Does a 501(c)(3) organization's Kansas income-tax exemption also exempt its employees' wages from Kansas withholding and individual income tax?

Plain-English summary

The Department accepted the IRS's determination that the organization qualified under Internal Revenue Code § 501(c)(3) and therefore treated the organization itself as exempt from Kansas income tax.

That organizational exemption did not carry over to employee wages. Kansas followed the federal withholding result:

• if federal income-tax withholding was required on the wages, Kansas withholding was required;
• if federal withholding was permissive or not required, Kansas withholding was also permissive; and
• wages included in an employee's federal adjusted gross income were subject to Kansas individual income tax.

What this means for you

Nonprofit employers

Do not stop Kansas payroll withholding merely because the organization is exempt from its own income tax. Apply the federal withholding classification to the employee wages.

Nonprofit employees

Your employer's 501(c)(3) status does not make ordinary wages tax-free. If the wages enter federal adjusted gross income, the letter says they also enter the Kansas income-tax base.

Payroll professionals

Separate entity-level exemption from employee-level tax. Keep the IRS determination for the organization's status, but follow federal and Kansas payroll rules for wages.

Common questions

Q: Was the organization exempt from Kansas income tax?
A: Yes. Kansas conformed to the IRS's 501(c)(3) determination for the organization.

Q: Were employee wages exempt from Kansas withholding?
A: No general exemption applied. Kansas withholding followed whether federal withholding was required or permissive.

Q: Were the employees' wages subject to Kansas income tax?
A: Yes when included in the employee's federal adjusted gross income.

Citations and references

• Internal Revenue Code § 501(c)(3) — federal exempt-organization determination recognized by Kansas in the letter
• Federal adjusted gross income — Kansas wage-tax starting point described in the letter

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2009-006

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

April 7, 2009

XXXXX
XXXXX
XXXXX
XXXXX

Re: Kansas Income Tax

Dear XXXXX:

Your correspondence of March 17, 2009 has been referred to me for response. Thank you for your inquiry.

Your letter notes you are requesting “a letter of determination from your agency regarding the IRS letter of 1982 enclosed.” A handwritten note on my copy of the letter indicates you want to know whether employee wages are taxable.

The IRS letter of 1982 indicates the IRS has determined your organization is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. The state of Kansas conforms to IRS determination such as this and, accordingly, finds your organization to be exempt from Kansas income tax.

As a rule the fact that an organization is exempt from paying income tax does not mean it is exempt from withholding income on employee wages. In this regard, Kansas law follows federal law. If federal withholding is required on employee wages, Kansas withholding is also required. If federal withholding is permissive (or not required) Kansas withholding is also permissive.

Wages received by an employee will be subject to Kansas income tax if the wages are included as part of the employee’s federal adjusted gross income.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

NOTE: This opinion letter is based solely on the facts provided in your request for advice. If material facts or information were not disclosed this letter is null and void. This letter will be revoked without further action by the Department if the statutes, administrative regulations, published revenue rulings, or court decisions that materially affect this opinion are changed.

Date Composed: 04/08/2009 Date Modified: 04/08/2009

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