Steps to Forming a Nonprofit: Federal Filing

Step 10: Apply for Federal ID Number (EIN).

Nonprofit organizations should have an EIN, often referred to as a Federal ID Number, even if it has no employees. The EIN acts similarly to a social security number for individuals and may be requested when opening a bank account or during other fiscal operations. Organizations must be incorporated before applying for an EIN and must have an EIN before applying for tax-exempt status. For more information, visit the IRS website.

Step 11: Obtain Income Tax Exemption from the IRS.

Once the organization's articles of incorporation have been filed and the bylaws have been approved by the initial board of directors, the next step for a new nonprofit is applying for federal tax exemption from the Internal Revenue Service. A common myth is that all nonprofits are automatically tax- exempt. This is not the case.

There are several steps and filing requirements an organization needs to complete before receiving exemption. And even then, not all organizations qualify for the same exemptions. The following steps applies for 501(c)(3) status from the IRS, the most common type of tax-exempt organization.

  1. Read IRS Publication 557, Tax-Exempt Status for Your Organization. This 55-page document includes no forms to file, but lays out the federal laws regulating tax-exempt organizations. It is available free and serves as a useful reference guide for filing requirements, employment issues, lobbying expenditures, and many other complex nonprofit issues regulated by IRS codes.
  2. Fill out IRS Form 1023, Application for Recognition of Exemption. Form 1023 applies for a ruling or determination letter on an organization’s exempt status under Section 501(c)(3). An estimated average of 60 hours will be spent filing Form 1023.
  3. Fill out IRS Form 8718, User Fee for Exempt Organizations Determination Letter Request. Form 8718 is used to process the fee for applying for tax-exempt status and must be included when filing Form 1023. Organizations applying for exemption under another 501(c) section should file IRS Form 1024.
  4. The filing fee is $850 for organizations anticipating gross receipts averaging more than $10,000 during its first four years and $400 for organizations anticipating gross receipts averaging less than $10,000 during its first four years.

 

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