A Primer on the Rules and Regulations of Tax Exemption for Fraternities and Sororities
From San Diego State to the University of California, fraternities and sororities have held a special place in the hearts and minds of college students for more than a century. However, if you are in charge of a Greek Letter Organization (GLO), it is vital that you take a periodic break from hosting parties and charitable events to consider your chapter’s tax responsibilities.
What is the Tax Status of Fraternities and Sororities in California?
In the state of California, and throughout the U.S., most fraternities and sororities are classified as tax-exempt social clubs under section 501(c)(7) of the Internal Revenue Code. This designation means that these organizations are exempt from paying federal income tax on business-related income.
Do Fraternities or Sororities Have to Pay Any Federal Taxes?
Though their classification as 501(c)(7) social clubs allows Greek Letter Organizations to avoid paying taxes on their business income, it does not exempt them from all federal taxes. For instance, fraternities and sororities than have full-time or part-time employees are required to pay FICA taxes on a quarterly basis.
Similarly, GLOs must also pay taxes on their unrelated business income. Such revenue generally includes any money received from non-members.
What Steps Must Greek Letter Organizations Take to Maintain Their Tax-Exempt Status?
The loss of tax exemption for fraternities and sororities can be financially catastrophic. As such, the leaders of such organizations should take the following steps to ensure that this nightmare scenario never occurs:
File All Necessary Paperwork
GLOs that wish to maintain their tax exemption in California must ensure that they file all necessary documents with the Internal Revenue Service on an annual basis. A brief list of some of the forms that may need to be submitted would include:
- Form 940
- Form 941
- Form 990
- Form 990-EZ
- Form 1099-MISC
- Form 1096
If you aren’t sure which documents your organization needs to fill out, a quick call to your San Diego tax attorney should point you in the right direction.
Avoid Discriminatory Practices
According to the IRS, a social club may be stripped of its tax-exempt status if its charter, by-laws, or written policy statements provide for “discrimination against any person based on race, color, or religion.” Thus, if a fraternity or sorority wishes to maintain their 501(c)(7) classification, they must avoid engaging in discriminatory practices.
Avoid Excessive Unrelated Income
The Internal Revenue Code allows social clubs to receive a small amount of unrelated income (typically from non-members) each year. However, if an organization appears to be receiving too much revenue of this nature, the IRS may choose to take away its tax-exempt status. Accordingly, it is generally a smart idea for fraternities and sororities to limit the income they receive from outside sources.
Your Trusted San Diego Tax Attorney
If you lead a local fraternity or sorority and need some assistance obtaining or maintaining tax exemption in California, you have come to the right place. Semanchik Law Group has been helping nonprofit organizations and social clubs stay compliant with state and federal regulations for years. Give us a call today at (619) 535-1811 to speak with a member of our experienced legal team.