Non-Member Income Limits for 501(c)(7) Social Clubs
In the first post in this series, we explored why a pickleball club was denied 501(c)(3) status, and how 501(c)(7) is often a better fit for clubs organized around social and recreational activities. As we explained, 501(c)(7) social clubs are designed to serve the mutual interests of their members, not the general public. But qualifying for 501(c)(7) exemption is just the beginning, clubs must also carefully navigate IRS limits on how they generate income, particularly when it comes to revenue from nonmembers.
In this post, we’ll dig into the IRS rules on membership income and how they affect eligibility for 501(c)(7) status. We’ll explain the 35% and 15% income thresholds, what counts as nonmember income, and how things like event tickets or facility rentals can impact your tax-exempt status.
The key takeaway is that 501(c)(7) social clubs must be careful not to let outside income or private benefits creep in and push them out of compliance.
To maintain tax-exempt status under 501(c)(7), a social club must ensure that its activities and financial support remain primarily focused on serving its members. While some outside income is allowed, the IRS sets strict limits on how much revenue can come from nonmembers without putting the club’s exemption at risk.
The 35%/15% Rule: Understanding the Limits
Substantially all of a 501(c)(7) organization’s activities must directly support its exempt purposes of pleasure, recreation, and other nonprofit goals. The IRS measures “substantially all” by evaluating the source of the organization’s gross receipts. Specifically, no more than 35% of gross receipts may come from sources outside the membership. Additionally, within this 35%, no more than 15% of gross receipts may be derived from the use of club facilities by nonmembers. The IRS uses a two-tiered test to measure how much of a 501(c)(7) social club’s gross receipts may come from nonmember sources. These thresholds are designed to ensure that the club is primarily supported by and operated for its members, as required under Treas. Reg. § 1.501(c)(7)-1.
Notably, the 35%/15% rule is not found in the Internal Revenue Code but is based on longstanding administrative practice (for good breakdowns, see IRS Exempt Organizations Continuing Professional Education Text and Revenue Procedure 71-17).
Generally, a club should ensure that:
● No more than 35% of gross receipts come from nonmember sources, including:
o Guest fees
o Rental income
o Investment income
o Revenue from public events or activities
● Within that 35%, no more than 15% of gross receipts can come from the use of club facilities or services by nonmembers, such as:
o Facility rentals for weddings or conferences
o Nonmember use of dining, recreation, or event spaces
o Guest fees for golf, tennis, or pickleball
What Counts as Member vs. Nonmember Income?
● Member income refers to funds received directly from bona fide members in exchange for their rights to use the club’s facilities, participate in club activities, or receive club services. This includes dues, assessments, fees for member events, and any payments made on the member’s behalf (such as by an employer) when the member is the actual beneficiary.includes dues, assessments, and event fees paid by bona fide members. Generally, this also includes income from members paying for nonmember guest enjoyment of club facilities.
● Nonmember income includes:
o Charges to guests of members (even if the member is present)
o Revenue from open-to-the-public events
o Investment earnings (including dividends of a taxable subsidiary) (yes, investment income is considered nonmember income, unlike the passive income rule with 501(c)(3)s.)
o Sponsorship— and even gifts explicitly intended to support the exempt purpose of the social club.
o There are no restrictions on free public use of club facilities that do not produce income. However, frequent or substantial use by nonmembers may still jeopardize 501(c)(7) status if the club primarily serves the public rather than its members.
Why This Matters
If a club consistently exceeds these thresholds, the IRS may determine that the organization is no longer operated “substantially for the pleasure and recreation of its members” the key requirement under Section 501(c)(7). This could result in the revocation of exempt status.
Even if nonmember income is under the threshold, that nonmember income is likely taxable as unrelated business income under IRC 512(a)(3)(A) unless it qualifies as exempt function income (i.e., income that directly supports the club’s exempt purpose of serving members).
Practical Tips
● Keep detailed records of all receipts, categorized by member vs. nonmember.
● Track gross receipts by source throughout the year, not just at year end.
● Use sign-in sheets or event ticket logs to document attendees and their member status.
● Be cautious with large public-facing events or outside facility rentals that could push nonmember income above safe thresholds.
● Revisit member definitions and ensure all revenue labeled as “member income” meets IRS criteria.
Maintaining the right balance between member and nonmember income is critical to keeping your club compliant and tax-exempt.
Conclusion
Staying within the IRS’s nonmember income limits is critical for any 501(c)(7) social club that wants to preserve its tax-exempt status. While some outside revenue is permitted, it must remain incidental to the club’s primary purpose: serving its members. By tracking income sources carefully, keeping good records, and being thoughtful about public-facing activities, clubs can stay compliant and tax-exempt.
With that said, every organization’s facts and financial structure are unique, and there are many exceptions and nuances in the IRS’s treatment of income and member status. This blog is for general informational purposes only and should not be relied on as legal or tax advice. Clubs facing issues should consult a qualified attorney or tax advisor familiar with 501(c)(7) compliance.