Nonprofit organizations have some unique situations when addressing the pay and payroll taxes for their employees. Here, we address many of the common pay situations for nonprofits.
Non-Profit Salary: Employee Records
There are many state and federal laws and regulations regarding employee registrations that can be confusing and sometimes contradictory. What employee records do you need to keep to be safe? The following items, if you actually have them (and you should), should be stored in the employee staff files. We recommend, for audit and IRS purposes, to keep them for at least seven full years.
- Applicant job application
- Reference and background checks
- Offer of employment
- Job description
- IRS Form W4
- Enter W4 equivalent
- HLS Form I9
- Enrollment for employee benefit or reduction of forms
- Annual evaluations of results
- Interim evaluations or disciplinary forms
- End interview
Additional possible forms to keep
Non-profit payrolls: payroll payrolls
Non-profit salaries: employees
Officers and Directors
The Internal Revenue Code defines executives in a corporation – president, vice president, secretary and treasurer – as employees, and your 501 (c) (3) must classify them as such for tax purposes. This is true if your organization pays these officers to perform their duties as officers.
A 501 (c) (3) should not classify a company officer as an employee if he or she does not perform any services, or only perform minor services and neither receives nor is entitled to compensation.
In contrast, the code defines directors of a corporation – that is, board members – as non-employees, and your 501 (c) (3) must classify them as such for tax purposes. This applies if your organization pays its board members to attend board meetings or otherwise compensate them for performing their duties as directors.
From time to time, approx. 501 (c) (3) s provide voluntary awards or gifts. Generally, if these are non-cash items of face value, such as a ham around the holidays, your organization should not count these items as taxable wages.
If your 501 (c) (3) provides voluntary cash items, such as gift certificates or any other taxable perks, it must include these items in the voluntary taxable wages.
If a person is not an officer, director or volunteer and you compensate them for work done and they are not an independent contractor, they are an employee. Like other employers, 501 (c) (3) s who pay wages to employees must pay federal employment taxes on those wages. These taxes include:
- Federal income tax
- FICA taxes (social security and medicine)
Non-profit payroll: withholding federal income tax
Your 501 (c) (3) must generally (except statutory employees) withhold and pay federal income tax on its employees’ salaries.
To find out how much federal income tax is withholding, employers must ask employees to fill out IRS Form W-4, Employee Withholding Approval Certificate. Ask each new employee to complete and sign a W-4 within his or her first work day. Keep the form in the archive and send a copy to the IRS if the IRS requires you to do so in a written notice.
If a new employee does not provide a completed Form W-4, your 501 (c) (3) must have a single status with no withholding allowance.
Non-profit salaries: FICA taxes
FICA taxes go to Social Security and Medicare. Your 501 (c) (3) must withhold and pay these taxes from employees’ wages, with one exception: If your organization pays an employee less than $ 100 in a calendar year, it does not have to withhold FICA taxes for that employee. A 501 (c) (3) must pay both the amount of FICA tax withheld from employees ’pay and the organization’s match of that amount.
Non-Profit Wages: Federal Unemployment Taxes
The following is a direct offer from the IRS 940 instructions available at the following link:
“Religious, educational, scientific, charitable, and other organizations described in section 501 (c) (3) and exempt from tax under section 501 (a) are not subject to FUTA tax and do not have to file Form 940. “
What it comes down to is that if you are a 501 (c) (3) and you have received your favorable decision letter from the IRS, you do not have to pay federal unemployment taxes.
Non-profit wages: state-paid taxes
States vary in terms of unemployment taxes on non-profits, and you should check with your state unemployment insurance department for the rules of the countries you have employees.
Non-Profit Salary: Payment of Federal Revenue and FICA Taxes
Your 501 (c) (3) must pay withholding income tax along with both employer and employee portions of FICA taxes (minus any pre-earned income credit [EIC] payments). These payments must be made electronically using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order or cash to an authorized depositary. Please note that some taxpayers must pay exclusively using EFTPS. Contact a qualified non-profit payroll tax professional for more information.
Non-profit payroll: Reporting payroll taxes
When your 501 (c) (3) pays federal income and FICA taxes, it must file returns reporting that it has withheld and paid them. Just as the 501 (c) (3) pays federal income and FICA taxes collectively, it must report them together on IRS Form 941 Employers Quarterly Federal Tax Return. They must also be reported annually on IRS Form W2, a copy of which will also be distributed to your employees
Non-profit wages: Conclusion
There are many similarities between non-profit payrolls and for profit payrolls, but several differences are not all discussed here. We always recommend that you use a qualified outsourcing company with payroll with CPAs on staff. That way, your questions can be answered professionally and any issues resolved by a CPA who is prominently qualified by the education and experience to work with the IRS on payroll tax issues.