Yes, colleges pay taxes, though how much depends entirely on how the school is organized. Non-profit colleges qualify for broad exemptions from federal and state income tax, local property tax, and most sales taxes, but they still owe payroll taxes, can be hit with an excise tax on endowment income, and pay regular corporate rates on business activities unrelated to education. For-profit colleges pay everything a normal business pays.
What Non-Profit Colleges Don’t Pay
The headline benefit of 501(c)(3) status is exemption from federal income tax. A qualifying non-profit college pays no federal income tax on tuition revenue, research grants, donations, or investment income from its endowment. Those income streams are all treated as substantially related to the school’s educational purpose.1Office of the Law Revision Counsel. 26 US Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc
Most states follow the federal lead and exempt qualifying non-profit colleges from state income tax. Beyond income taxes, non-profit schools are generally exempt from local property taxes on land and buildings used for educational purposes, including classrooms, libraries, labs, and dormitories. Property tax exemption is governed by state law, and every state provides some version of it, though the exact scope varies. Schools also typically qualify for sales tax exemptions on purchases tied to their educational mission.
These exemptions add up to enormous sums. A large research university with billions in property holdings, substantial endowment income, and thousands of employees would owe tens or even hundreds of millions in taxes annually if it operated as a regular business. That gap is exactly why tax-exempt status attracts so much public scrutiny.
Donors benefit too. Contributions to a 501(c)(3) college are tax-deductible for the donor, and the college itself can issue tax-exempt bonds to finance construction, borrowing at lower interest rates than a for-profit competitor can access.
What Non-Profit Colleges Still Owe
Tax-exempt does not mean tax-free. Every non-profit college is an employer, and employers owe payroll taxes. Non-profit schools withhold and remit Social Security and Medicare (FICA) taxes on employee wages, just like any for-profit business.2Internal Revenue Service. Employment Taxes for Exempt Organizations For a university with thousands of faculty and staff, the payroll tax bill alone runs into the millions each year.
One payroll tax break does exist. Organizations with 501(c)(3) status are exempt from the Federal Unemployment Tax (FUTA).3Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption State unemployment insurance still applies, though most states let non-profit employers choose between contributing to the fund like a regular employer or reimbursing the state dollar-for-dollar when a former employee actually collects benefits.
On top of employment taxes, non-profit colleges can trigger three separate federal taxes that catch many people by surprise: an excise tax on large endowments, income tax on unrelated business activities, and steep excise taxes when insiders receive excessive pay.
The Endowment Excise Tax in 2026
Starting in 2026, the excise tax on private college endowments looks substantially different than it did in prior years. Congress originally created this tax in 2017 as a flat 1.4% levy on the net investment income of large private colleges. The One Big Beautiful Bill Act, signed into law in 2025, replaced the flat rate with a graduated structure that hits the wealthiest schools far harder.
For tax years beginning in 2026, the rates are:4Office of the Law Revision Counsel. 26 US Code 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
- 1.4% on net investment income for schools with a student-adjusted endowment between $500,000 and $750,000 per student
- 4% for endowments above $750,000 but not exceeding $2,000,000 per student
- 8% for endowments above $2,000,000 per student
The “student-adjusted endowment” is calculated by dividing the fair market value of the school’s non-educational-use assets at the end of the prior tax year by the number of students. A school with a $30 billion endowment and 10,000 students would have a student-adjusted endowment of $3 million, placing it in the 8% bracket.
The law also raised the minimum student count from 500 to 3,000 tuition-paying students (with more than half located in the United States), and it continues to exclude public colleges and universities entirely.4Office of the Law Revision Counsel. 26 US Code 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities Fewer schools trigger the tax at all, but those that do with very large per-student endowments now face rates nearly six times the original.
Tax on Unrelated Business Income
When a non-profit college earns money from activities that have nothing to do with education, that income is taxed. The IRS calls this the Unrelated Business Income Tax (UBIT), and it exists to keep tax-exempt organizations from using their status to undercut regular businesses.5Internal Revenue Service. Publication 598 – Tax on Unrelated Business Income of Exempt Organizations
Common triggers at colleges include running a fitness center open to the general public, operating a hotel or conference center that primarily serves outside guests, and selling advertising space in campus publications. The IRS looks at whether the activity is regularly carried on and whether it is substantially related to the school’s educational mission. If not, the income is taxed at the regular corporate rate of 21%.6Office of the Law Revision Counsel. 26 US Code 511 – Imposition of Tax on Unrelated Business Income
Several exclusions keep everyday campus operations out of UBIT. A campus bookstore, cafeteria, or laundry facility run primarily for students, staff, and faculty is excluded even if it looks commercial. Activities where substantially all the work is done by unpaid volunteers are excluded, which covers many fundraising events. Sales of donated goods are also excluded regardless of how much they earn.
