501(c)(4) Social Welfare Organizations: Roles, Rules, and Effective Partnerships

When people think about tax-exempt organizations, typically they think about public charities or private foundations. However, there are 29 different ways an organization can be considered a not- for-profit entity under the Internal Revenue Code. One is under the 501(c)(4) designation. This designation is split between two categories: the local association of employees and the social welfare organization. This discussion will center on social welfare organizations.

Social welfare organizations’ purpose must include, in some way, promoting the common good and general welfare of the community. Organizations wishing to make this designation have to file a Form 8976, telling the IRS they want to operate as a 501(c)(4). American Civil Liberties Union, Sierra Club, National Organization for Women, and local community service clubs like Kiwanis and Rotary clubs are all examples of 501(c)(4) organizations.

501(c)(4) organizations are used because, unlike a public charity, they are not limited in the amount of lobbying they can do. The IRS defines lobbying as attempting to influence legislation at the federal, state, or local levels by contacting or urging the public to contact members or employees of a legislative body for purposes of proposing, supporting, or opposing legislation or if the organization advocates the adoption or rejection of legislation. Public charities can lobby but are limited to certain thresholds based on their total budget or facts and circumstances like whether the lobbying activity is more than an insubstantial part of their overall operations. However, social welfare organizations can lobby in unlimited amounts without losing their tax-exempt status if the lobbying is related to their social welfare purpose. Social welfare organizations can also participate in political activity as long as it remains less than a majority of its overall activity. Most social welfare organizations operating in this space attempt to keep political activity below 40% of their overall total. One big catch for social welfare organizations is that the donations they receive are not considered charitable donations and are, therefore, not tax deductible under those guidelines. Because of each type of entity’s restrictions, public charities and social welfare organizations can join forces or be affiliated with each other to maximize their impact on their common mission.

When creating affiliated public charities and social welfare organizations, the relationship between the organizations needs to be clearly defined. The public charity should not be funneling unrestricted money to the social welfare organization with no expectation of being reimbursed. Any grants or loans from the public charity to the social welfare organization should be clearly restricted for specific charitable purposes, or if the charity is intending to have the dollars used for lobbying, restricted to lobbying and advocacy. Most importantly, no charitable resources may be used for political activity and all such intercompany activity must be document as such.

Often times public charities and social welfare organizations will share resources for efficiency purposes. Setting up consistent reimbursements between the organizations for shared costs (i.e., payroll, office space, supplies, etc.) should be established at the onset and documented in a written agreement. The agreement should dictate how staff costs, often the largest cost pool, will be split. Either organization may be the common paymaster, which is a designation given to a member of a group of related entities that handles the payment of employees for two or more entities in the group and is responsible for keeping the books and records. And, while the employees may still be common law employees of one or both of the organizations, the common paymaster arrangement allows simplicity with regards to W-2’s, payroll reporting, and paying taxes. Note the focus from the IRS in these cases is often payroll taxes, including FUTA, which is not owed by the public charity but is applicable to the social welfare organization. Finally, the boards of the two organizations may have partial or majority overlap depending on the degree of control the ‘parent’ desires of its subsidiary entity. What is important is that each organization has a functioning governing body and management team that is serving its fiduciary duty their organization.

When a public charity and a social welfare organization are affiliated, they should operate as much as possible as independent entities. Any overlap in activity between the two should be clearly defined and approved by management and/or the governing body of the organization. If executed properly, this operational affiliation can enhance the effectiveness of each organization’s missions. The charitable organization may find it has more ability to advocate for its issues, while the social welfare organization may find it has more financial support and membership reach through the charity. Understanding the distinctions and regulatory limitations of both organizations is a critical part of determining whether it makes sense for a 501c3 and 501c4 to work together.