Colleges do pay taxes, but how much depends entirely on whether the school is organized as a non-profit or a for-profit business. Non-profit colleges are generally exempt from federal and state income taxes, local property taxes, and most sales taxes on mission-related purchases. For-profit colleges pay all of those, at the same rates any other business does. And “tax-exempt” has never meant zero taxes: even the wealthiest non-profit universities owe payroll taxes, a federal excise tax on endowment investment income, and income tax on side businesses that have nothing to do with educating students.
What Non-Profit Colleges Don’t Pay
A college qualifies for tax-exempt status by organizing and operating exclusively for educational purposes under Section 501(c)(3) of the Internal Revenue Code. No portion of its net earnings can flow to any private individual with a personal stake in the institution.1Office of the Law Revision Counsel. 26 US Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc
Once that status is granted, the school pays no federal income tax on tuition revenue, research grants, donations, or investment income from its endowment. These income streams are all treated as substantially related to the educational mission.
Most states follow the federal lead and exempt qualifying non-profit colleges from state income taxes. Non-profit schools are also 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 typically qualify for sales tax exemptions on purchases tied to the educational mission as well.
The dollar value is substantial. A large research university with billions in property holdings and significant endowment income would owe tens or hundreds of millions in taxes annually if it operated as a regular business. Donors benefit too: contributions to a 501(c)(3) college are tax-deductible, and the school can issue tax-exempt bonds to borrow at lower rates than a for-profit competitor can access.
What Non-Profit Colleges Still Owe
Exempt status leaves several tax bills intact.
Payroll Taxes
Every non-profit college withholds and remits Social Security and Medicare (FICA) taxes on employee wages, exactly like any for-profit business.2Internal Revenue Service. Employment Taxes for Exempt Organizations For a university with thousands of faculty and staff, that bill runs into the millions each year.
One payroll break does apply: 501(c)(3) organizations 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 acting as a “reimbursing” employer that pays the state dollar-for-dollar when a former employee actually collects benefits.
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, or UBIT, and it exists to keep tax-exempt organizations from using their status to undercut regular businesses.4Internal Revenue Service. Publication 598 – Tax on Unrelated Business Income of Exempt Organizations
Common triggers 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. If the activity is regularly carried on and not substantially related to the educational mission, the income is taxed at the regular corporate rate of 21%.5Office of the Law Revision Counsel. 26 US Code 511 – Imposition of Tax on Unrelated Business Income
Everyday campus operations are protected by specific exclusions. A bookstore, cafeteria, or laundry run primarily for students, staff, and faculty is excluded as a convenience activity. Fundraising events staffed substantially by unpaid volunteers are excluded. Thrift-shop sales of donated goods are excluded regardless of how much they earn.6Internal Revenue Service. Unrelated Business Income Tax Exceptions and Exclusions The practical line looks like this: a university running its own dining hall for students owes no UBIT, but renting the same dining hall to an outside catering company on weekends can trigger it.
Penalties on Excess Executive Compensation
Non-profit colleges have no shareholders, but presidents, coaches, and senior administrators sometimes earn millions. When insiders receive compensation that exceeds what is reasonable for the services they provide, the IRS can impose steep excise taxes under Section 4958 without revoking the school’s exempt status. The person who received the excess owes an initial tax of 25% of the excess amount, rising to 200% if it isn’t returned within the taxable period. An organization manager who knowingly approved the deal owes 10% personally, capped at $20,000 per transaction.7Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions
The Endowment Excise Tax in 2026
Starting with tax years beginning in 2026, the federal excise tax on private college endowments looks very different from what Congress first enacted in 2017. The original flat 1.4% levy on net investment income has been replaced, under the One Big Beautiful Bill Act signed into law in 2025, with a graduated structure that hits the wealthiest schools harder.
The rates on net investment income are now:8Office of the Law Revision Counsel. 26 US Code 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
- 1.4% 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 land at $3 million per student, placing it squarely 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. Fewer schools trigger the tax at all now, but those that do with very large per-student endowments face rates close to six times the original.
What For-Profit Colleges Pay
For-profit colleges are structured to generate returns for owners or shareholders, and they are taxed like any other business. None of the 501(c)(3) exemptions apply.
- Federal corporate income tax at 21%, plus whatever the state charges on net earnings
- Property taxes on campuses, office buildings, and facilities, assessed as commercial property
- Sales taxes on purchases for operations, subject to the usual business exemptions in each state
- Full payroll taxes, including the FUTA that non-profits skip
The tax gap reaches beyond the school’s own return. Donations to a for-profit college are not tax-deductible, and the school cannot issue tax-exempt bonds. For-profit colleges can raise capital by selling stock, which non-profits cannot do, but that capital comes with investor expectations for returns.
Payments in Lieu of Taxes
Because non-profit colleges don’t pay property taxes, the cities and towns that host them often lose a significant chunk of their tax base. A university can own hundreds of acres of prime real estate while the surrounding municipality still provides police, fire protection, and road maintenance for that land.
Many large private colleges address this gap through voluntary “payments in lieu of taxes,” or PILOTs. These are negotiated agreements, not legal obligations, and the 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 such as free community access to campus facilities. There is no federal law requiring these payments, and many non-profit colleges make none at all.