Do Hospitals Pay Taxes? Nonprofit, For-Profit, and Government

Whether a hospital pays taxes depends on who owns it. Of the roughly 6,100 hospitals in the United States, about 2,984 are nonprofits exempt from federal income tax under Section 501(c)(3), another 1,123 are government-owned and exempt as public entities, and about 1,224 are for-profit businesses that pay corporate taxes like any other company.¹ So the short answer to “do hospitals pay taxes” is: a minority of them do in full, most don’t pay federal income tax, and even the exempt ones still owe several categories of tax that the exemption doesn’t touch.

For-Profit Hospitals Pay the Full Tax Load

For-profit hospitals are taxed exactly like other corporations. They pay the flat 21% federal corporate income tax on net profits, plus any state corporate income tax. They owe local property taxes on their buildings and land, sales taxes on most purchases, and the full set of employer payroll taxes. Being a hospital gives them no break.

On payroll, they withhold and match Social Security tax at 6.2% and Medicare tax at 1.45% on employee wages, and they pay federal unemployment taxes. Any surplus revenue goes to shareholders or owners, with the government taking its cut along the way. This is the baseline that makes the nonprofit exemption so valuable by comparison.

Why Nonprofit Hospitals Are Exempt

Section 501(c)(3) of the Internal Revenue Code exempts organizations operated for charitable purposes from federal income tax.² The statute doesn’t mention hospitals by name. The IRS has long treated the promotion of community health as a charitable purpose under the general law of charity, even though the beneficiaries don’t include every person in the community.³

To qualify, a hospital applies to the IRS and must show that it benefits a class broad enough to serve the community and that it operates for a public rather than a private interest. Once approved, it owes no federal income tax on revenue tied to its charitable mission. State and local governments usually extend their own exemptions on top of that — including property tax and sales tax — based on the federal determination, though each state sets its own process.

The ongoing test for keeping the exemption is the community benefit standard set out in Revenue Ruling 69-545.⁴ The IRS looks at factors such as whether the hospital runs an emergency room open to everyone regardless of ability to pay, accepts Medicare and Medicaid patients, reinvests any surplus into facilities and research rather than distributing it, and draws board members from the broader community. No single factor is required, and no single factor is enough on its own. Every nonprofit hospital documents its community benefit activities each year on Schedule H of IRS Form 990, which is a public filing.⁵

The Affordable Care Act added further conditions through Section 501(r), including a triennial community health needs assessment, a written financial assistance policy, limits on what financial-assistance-eligible patients can be charged, and restrictions on aggressive collections.⁶ A hospital that systematically fails these requirements can lose its tax-exempt status entirely, though the IRS treats outright revocation as a last resort.

Taxes Nonprofit Hospitals Still Owe

Tax-exempt status covers federal income tax on mission-related revenue. It does not cover everything else, and two categories catch nonprofit hospitals most often.

Payroll Taxes

Every nonprofit hospital with employees must withhold and match Social Security tax at 6.2% and Medicare tax at 1.45% on employee wages. The combined employer-employee FICA contribution totals 15.3% of covered wages, and the hospital is responsible for half.⁷ For a large hospital system with thousands of employees, that runs to tens of millions of dollars a year.

One break does apply. Organizations exempt under Section 501(c)(3) are automatically exempt from the Federal Unemployment Tax Act, so nonprofit hospitals don’t pay federal unemployment taxes. State unemployment obligations vary.⁷

Unrelated Business Income Tax

A nonprofit hospital still owes federal income tax on revenue from commercial activities that don’t relate to its healthcare mission. The Unrelated Business Income Tax exists to keep tax-exempt organizations from using their status to undercut for-profit competitors in unrelated markets.⁸

An activity triggers the tax when it’s a regularly conducted trade or business with no substantial connection to the hospital’s charitable purpose. A pharmacy serving mostly walk-in customers from the street, a lab doing routine commercial testing for outside clinics, or a parking garage open to the general public could all generate taxable unrelated business income. Any hospital with $1,000 or more in gross unrelated business income must file Form 990-T.⁹

Several carve-outs keep this tax from hitting core hospital operations. Activities that exist primarily for the convenience of patients or employees — a hospital cafeteria, a gift shop, an in-house pharmacy filling prescriptions for admitted patients — don’t produce taxable income even if outsiders occasionally use the service.¹⁰ All income a hospital earns from research is excluded regardless of who funds it. Passive income such as royalties, dividends, interest, and most rents from real property is also excluded.¹¹ The convenience exception is the line that matters most in daily hospital operations: it separates a pharmacy that primarily serves patients from one that competes with the CVS across the street.

Government Hospitals

About 1,123 U.S. hospitals are operated by government entities. Of those, 913 are run by state and local governments, and 210 are federal, including the Veterans Affairs system.¹ They are exempt from federal income tax not under Section 501(c)(3) but because the government itself is not a taxable entity, and they are generally exempt from property taxes and other local levies as well.

Property Taxes and Payments in Lieu of Taxes

Because nonprofit and government hospitals are exempt from property taxes, cities and counties lose revenue on what are often the largest properties in town. Some municipalities negotiate voluntary agreements called Payments in Lieu of Taxes, or PILOTs, where the hospital makes annual payments toward public services like roads, police, and fire protection.¹²

These payments are almost always far less than what the hospital would owe if it were fully taxable. Hospitals account for roughly a quarter of all PILOT revenue nationwide. Negotiations can be contentious; a city often has the most leverage when a hospital needs a building permit or zoning change. Other hospitals make voluntary payments out of a sense of community responsibility.

PILOTs also address a built-in mismatch in the property tax exemption: it saves the most money for hospitals with the most valuable real estate, not necessarily those providing the most community benefit. A hospital on a high-value downtown campus saves far more than a smaller facility in a rural county, regardless of how much charity care either one provides.¹²

1
American Hospital Association. Fast Facts on US Hospitals, 2026
2
Office of the Law Revision Counsel. 26 USC 501 – Exemption from Tax on Corporations, Certain Trusts, Etc.
3
Internal Revenue Service. Charitable Hospitals – General Requirements for Tax-Exemption Under Section 501(c)(3)
4
Internal Revenue Service. Revenue Ruling 69-545 – Nonprofit Hospital Exemption
5
Internal Revenue Service. Instructions for Schedule H (Form 990)
6
Internal Revenue Service. Requirements for 501(c)(3) Hospitals Under the Affordable Care Act – Section 501(r)
7
Internal Revenue Service. Exempt Organizations – What Are Employment Taxes
8
Office of the Law Revision Counsel. 26 USC 511 – Imposition of Tax on Unrelated Business Income of Charitable, Etc., Organizations
9
Internal Revenue Service. Unrelated Business Income Tax
10
Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business
11
Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income
12
Lincoln Institute of Land Policy. Nonprofit PILOTs Policy Brief