What expense category is Membership Services Costs?

For membership-based nonprofit organizations, such as professional societies, trade associations, or community groups, providing benefits and services to members is the very reason for their existence. The costs directly related to delivering these services—from publishing journals to hosting member-only events—are the primary operational expenses of the organization.

Unlike a for-profit business, where expenses are measured against profit, a nonprofit's expenses are a measure of its mission delivery. 

Correctly categorizing these membership service costs is essential for accurate financial reporting, demonstrating value to members, and complying with IRS requirements for tax-exempt organizations. This guide will clarify how to classify these costs based on standard accounting and tax principles.

Membership Services Costs Category

For a membership-based nonprofit, the costs of providing benefits and services directly to its members are a direct Program Expense.

While the provided IRS documents focus on for-profit businesses, they establish the principle of deducting ordinary and necessary expenses. For a membership organization, providing member services is its ordinary and necessary activity. 

Therefore, these costs are a primary program expense that directly advances the organization's tax-exempt purpose, not a general administrative or fundraising cost.

Important Considerations While Classifying Membership Services Costs

The most critical factor is distinguishing between the costs that directly serve your members and those that support your organization's general overhead.

Program Expense vs. Administrative Expense

• Program Expense (Direct): These are costs for services that members directly benefit from. Examples include the cost of printing and distributing a member journal, speaker fees for a member-only educational webinar, or materials for a professional development workshop.
• Administrative Expense (Indirect/Overhead): These are general overhead costs required to run the organization, such as salaries for administrative staff, office rent, and utilities.

Allocation of Joint Costs

If an activity or cost serves both a program purpose and an administrative or fundraising purpose (e.g., a newsletter that includes both educational articles and a fundraising appeal), the costs must be reasonably allocated between the different functions. This allocation is a key component of nonprofit accounting.

Tax Implications and Recordkeeping

Properly accounting for membership service costs is essential for a nonprofit's financial statements and its annual IRS reporting.

How to Report the Expense

While the provided documents focus on for-profit tax forms, nonprofits have their own specific reporting requirements (such as the Form 990 series). On these forms, membership service costs are reported as program service expenses. 

This is a critical metric used by the IRS, donors, and the public to evaluate how effectively the organization is using its revenue to fulfill its mission, as opposed to spending on overhead or fundraising.

What Records to Keep

Thorough recordkeeping is essential to substantiate all program expenses. Your records must include:

• Invoices from all vendors and service providers (e.g., printers, event venues, speakers).
• Contracts and service agreements.
• Proof of payment for all related costs.
• A clear methodology for how you allocated any joint costs.

How Sage Expense Management (formerly Fyle) Automates Expense Tracking for Membership Services

Sage Expense Management helps you capture and organize the diverse costs of providing member benefits, ensuring every expense is documented and correctly allocated.

• Track by Program: Code every expense to a specific member service or program for precise financial reporting.
• Centralize All Invoices: Forward or attach your vendors for journals, events, and other services invoices directly to Sage Expense Management for automatic capture.
• Allocate Joint Costs: Easily split a single invoice between program, administrative, and fundraising categories within Sage Expense Management.
• Automate Your Accounting: Sync categorized program expenses directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.