Whether hospitals pay taxes depends on who owns them. Of roughly 6,100 hospitals in the United States, about 2,984 are nonprofits exempt from federal income tax under Section 501(c)(3), about 1,123 are government-owned and exempt as public entities, and about 1,224 are for-profit companies that pay corporate taxes like any other business.1American Hospital Association. Fast Facts on US Hospitals, 2026 Even the exempt ones aren’t fully off the hook: they still owe payroll taxes, they can owe income tax on side businesses, and they have to keep meeting federal requirements or they lose the exemption.
For-Profit Hospitals Pay the Full Corporate Tax Load
Roughly one in five U.S. hospitals is a for-profit company, and those hospitals are taxed exactly like other corporations. They pay the 21% federal corporate income tax on net profits, plus state corporate income tax, local property tax on their buildings and land, and sales tax on purchases in most states. Being a hospital doesn’t give them a break.
Their payroll obligations match any private employer. They withhold and match Social Security tax at 6.2% and Medicare tax at 1.45% on employee wages, and they pay federal unemployment tax. Surplus revenue goes to shareholders, and the government takes its cut on the way.
How Nonprofit Hospitals Qualify for Exemption
Section 501(c)(3) of the Internal Revenue Code exempts organizations operated for charitable purposes from federal income tax.2Office of the Law Revision Counsel. 26 USC 501 – Exemption from Tax on Corporations, Certain Trusts, Etc. Hospitals aren’t named in the statute. The IRS has long treated promotion of community health as a charitable purpose in itself, so a hospital that serves a broad enough class of people can qualify.3Internal Revenue Service. Charitable Hospitals – General Requirements for Tax-Exemption Under Section 501(c)(3)
A hospital applies to the IRS and has to show two things: that it benefits a class of people wide enough to count as the community, and that it operates for public rather than private benefit. Once approved, it owes no federal income tax on revenue tied to its charitable mission. State and local governments usually extend their own exemptions from property tax and sales tax based on the federal determination, though the process varies from state to state.
The Community Benefit Standard
The central test is the community benefit standard, set out by the IRS in Revenue Ruling 69-545.4Internal Revenue Service. Revenue Ruling 69-545 – Nonprofit Hospital Exemption It isn’t a single bright-line rule. The IRS weighs factors together:
- An emergency department open to everyone regardless of ability to pay
- Acceptance of patients covered by Medicare, Medicaid, and other public programs
- Reinvestment of any surplus into the facility, equipment, training, and research rather than payouts to owners
- A board of directors that includes members drawn from the broader community
No single factor is required, and no single factor is enough on its own. A hospital without an emergency department can still qualify if the rest of the picture shows enough community benefit. Every nonprofit hospital documents these activities each year on Schedule H of Form 990, and that filing is public.5Internal Revenue Service. Instructions for Schedule H (Form 990)
ACA Requirements Under Section 501(r)
The Affordable Care Act added a second layer through Section 501(r), which applies facility by facility. A system with ten hospitals has to comply at each of the ten separately.6Internal Revenue Service. Requirements for 501(c)(3) Hospitals Under the Affordable Care Act – Section 501(r) Each facility must:
- Conduct a Community Health Needs Assessment every three years and adopt a strategy to address the needs it identifies
- Maintain and publicize a written financial assistance policy describing who qualifies for free or discounted care
- Limit charges to patients eligible for financial assistance so they aren’t billed more than insured patients pay for the same services
- Hold off on aggressive collection actions against patients who may qualify for assistance until it has made reasonable efforts to determine eligibility
Missing the Community Health Needs Assessment deadline triggers a $50,000 excise tax per facility for each year of noncompliance.7Office of the Law Revision Counsel. 26 USC 4959 – Taxes on Failures by Hospital Organizations More serious or systematic 501(r) failures can cost a hospital its exemption entirely, since compliance is a statutory condition of being described in Section 501(c)(3).
Taxes Nonprofit Hospitals Still Owe
The exemption covers income tax connected to the charitable mission. It doesn’t cover everything.
Payroll Taxes
Every nonprofit hospital with employees withholds and matches Social Security tax at 6.2% and Medicare tax at 1.45% on wages. The combined FICA contribution is 15.3%, with the hospital paying half.8Internal Revenue Service. Exempt Organizations – What Are Employment Taxes For a large system, that runs into the tens of millions of dollars a year.
One break does apply: 501(c)(3) organizations are automatically exempt from the Federal Unemployment Tax Act, so nonprofit hospitals don’t pay federal unemployment taxes. State unemployment obligations vary.
Unrelated Business Income Tax
A nonprofit hospital owes federal income tax on revenue from commercial activities that aren’t substantially related to its healthcare mission. The Unrelated Business Income Tax exists to keep exempt organizations from using their status to undercut for-profit competitors in unrelated markets.9Office of the Law Revision Counsel. 26 USC 511 – Imposition of Tax on Unrelated Business Income of Charitable, Etc., Organizations
The tax kicks in when an activity is a regularly conducted trade or business with no substantial connection to the hospital’s charitable purpose. A pharmacy serving mainly walk-in customers off the street, a lab doing routine commercial testing for outside clinics, or a parking garage open to the public can all generate taxable unrelated business income. Any hospital with $1,000 or more in gross unrelated business income files Form 990-T.10Internal Revenue Service. Unrelated Business Income Tax
Several carve-outs keep this tax from hitting core operations. An activity carried on primarily for the convenience of patients or employees isn’t taxable even if outsiders sometimes use it, which covers cafeterias, gift shops, and in-house pharmacies filling prescriptions for admitted patients.11Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business All research income is excluded, regardless of who funds it. Passive income like royalties, dividends, interest, and most rents from real property is excluded as well.12Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income
The convenience exception does most of the work in practice. It draws the line between a pharmacy that serves patients (not taxable) and a pharmacy that competes with the CVS across the street (potentially taxable), with the primary customer base as the deciding factor.
Government-Owned Hospitals
Around 1,123 U.S. hospitals are run by government entities: 913 by state and local governments and 210 by the federal government, including the Veterans Affairs system.1American Hospital Association. Fast Facts on US Hospitals, 2026 These hospitals don’t pay federal income tax because the government itself isn’t a taxable entity, not because of Section 501(c)(3). They’re also generally exempt from property taxes and other local levies.
Property Taxes and PILOTs
Because nonprofit and government hospitals are exempt from property taxes, the cities and counties hosting them lose revenue on what are often the largest properties in town. Some municipalities negotiate voluntary Payments in Lieu of Taxes, in which the hospital makes annual payments toward public services like roads, police, and fire protection.13Lincoln Institute of Land Policy. Nonprofit PILOTs Policy Brief These payments are almost always well below what the hospital would owe under full taxation. Hospitals account for roughly a quarter of PILOT revenue nationwide.
PILOTs also work around a mismatch built into the property tax exemption: the exemption saves the most money for hospitals sitting on the most valuable real estate, not the ones providing the most charity care. A hospital on a high-value downtown campus saves far more than a smaller facility in a rural county, regardless of what either one gives back to its community.