Affiliated Organizations: Sharing Employees

It is becoming increasingly common to see 501(c)(3) organizations affiliated with 501(c)(4) social welfare organizations or 501(c)(6) business leagues. Such affiliations provide an ability to coordinate activities and share resources to further a common goal. But the affiliated organizations must maintain appropriate separation to mitigate against the risks of (1) liability ascending from one organization to the other and (2) attribution of one organization’s activities to the other. The 501(c)(3) organization must be particularly careful to ensure political intervention activities of an affiliated organization are not attributed to the 501(c)(3) organization due to its control of, or provision of resources to, its affiliate. Accordingly, the 501(c)(3) organization should generally make sure that it pays only its fair share for shared resources, including for costs related to “shared” employees, if such resources may be used by its affiliate to engage in political intervention activities.

How Affiliated Organizations Share Employees

There are several options for affiliated organizations that have common workers. This post will review a couple options using the example of an established 501(c)(3) organization (“Charity”) with a new 501(c)(4) affiliate (“Action Fund”):

  1. Charity is contracted out by Action Fund to provide services. In such case Charity employees should track their time spent on Action Fund matters, and Charity should charge Action Fund at least the cost of providing such employees’ services, including their wages and benefits.
    • From a more aggressive standpoint, Charity can be contracted to provide any and all services to Action Fund so long as Charity is getting fairly reimbursed. Reliance on this position may partly arise from the Supreme Court case, Regan v. Taxation With Representation (1983), discussed below.
    • From a more conservative standpoint, Charity should not be contracted to provide services that it could not do it for itself (i.e., political intervention) in the same manner that it certainly could not be contracted to provide such services by a candidate for public office.
    • Charity should consider whether monies received for providing services to Action Fund could be unrelated business taxable income subject to the unrelated business income tax (UBIT).
  2. Charity and Action Fund each employ the same individuals.
    • Charity and Action Fund may each employ a common employee who is paid separately by each. For example, Charity may hire the individual and pay her for 30 hours per week, and Action Fund may hire the same individual and pay her for 10 hours per week. Each organization is responsible for providing such employee with any benefits consistent with its own benefits policies.
    • Charity and Action Fund may each employ a common employee who is paid by one of the organizations as a Common Paymaster, as discussed below.

Taxation With Representation

Justice Blackmun, in a concurring opinion, states:

If viewed in isolation, the lobbying restriction contained in §501(c)(3) violates the principle … “that the government may not deny a benefit to a person because he exercises a constitutional right.” Section 501(c)(3) does not merely deny a subsidy for lobbying activities, … it deprives an otherwise eligible organization of its tax-exempt status and its eligibility to receive tax-deductible contributions for all its activities, whenever one of those activities is “substantial lobbying.” Because lobbying is protected by the First Amendment, … §501(c)(3) therefore denies a significant benefit to organizations choosing to exercise their constitutional rights.


The constitutional defect that would inhere in §501(c)(3) alone is avoided by §501(c)(4). …


Given this relationship between §501(c)(3) and §501(c)(4), the Court finds that Congress’ purpose in imposing the lobbying restriction was merely to ensure that “no tax-deductible contributions are used to pay for substantial lobbying.” … Consistent with that purpose, “[t]he IRS apparently requires only that the two groups be separately incorporated and keep records adequate to show that tax-deductible contributions are not used to pay for lobbying.”


A §501(c)(3) organization’s right to speak is not infringed, because it is free to make known its views on legislation through its §501(c)(4) affiliate without losing tax benefits for its nonlobbying activities. Any significant restriction on this channel of communication, however, would negate the saving effect of §501(c)(4). It must be remembered that § 501(c)(3) organizations retain their constitutional right to speak and to petition the Government. Should the IRS attempt to limit the control these organizations exercise over the lobbying of their §501(c)(4) affiliates, the First Amendment problems would be insurmountable.

Common Paymaster

A common paymaster is any member of a group of related corporations that disburses remuneration to employees of two or more of those corporations on their behalf and that is responsible for keeping books and records for the payroll with respect to those employees. The common paymaster has the primary responsibility for remitting taxes pursuant to sections 3102 and 3111 (FICA) with respect to the remuneration it disburses as the common paymaster. The common paymaster, if it is itself one of the common employers, computes these taxes as though it were the sole employer of the concurrently employed individuals. If the common paymaster fails to remit these taxes (in whole or in part), it remains liable for the full amount of the unpaid portion of these taxes. In addition, each of the other related corporations using the common paymaster is jointly and severally liable for its appropriate share of these taxes.

In addition to the administrative convenience, a major advantage of having a common paymaster is lower FICA tax liability than would be owed collectively by Charity and Action Fund if they were each paying the common employee separately. The maximum amount of wages subject to FICA in 2018 is $128,400. Without a common paymaster, wages paid to a common employee of Charity and Action Fund would be subject to FICA up to the maximum amount for each organization rather than cumulatively. While the employee can claim a credit for the excess tax withheld on wages above the maximum wage base, this is not the case for the employers and their share of the FICA tax.

Where Charity is the common paymaster, it must remember that it is responsible for the reporting of the FUTA. Even though wages paid for employees of 501(c)(3) organizations are exempt from FUTA, the same is not true for wages paid for employees of 501(c)(4) organizations. Accordingly, Charity, as common paymaster, is required to file Form 940 and pay the FUTA tax for the Action Fund employees. The 940 filing requirement and FUTA tax liability transfers to the Action Fund if Charity fails to report the FUTA wages disbursed to the Action Fund employees.

Corporations are considered related corporations for a particular calendar quarter if they satisfy any one of the following tests at any time during that calendar quarter:

  1. In the case of a nonstock corporation, either fifty percent or more of the members of one corporation’s board of directors (or other governing body) are members of the other corporation’s board of directors (or other governing body), or the holders of fifty percent or more of the voting power to select such members are concurrently the holders of more than fifty percent of that power with respect to the other corporation.
  2. Fifty percent or more of one corporation’s officers are concurrently officers of the other corporation.
  3. Thirty percent or more of one corporation’s employees are concurrently employees of the other corporation.

Additional Resources for Affiliated Organizations

Affiliated Organizations: Sharing Resources (Nonprofit Law Blog)

When Should a 501(c)(3) Consider Creating an Affiliated 501(c)(4)? (Nonprofit Law Blog)

The Practical Implications of Affiliated 501(c)(3)s and 501(c)(4)s (Bolder Advocacy, AFJ)

Establishing and Operating Affiliated 501(c)(3) and 501(c)(4) Organizations (Bolder Advocacy, AFJ)

Affiliations Among Political, Lobbying and Educational Organizations (2000 EO CPE Text, IRS)

Happy Families: 501(c)(3)s with 501(c)(4) Affiliates – A Primer (Adler & Colvin / CalNonprofits)