Do Small Clubs Have to Pay Tax on Income?

Small clubs, whether focused on sports, hobbies, or community activities, often generate income through membership fees, donations, and events. Whether these earnings are taxable depends on the club’s legal status and revenue sources.

Understanding tax obligations can help clubs avoid unexpected liabilities. Some organizations qualify for tax-exempt status, while others must report and pay taxes on certain income.

Nonprofit vs. For-Profit Status

A club’s tax obligations depend on whether it operates as a nonprofit or for-profit entity. Nonprofit clubs form for social, recreational, or charitable purposes rather than to generate profits for owners or shareholders. Many seek recognition under Internal Revenue Code (IRC) Section 501(c), which provides tax benefits if they meet specific requirements. Social clubs often qualify under IRC Section 501(c)(7), which applies to groups organized for pleasure, recreation, or other non-business purposes.

For-profit clubs, by contrast, operate to generate income for owners or investors. These entities are subject to federal income tax, state corporate tax (if applicable), and self-employment tax for sole proprietors or partnerships. Even if a for-profit club reinvests its revenue into operations, it remains liable for taxes.

Tax-Exempt Qualification

A nonprofit club may qualify for tax-exempt status, meaning it does not have to pay federal income tax on certain revenue. However, not all income is automatically exempt, and the club must meet IRS requirements. The tax treatment of membership dues, donations, and fundraising proceeds depends on how funds are collected and used.

Dues

Membership dues are a primary income source for many small clubs. If a club qualifies as tax-exempt under IRC Section 501(c)(7), dues paid by members are generally not subject to federal income tax. However, at least 65% of the club’s income must come from membership dues, fees, and assessments to maintain tax-exempt status. If more than 35% of revenue comes from non-member sources, such as guest fees or public events, that portion may be taxable.

Dues must support the club’s exempt purpose, such as maintaining facilities or organizing activities. If a club provides significant benefits in exchange for dues—such as exclusive services or goods—the IRS may classify the payments as taxable income. Proper documentation of how dues are collected and spent is essential for compliance.

Donations

Donations may or may not be tax-deductible for the donor, depending on the club’s tax-exempt classification. Organizations recognized under IRC Section 501(c)(3), such as charities and educational groups, can receive tax-deductible donations. However, social clubs under IRC Section 501(c)(7) do not qualify for this benefit, meaning contributions to these clubs are not deductible for the donor.

Even though donations to a 501(c)(7) club are not deductible, the club itself does not have to pay tax on these contributions as long as they are used for exempt purposes. If a club solicits donations from non-members, it must ensure that these funds do not push its non-member income above the 35% threshold, which could jeopardize its tax-exempt status. Proper recordkeeping is essential, as the IRS may require documentation showing how donated funds were used.

Fundraisers

Fundraising activities can generate additional income, but tax treatment depends on the nature of the event and the source of funds. If a club holds a fundraiser such as a raffle, auction, or ticketed event, proceeds may be subject to unrelated business income tax (UBIT) if the activity is not directly related to the club’s exempt purpose. Under IRC Section 511, tax-exempt organizations must pay UBIT on income from activities that are regularly carried on and not substantially related to their mission.

For example, if a social club hosts an annual golf tournament open to the public, revenue from entry fees may be taxable if it exceeds the allowable non-member income limit. However, if the event is primarily for members and supports the club’s recreational purpose, income may remain tax-exempt. Some states also impose sales tax on fundraising event tickets or auctioned items, so clubs should check local tax laws. Keeping detailed financial records and consulting a tax professional can help ensure compliance.

Filing Thresholds

Tax-exempt clubs must still comply with IRS filing requirements, which vary based on annual gross receipts. The primary form used is the 990 series, with different versions depending on revenue levels.

– Organizations with gross receipts of $50,000 or less can file Form 990-N (e-Postcard), a simplified online filing requiring basic details like the club’s name, EIN, and confirmation that revenue remains within the threshold.
– Clubs with receipts under $200,000 and assets below $500,000 must file Form 990-EZ.
– Organizations exceeding these limits must submit the full Form 990.

Failing to file can result in penalties, starting at $20 per day for late submissions, capped at the lesser of $10,500 or 5% of the organization’s gross receipts. If a club fails to file for three consecutive years, it risks automatic revocation of tax-exempt status, requiring a costly and time-consuming reinstatement process. Once revoked, the club is treated as a taxable entity, meaning all income is subject to federal tax until exemption is restored.

Taxable Activities

Even tax-exempt clubs may owe taxes on certain income. Unrelated business income (UBI) arises when a club engages in regular commercial activities that do not directly support its exempt function. Under IRC Section 512, such income is taxed at corporate rates if it exceeds $1,000 annually, requiring the club to file Form 990-T and pay unrelated business income tax (UBIT).

For example, if a social club operates a dining facility that serves both members and non-members, revenue from non-member sales could be taxable. Similarly, if a club rents out its facilities for private events, the rental income may be subject to UBIT unless the property is leased under terms that qualify for an exemption, such as passive rental arrangements without significant services provided. Advertising revenue is another common trigger, as clubs that sell ad space in newsletters or on websites may be engaging in taxable business activity if the ads promote external businesses rather than club-related initiatives.

Recordkeeping

Accurate financial records are necessary to ensure compliance with tax laws and maintain tax-exempt status. The IRS requires tax-exempt organizations to retain financial records for at least three years, though longer retention may be advisable for significant transactions or property-related documents.

Clubs should keep detailed records of membership dues, donations, and fundraising proceeds, including receipts, bank statements, and invoices. If a club generates unrelated business income, it must maintain separate accounting records to distinguish taxable and non-taxable revenue. Payroll records are also required if the club has employees, as employment taxes must be reported and paid accordingly. Using accounting software or hiring a bookkeeper can help streamline recordkeeping and ensure financial transparency, which is particularly important if the club undergoes an IRS audit.

Penalties for Non-Compliance

Failing to meet tax obligations can result in financial penalties and loss of tax-exempt status. The IRS imposes fines for late or incorrect filings, with penalties increasing based on the severity of the violation. If a club fails to file a required Form 990 for three consecutive years, its tax-exempt status is automatically revoked, forcing it to reapply and potentially pay back taxes on previously exempt income.

If a club engages in taxable activities without reporting them, it may be subject to back taxes, interest, and additional penalties. For instance, if a club earns unrelated business income but does not file Form 990-T, the IRS can assess taxes owed along with fines for underpayment. In extreme cases, intentional tax evasion can lead to legal consequences, including fines or criminal charges. To avoid these risks, clubs should regularly review tax requirements, consult a tax professional when necessary, and ensure all filings are accurate and timely.