick electronic notice with a fee and penalties if late.
Step 3: Prepare what the IRS expects to see
Typical requirements include:
- Organizing documents (with proper purpose/dissolution clauses)
- Bylaws
- Narrative of activities (what you do, who benefits, how activities further your exempt purpose)
- Financials (actual or projected)
- Board roster and key policies (e.g., conflicts)
Publication 557 and the form instructions outline what to attach; follow the e-file prompts on Pay.gov.
Step 4: File online and pay the user fee
All exemption applications (1023, 1023-EZ, 1024, 1024-A) are submitted electronically via Pay.gov with a user fee at checkout (amounts change, verify current fees on IRS.gov).
Step 5: Understand timing, retroactivity, and while-you-wait rules
- Processing & status: The IRS processes cases in the order received, sometimes requesting more information. You can check the official “Where’s my application?” page for expectations.
- Retroactive recognition (“27-month rule”): If you apply within 27 months of formation and qualify, recognition generally dates back to your formation date; otherwise, it may be effective from the application date. See Pub. 557 for details and exceptions.
- While pending, you must still file the appropriate Form 990-series return (and check the “application pending” box). If you have ≥ $1,000 in unrelated business income, file Form 990-T as well.
After approval: operate like a public-facing organization
Annual returns & public disclosure
Most exempt orgs file Form 990, 990-EZ, or 990-N each year, and many filings (including exemption applications) are publicly accessible, through your own office and via IRS systems (e.g., TEOS). Build a cadence for timely, accurate disclosure.
Public charity vs. private foundation (for 501(c)(3))
The IRS classifies 501(c)(3)s as public charities or private foundations, which affects filings and rules. Review the 509(a) frameworks and check the IRS overview before you assume your status.
Donations & acknowledgments
For donors to claim deductions on gifts ≥ $250, you must provide a written acknowledgment with specific content (amount/description, goods/services statement, etc.). Add this to your routine receipting.
Unrelated Business Income (UBI)
If you generate ≥ $1,000 in gross UBI, you must file Form 990-T (and pay any tax). Keep strong cost-allocation and activity tracking to avoid surprises.
State charitable registration
Federal recognition doesn’t equal blanket fundraising permission in every state. Many states require charitable solicitation registration before you ask residents for donations. Start with your home state regulator (example: Maryland Secretary of State / OneStop portal).
People-first payroll & HR: small nonprofit realities
Your compliance is stronger when your people processes are clear and simple:
- Timekeeping by grant/program. Track hours to funding sources for audits and board reports; export cleanly to the GL.
- Volunteer vs. employee. Volunteers can serve nonprofits, but FLSA rules apply; avoid misclassifying paid work as “volunteering.” Train managers on DOL basics.
- Stipends & allowances. Map to correct earnings codes and document your accountable plan approach for reimbursements.
- Benefits & filings. If you grow, consider ACA reporting and, for 501(c)(3)s, whether a 403(b) plan fits your workforce.
- Training & certifications. Use an LMS (even lightweight) to keep CPR/mandated reporter/other credentials current.
With PeopleWorX, you get modern payroll, time, and HR plus a dedicated human who already knows your mission and answers the phone. That’s our People Matter promise, tech + expertise, sized for SMB nonprofits.
Worked example: picking the right path
- Small community arts startup projecting <$50k receipts and <$250k assets, simple programs: likely 1023-EZ (if it passes the worksheet).
- Neighborhood social-welfare group advocating for safer streets: 501(c)(4) → Form 1024-A and Form 8976 within 60 days.
- Trade association for local cafés: often 501(c)(6) → Form 1024 via Pay.gov.
Smart compliance checklist
- Articles with IRS-compliant purpose/dissolution language (Pub. 557)
- EIN acquired (free)
- Select 1023 / 1023-EZ / 1024 / 1024-A path; verify EZ eligibility worksheet
- Pay.gov e-filing completed; fee paid
- If 501(c)(4): Form 8976 filed within 60 days
- Add 990-series filing tasks to your calendar (while pending and annually)
- Post-approval: appear in TEOS; make required public disclosures accessible
- Set up donation acknowledgments (≥$250) workflow
- Confirm state charitable registration where you solicit (e.g., MD)
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1) Do we need an EIN before applying?
Yes. Obtain an EIN directly from the IRS (free, online) and include it on the application.
2) 1023 or 1023-EZ, how do we decide?
Use the IRS Eligibility Worksheet in the 1023-EZ instructions. If you don’t meet all criteria, file the full 1023.
3) How long does IRS approval take?
Timelines vary and the IRS may request more info. See Where’s my application? for the latest guidance and reminders (e.g., file 990 while pending).
4) If our application is pending, do we still file a 990?
Yes. File the appropriate 990-series return and check “application pending.”
5) Is our 501(c)(3) automatically a public charity?
By default, a new 501(c)(3) is a private foundation unless it meets a public charity test under 509(a). Review the IRS criteria.
6) Are we allowed to fundraise nationwide once we get IRS recognition?
No. Many states require charitable solicitation registration before fundraising; start with your home state regulator.
7) What donor receipt is required for gifts ≥ $250?
Provide a written acknowledgment including the elements listed by the IRS (amount/description; goods-and-services statement, etc.).
8) What if we have revenue from activities unrelated to our mission?
If gross UBI is ≥ $1,000, file Form 990-T (in addition to your 990/990-EZ/990-N).
9) We’re a 501(c)(4). Do we have any special early filing?
Yes, most 501(c)(4)s must file Form 8976 within 60 days of formation (separate from Form 1024-A).
