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Nonprofit Payroll

Nonprofit organizations have some unique situations when dealing with their employees’ payroll and payroll taxes. Here we are addressing many of the common payroll situations for nonprofit payrolls.

Nonprofit Payroll – Employee Records

There are many state and federal laws and regulations related to employee records that can be confusing and sometimes contradictory. What employee records should you keep to be safe? The following items, if you really have them (and should) should be kept in the employee’s personnel files. We recommend for auditing and IRS purposes that you keep them for at least seven full years.

• employee job application
• Background checks and references
• Job offer
• Work description
• IRS Form W4
• Equivalent W4 status
• HLS Form I9
• Employee Benefits Enrollment or Denial Forms
• Annual performance reviews
• Intermediate evaluations or disciplinary forms
• exit interview

Possible additional ways to keep

Nonprofit Payroll – Payroll Payment Records

Nonprofit Payroll: Employees

Officers and Directors

The Internal Revenue Code defines a corporation’s officers (president, vice president, secretary, and treasurer) as employees, and your 501(c)(3) must classify them as such for tax purposes. This applies if your organization pays these officers to perform their duties as officers.

A 501(c)(3) should not classify a corporate officer as an employee if they perform no or only minor services and do not receive or are entitled to compensation.

Rather, the Code defines a corporation’s directors, meaning members of the board of directors, as non-employees, and your 501(c)(3) must classify them as such for tax purposes. This applies if your organization pays board members to attend board meetings or otherwise compensates them for performing their duties as directors.

volunteers

From time to time, some 501(c)(3)s may provide prizes or gifts to volunteers. In general, if they are non-cash items of nominal value, such as a ham during the holidays, your organization should not count these items as taxable wages.

If your 501(c)(3) gives volunteers cash items, such as gift certificates or any other taxable fringe benefits, you must include these items in the volunteers’ taxable wages.

Employees

If a person is not an officer, director, or volunteer and you compensate them for work performed and they are not an independent contractor, they are an employee. Like other employers, 501(c)(3)s that pay wages to employees must pay federal employment taxes on those wages. These taxes include:

• Federal taxes
• FICA taxes (Social Security and Medicare)

Nonprofit Payroll: Holding Federal Income Taxes

Your 501(c)(3) generally (except statutory employees) must withhold and pay federal income taxes on your employees’ wages.

To figure out how much federal income tax to withhold, employers should have employees complete IRS Form W-4, Employee Withholding Allowance Certificate. Have each new employee complete and sign a W-4 before their first day of work. Keep the form on file and send a copy to the IRS if the IRS directs you to do so in a written notice.

If a new employee does not provide a completed Form W-4, their 501(c)(3) must assume single status with no withholdings.

Nonprofit Payroll: FICA Taxes

FICA taxes go toward Social Security and Medicare. Your 501(c)(3) must withhold and pay these taxes from employee wages, with one exception: if your organization pays an employee less than $100 in any calendar year, you do not need to withhold FICA taxes for that employee. . A 501(c)(3) must pay both the amount of FICA tax withheld from employees’ wages and the organization’s matching of that amount.

Nonprofit Payroll: Federal Unemployment Taxes

The following is a direct quote from the IRS 940 instructions available at the following link:
http://www.irs.gov/instructions/i940/ch01.html#d0e251

“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 the Form 940.”

It all boils down to if you are a 501(c)(3) and have received your favorable determination letter from the IRS, you do not have to pay federal unemployment taxes.

Nonprofit Payroll: State Unemployment Taxes

States vary on unemployment taxes on nonprofits, and you should check with your state Department of Unemployment Insurance for the rules in the states where you have employees.

Nonprofit Payroll – Paying Federal Income Taxes and FICA

Your 501(c)(3) must pay the income taxes withheld, along with the employer and employee portions of the FICA taxes (minus any advanced 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 depository. Please note that some taxpayers are required to deposit exclusively using EFTPS. Consult with a qualified nonprofit payroll tax professional for additional information.

Nonprofit Payroll – Payroll Tax Filing

Once your 501(c)(3) deposits federal income taxes and FICA, you must file returns stating that you have withheld and paid them. Just as the 501(c)(3) pays federal income taxes and FICA together, you must report them together on IRS Form 941, Quarterly Federal Income Tax Return for Employers. They must also be reported annually on IRS Form W2, a copy of which is also distributed to your employees.

Payroll Without Benefit: Conclusion

There are many similarities between nonprofit payroll and for-profit payroll, but there are several differences that have not all been discussed here. We always recommend that you use a qualified payroll outsourcing company with a CPA on staff. That way, your questions can be professionally answered and any issues resolved by a CPA who is eminently qualified by training and experience to work with the IRS on payroll tax issues.