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hey y'all today i'm going to do a really basic video on the difference between sales tax and income tax for your 501c3 nonprofit let's get into it [Music] hey y'all this is tiffany with boss in the budget i help new and small non-profits get up and running if you need help with your non-profit make sure you are subscribed because i share videos about starting a non-profit how to run your non-profit in your first year and also about how to raise money for your new non-profit i share videos every week on those topics so make sure you are following me at boston a budget now i'm going to do a very basic 101 now i'm just going to get some stuff out the way before we even get into this video because i just need you to understand some things number one i am not an accountant and number two i am not your accountant so the information that i share in this video is for general information if you really need specific advice related to your nonprofit i suggest you contact a professional in your area that actually practices in your state because a lot of this depends on the different states that you're operating in the second thing i just wanted to share is that this is like a basic video on sales tax and income tax but there are plenty of people on youtube who do a better job at explaining accounting and what the sales tax mean for your nonprofit what does income tax mean for your nonprofit and how to deal with that so i'm not going to go all the way into details but i'm just explaining just enough so you know the difference because this has implications for the forms that you use and people get tripped up especially when they're starting and they don't know what form they should be thinking about how to approach it so that's why i wanted to do this video so i know you're like okay if you have to do all these caveats tiffany why are you doing the video but i'm doing the video because just for myself when i was first starting a non-profit and beginning to understand sales tax and income tax i was confused so i a lot of times will share videos based on my own experience and the things that i had to learn along the way so i'm just sharing it with you all right so in this video what i'm going to do is define sales tax versus income tax then i'm going to explain the different forms you have to fill out for your nonprofit depending on each one and then i'm going to talk about what that means for your donors and what that means for your organization so that's kind of the structure of this video and i'm going to put down like the different sections so you can skip to the sections below now first things first what's the definition of both okay so for sales tax it's a tax that is imposed on purchases so when people purchase an item then they have to often pay tax for that now that depends on the state because there are certain items in certain states that you don't have to pay sales tax on income tax is income that you make like anything that is considered as income so if you make any sort of income as an individual or as a business and the irs catches wind of it then they are expecting for you to pay tax on that income which is why at the end of the year we do our taxes because we have to make sure that we've submitted all of our tax that we're owed that are owed to the federal government now the differences between the sales tax and income tax is the the level right so for sales tax that's usually delegated to the states so each state has its own rules around sales tax what is supposed to be taxed what the customer has to pay in terms of tax and how the organization is supposed to deal with that if they're selling to someone right so this only comes to play for your nonprofit if you're selling items and you're collecting sales tax because the customer had to pay sales tax all right so keep that in your mind income tax any money that you make as a non-profit any money versus your you know your donations or whether you sold a product or you got a grant that's income right and so if that income is taxed that's what income tax is but as a non-profit the whole point of it is the benefit of it is that you don't have to pay that if you do make money and it's related to your charitable purpose then you are exempt hence the word tax exempt but i just want to be clear that that's at the federal level when we're talking about 501 c 3 status that means you're exempt from paying federal income tax now a little caveat is sometimes states have income tax too and sometimes states will allow you to be exempt from state income tax as well that's a different process that's a whole different level so when you're con you're thinking about taxes and the implications for your organization you have to remember that there are two different levels you need to deal with there's the state level and then there's the federal level okay so now let's move on to forms what does that mean for you in terms of forms and what's different so when we're talking about sales tax if you are a non-profit and you are selling a product or service that is taxable in your state that means that you need to collect the sales tax that you charge your customers and you need to submit that tax that you collected to the state so you should be keeping track of every purchase that you make because more than likely probably monthly you're going to have to send in that tax and pay it to the state if the state finds out that you're charging sales tax and you're not collecting right or you're not submitting it to the state then that can be a major problem for you so usually in each state you'll have to fill out a form that allows you first of all to sell items in your state and maybe different names so i can't say what the names are for every state and my state is called a sales and use tax certificate so you have to fill out a form to get your sales and use tax certificate and then what you have to do is sign up for an account at the government tax website for the state and then every month go in then record how many purchases or how many items you sold for the month and then how much tax you collected for the month and then you're gonna have to pay it directly to the state so that's different those are the forms and the process for that when it comes to your income tax if you want to be exempt from federal income tax then you need to fill out the 10 23 or the 1023 e z form okay those are the forms that you use to apply for 501c3 tax exempt status i actually talk a lot about these forms and this process so i'm linking above first of all a video that i did explaining the 1023 ez form and then another video that i did also about the biggest mistake people make when filling out these forms so when we're dealing with federal income tax and you want to be exempt from paying that then you would use those particular forms i hope you're still with me right so sales and use tax is when you're selling a product and you're charging the customer you have to fill out a form first of all to be able to do that as a non-profit and then you have to remit that tax to the state again every state is different right how you collect it what it's called is different so you need to do your due diligence and start with the secretary of state's office and if there's a department of assessment or taxation they can help you as well okay now i'm going to talk about what does that mean for your donors and what does that mean for you as an organization so for your donors for the people who are your supporters when it comes to sales tax exactly what i said if they are purchasing an item from you then you need to make sure that you're collecting sales tax there are a lot of you know different apps and services that will collect the sales tax for you so i'll just throw it out there ebay like if you're doing stuff i'm selling items on ebay then ebay will collect the sales tax and ebay will actually submit it for you to the state but you need to know what what the process is so you're not making mistakes or you're not doing something that the state expects you to do when it comes to federal income tax that means for your donors is that they can write off the donations that they give to you that's the implication for them that's how it impacts them so that means that when they donate to you they more than likely will need a tax receipt now there are some limitations on that you don't necessarily have to give a tax receipt for every donation but i recommend that you do and i actually broke that down in a video i'm linking above about tax receipts for donations but you can provide that information to them and they can use that to write off that donation on their taxes so for you as an organization you just need to make sure that you're keeping track of the donations that are donated to you so that you can make sure you're sending those donations in and then for your 990 form which is your annual tax form you have all those things in order so you're collecting and tracking that information one more thing i want to say about sales tax which means that you're probably selling something you just need to be very clear that if you're selling an item or you're selling a service that if it's not related to your charitable purpose then you may risk losing your 501c3 status if you spend too much time on that particular um thing right or if you spend too much time selling that item if it becomes way more encompassing than your actual mission work then the irs sees that as a red flag that's called unrelated business income and there they may add more scrutiny to what you're doing you do need to also record that and report that if you're making money not related to your charitable purpose so i talked about this a little bit in a video that i talked about with earned income strategies so you should check that out and also i'm linking it below and a freebie that gives you 50 free earned income ideas for your non-profit you just got to know all the implications because it can get really really messy all right this is the last thing i want to share though i know this is probably complicated and you're listening to me and you're like tiffany i still don't understand well i hope you at least got a little bit out of what i'm saying a little bit of clarification but i just want to say one more thing as a non-profit you may not have to pay sales tax right so this is a little bit different this is not your customers paying sales tax this is you as a founder going to pay for an item and you you don't want to pay sales tax on that item when you purchase it right that is a different process than anything that i've talked about in this video now this is up to the state and this is actually up to the specific store that you're working with there are certain kinds of documentation they may want to see they may want to see your 501c3 letter or they may want to see something else but in order for you for you as an organization not to have to pay sales tax that's a different process as well so you may be able to make purchases regularly and not have to pay the extra five six percent whatever it is in that particular state so that's a separate process that's something even different than what i've talked about that i just wanted to clarify to make sure you understood all right y'all so hopefully you got something out of this video if you need more help make sure you go to my website .bostonthebudget.com and i'll see you in the next video [Music] you