Accepting credit cards won't affect nonprofit's tax status
By Elaine Pofeldt | Published: August 17, 2015
Your Business Credit
Dear Your Business Credit,
We have a nonprofit organization. However, the bank opened the account as a business account. We are looking into getting a credit card reader for our fundraisers. Will this device affect the authorized user on the business account's financial aid or our personal tax return? -- Nancy
Adding a credit card reader should not affect the finances of the person who opened the business account. If you are maintaining your books properly, the finances of the nonprofit will be separated from the personal finances of any individuals who work for it.
No matter how you accept funds from donors -- whether by check or by credit card -- or how much money flows through your business account, your method of collecting donations has no connection to anyone's personal tax returns. Nonprofits generally must file their own annual return, according to the Internal Revenue Service. (There are some exceptions, which the IRS lists on its website.) Meanwhile, the individual employees of the nonprofit should file their own tax returns.
There is one way that the presence of the reader could affect the finances of the authorized user on the bank account, but it is very roundabout. If the nonprofit generates extra funds as a result of accepting credit card payments and decides to give this employee a raise, that could affect his or her tax situation and financial aid. But this would simply be because the individual was earning more money, not because a credit card reader was used.
It sounds to me as if you may have a fairly new nonprofit and would benefit from getting some advice on the financial side of running one. If you don't have a good accountant, I'd recommend asking other small nonprofits in your area whom they use.
I realize nonprofits are often on a tight budget, but making sure a qualified accountant sets up your books properly, does your taxes and addresses your financial questions would be a very good investment. Many nonprofits run into financial problems because they have improperly handled their finances. Even an honest mistake can lead to serious problems with the IRS.
You might also find it helpful to take a look at the National Council of Nonprofits' guide to financial management, which answers common questions on the subject. The guide links to the Nonprofit Financial Management Self-Assessment Tool, developed by the Nonprofit Association of Oregon. The tool can help you evaluate your organization's financial management policies and pinpoint any areas where you need help.
As for the credit card reader, I am assuming you are considering either using a service such as Square that does not require a merchant account or getting a [%Link?type=glossary&id=514&text="merchant account"%] to process the donors' cards. Make sure you shop around carefully for an account that meets your needs or you could end up overpaying.
For some tips on this, see "Is it time to negotiate a new merchant account?"
Fees from merchant accounts can add up, and any savings you find in processing your donors' credit cards will be money you can devote to your charitable cause.
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