These carve-outs matter because they draw a line between a university running a student dining hall (not taxed) and that same university renting its dining hall to an outside catering company on weekends (potentially taxed).7Internal Revenue Service. Unrelated Business Income Tax Exceptions and Exclusions
Excise Taxes on Executive Pay
Non-profit colleges don’t have shareholders, but they do have presidents, coaches, and administrators who sometimes earn millions. When insiders receive compensation or other benefits that exceed what’s reasonable for the services they provide, the IRS can impose steep penalties under Section 4958 of the Internal Revenue Code without revoking the school’s exempt status entirely. These are known as intermediate sanctions.
The penalty structure is deliberately punishing. The person who received the excess benefit owes an initial excise tax of 25% of the excess amount. If that person doesn’t return the excess within the taxable period, a second tax of 200% kicks in. Any organization manager who knowingly approved the deal owes 10% of the excess benefit personally, capped at $20,000 per transaction.8Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions
To avoid these penalties, college boards typically benchmark executive compensation against peer institutions and document their reasoning in board minutes before approving any package.
Annual Filing and Public Disclosure
Every non-profit college must file an annual information return with the IRS, usually Form 990. This isn’t a tax return in the traditional sense because the school doesn’t owe income tax, but it discloses finances, governance, compensation of top employees, and program activities in considerable detail.
Missing the filing deadline triggers a penalty of $25 per day the return is late, up to the lesser of $13,000 or 5% of the organization’s gross receipts for the year. Larger organizations with gross receipts above roughly $1.3 million face $130 per day, up to $65,000.9Internal Revenue Service. 2025 Instructions for Form 990
The bigger consequence comes from sustained neglect. If a tax-exempt organization fails to file any required annual return for three consecutive years, its tax-exempt status is automatically revoked by operation of law. There is no warning letter and no second chance. The school has to reapply from scratch.10Internal Revenue Service. Annual Exempt Organization Return: Penalties for Failure to File
Non-profit colleges must also make their Form 990 available for public inspection. Anyone can request a copy, and many schools satisfy this obligation by posting the return online. Executive salaries, investment performance, and spending priorities at non-profit schools are effectively public information.
Payments in Lieu of Taxes
Because non-profit colleges don’t pay property taxes, the cities and towns that host them sometimes lose a significant chunk of their tax base. When a university owns hundreds of acres of prime real estate, the surrounding municipality still has to provide police, fire protection, road maintenance, and other services without collecting property taxes on the land.
To address this, many large private colleges make voluntary payments in lieu of taxes, or PILOTs. These are negotiated agreements, not legal obligations. Amounts vary enormously. Yale’s PILOT to New Haven runs roughly $23 million per year, while smaller colleges might pay a few hundred thousand dollars annually. Some agreements include non-cash contributions like community access to campus facilities or commitments to return unused buildings to the tax rolls.
PILOTs remain controversial. Municipalities often argue the payments represent a fraction of what full property taxes would yield, while universities counter that their economic impact through jobs, student spending, and research investment far exceeds any tax obligation. There is no federal law requiring these payments, and many non-profit colleges make none at all.
For-Profit Colleges Pay Everything
For-profit colleges are businesses structured to generate returns for their owners or shareholders, and they are taxed accordingly. They receive none of the broad exemptions that 501(c)(3) status provides.
The obligations pile up across every level of government. For-profit colleges pay federal corporate income tax at 21% plus whatever their state charges. Their campuses, office buildings, and facilities are assessed and taxed like any commercial property. Purchases for operations are generally subject to state and local sales tax, though specific business exemptions may apply depending on the jurisdiction. For-profit schools owe FICA taxes just like non-profits, but they also owe FUTA, which non-profits skip.
The gap extends beyond what the school itself pays. Donations to a for-profit college are not tax-deductible for the donor, and for-profit schools cannot issue tax-exempt bonds. These indirect disadvantages compound over time and help explain why non-profit schools can build larger endowments and charge lower net tuition even when their sticker prices are high. For-profit colleges offset some of the difference through access to equity markets, since they can sell stock to raise capital, but that capital comes with investor expectations that non-profit governance structures are designed to prevent.