501(c)(3) vs. 501(c)(4): What’s the Difference?

  • By: Gina Guy
  • November 21, 2022
501(c)(3) vs. 501(c)(4)
Reading Time: 4 minutes

Although organizations registered under Internal Revenue Code 501(c)(3) and 501(c)(4) are both considered nonprofits, there are notable differences.

As a prospective nonprofit organization, you may feel confused about which Internal Revenue Code (IRC) section is most appropriate for your goals and needs.

After all, depending on your nonprofit governance model, a 501(c)(3) nonprofit can qualify for registration under the IRC section 501(c)(4), but not the other way around. While there may be some overlap in their definition and scope, the IRS recognizes the two separately.

Read on to learn the key difference between 501(c)(3) and 501(c)(4).

501(c)(3) Overview

A 501(c)(3) status is an IRC designation for public charity nonprofit organizations. 501(c)(3) organizations are exempt from paying federal taxes.

Still, they’re required by law to withhold and remit employee income taxes and other contributions like social security payments.

For an organization to qualify for 501(c)(3) status, it must fit the IRS definition of a charity organization, which may include:

  • Initiatives meant to help the poor
  • Activities that promote the advancement of science and religion
  • Preventing and advocating against child abuse or animal cruelty
  • Advocating for civil and human rights
  • Preventing and calling out discrimination

A 501(c)(3) status affords a nonprofit organization three major benefits: Tax deductible contributions, exemption from paying federal and unemployment tax, and eligibility to receive grants from private and government sources to advance the nonprofit’s agenda.

Unfortunately, these privileges can be misused. As such, the IRS reserves the right to revoke 501(c)(3) status if it has sufficient proof a nonprofit violates the rules and regulations.

501(c)(4) Overview

Entities registered under the IRC section 501(c)(4) are generally referred to as social welfare organizations by the IRS. The foundational principle behind these organizations is they’re meant to promote the social welfare of the general public.

For an organization to qualify for a 501(c)(4) status, it should:

  • Provide social welfare to the general public
  • Operate on a nonprofit model
  • Participate in non-commercial activities that aren’t charitable

Given the IRS’s broad definition of what social welfare organizations can do; 501(c)(4) nonprofits generally enjoy more freedom and relatively fewer restrictions apply to them.

Like 501(c)(3) nonprofit status, the IRS can revoke any organization’s 501(c)(4) status if it determines the organization has breached any of its regulations.

Key Differences Between a 501(c)(3) vs. 501(c)(4)

Although organizations registered under IRC 501(c)(3) and 501(c)(4) are both considered nonprofits, there are some notable differences, such as:

1. Registration

Registration as a 501(c)(3) nonprofit requires the organization’s sponsors to file Form 1023 with the IRS. In contrast, sponsors must file Form 1024-A when applying for registration as a 501(c)(4) nonprofit organization.

For both designations, the organization must first register at the state level. Then, the nonprofit sponsors can apply for their respective 501(c) statuses. 

It’s worth noting that each state’s procedure for starting a nonprofit is different. Here are six quick guides to help you out:

  1. How to Start a Nonprofit in California (Step-by-Step Guide)
  2. How to Start a Nonprofit in Pennsylvania (Step-by-Step Guide)
  3. How to Start a Nonprofit in Michigan (Step-by-Step Guide)
  4. How to Start a Nonprofit in Texas (Step-by-Step Guide)
  5. How to Start a Nonprofit in Ohio (Step-by-Step Guide)
  6. How to Start a Nonprofit in Colorado (Step-by-Step Guide)
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2. Grounds for Revocation of Status

The IRS can revoke 501(c)(3) status due to the following reasons: 

  • Excessive lobbying: Even though lobbying is allowed if it’s within the nonprofit’s purpose, influencing legislation to benefit a partisan side is prohibited. 
  • Political activity: Political activities like civic and voter education are allowed, but the nonprofit shouldn’t be partisan in any way. 
  • Private benefit and inurement: As a charity organization, all proceeds from its activities must be directed to the nonprofit’s cause. Any attempt by various nonprofit board positions or those in a similar capacity to divert or misappropriate the organization’s funds results in revocation of status.
  • Failure to submit annual reports: All 501(c)(3) nonprofits must submit annual reports to the IRS.  Failure to comply can lead to revocation of 501(c)(3) status.

A 501(c)(4) status, on the other hand, can only be revoked by the IRS if:

  • The nonprofit fails to submit annual returns (This revocation is automatic  after three consecutive violations)
  • It fails to abide by its stated or registered purpose
  • It engages in and fails to report unrelated commercial activity that goes beyond the scope of its objectives and earns income as a result

501(c)(4) nonprofits are free to engage in lobbying activities provided they align with their registered purpose. Similarly, they can be partisan in their political engagements, so long as they don’t coordinate directly with a political party’s campaign team.

3. Tax Exemption and Eligibility for Tax Relief

Both 501(c)(3) and 501(c)(4) nonprofits are exempted from paying federal taxes; however, only donor contributions to 501(c)(3) nonprofits qualify for tax relief. Donor contributions to 501(c)(4) nonprofits do not carry any tax relief.

4. Disclosure of Donor Fund Sources

Given the privileged status of 501(c)(3) nonprofits, they’re required by law to maintain total transparency, including revealing details on their donors. On the other hand, 501(c)(4) nonprofits are exempt from this requirement. 

For 501(c)(4) nonprofits, donors are shielded from public scrutiny, which may encourage more donations to social welfare organizations.

Technology's Impact on Board Effectiveness

A skilled and well-equipped board of directors is crucial to the nonprofit’s success. From determining how to prepare for a board meeting to using the best nonprofit board meeting minutes template, a nonprofit must be ready to leverage technology to operate efficiently in today’s digital-first world.

OnBoard’s nonprofit board management software does the heavy lifting for your nonprofit’s board. Our powerful board intelligence software helps boards work more effectively, and ensures nonprofit meetings become more productive by supporting real-time collaboration, facilitating virtual meetings, managing meeting minutes and agendas, and automating administrative tasks. 

Additionally, OnBoard reduces the risk of non-compliance with federal and state rules, and makes it easy for board members and staff to collaborate and work together virtually.

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About The Author

Gina Guy
Gina Guy
Gina Guy is an implementation consultant who specializes in working with nonprofit organizations get the most from their board meetings. She loves helping customers ease their workloads through their use of OnBoard. A Purdue University graduate, Gina enjoys refinishing furniture, running, kayaking, and traveling in her spare time. She lives in Monticello, Indiana, with her husband.