By nature, nonprofits operate with the selfless assistance of volunteers. However, what if we told you that nonprofits also have paid employees who rely on regularly scheduled paydays?
Nonprofits face payroll challenges similar to those of for-profit businesses
Just like for-profit businesses, nonprofits have to learn how to accurately withhold payroll taxes on behalf of their employees. But because they are nonprofits, they are required to work within tight and limited budgets while determining reasonable executive compensation for each employee.
Interestingly enough, many people believe a common misconception that suggests nonprofits do not have to pay their employees, which would mean they don’t have to run payroll or withhold taxes. However, that’s not entirely true. If a nonprofit employs staff members who are classified as employees, they are subject to the same payroll taxes as for-profit firms.
What types of taxes do nonprofits have to pay?
Nonprofits are required to pay the Federal Insurance Contributions Act (FICA) tax. They fulfill this responsibility by withholding federal income taxes — as well as Social Security and Medicare — from the paychecks of their employees. Nonprofits are also required to match the contributions their employees make toward Social Security and Medicare.
When it comes to 501(c)(3) organizations, they are not liable for Federal Unemployment Tax Act (FUTA) taxes. That said, nonprofits that do not fit this particular classification are liable. Furthermore, nonprofit organizations must pay applicable state and local taxes. One example of this type of tax is the State Unemployment Tax Act (SUTA).
While there are certain exemptions that charitable nonprofits are eligible for, it’s imperative that you check the city and state tax requirements in your area. Also, in some cases, quarterly SUTA tax payments can be dispensed with in favor of directly paying the state for unemployment benefits regarding former employees.
Of course, keep in mind that there are different kinds of nonprofits, with subtle but important differences. Be sure to work with professionals to understand what laws and regulations apply to yours.
How should nonprofits deal with volunteer workers?
If taxable gifts are offered to volunteers in exchange for their work, then taxes must be withheld from the monetary gift just like they would be for payroll on behalf of employees. Volunteers are required to report the value of the gifts as being taxable income when submitting their tax information to the IRS.
What about grants that nonprofits receive?
Nonprofits might receive grants from foundations. The intention behind the grants is for the nonprofits to use said grants for specific projects that are designed to further the mission of the nonprofit. Grants can also be used to cover payroll costs associated with employees whose work-related duties support the progression of the project.
Also, while carrying out projects funded by grants, it is important to track the amount of time that people within the nonprofit allocate toward the project. If you need help doing so, consider utilizing a mobile app that can capture the number of hours spent on the project. Then, make sure the hours being tracked in real time connect directly to a payroll application for recordkeeping purposes.
IRS rules are in effect
In the eyes of the IRS, nonprofit officers and directors must meet specific requirements for reasonable compensation. This must account for total compensation, including wages, fringe benefits, and paid time off.
Professional development costs, bonuses, and health insurance are part of this as well, if applicable. To stay on top of the value of everyone’s total compensation, nonprofits should regularly review the salaries of their employees. This will help ensure that they uphold total compliance with the IRS’ rules.
Payroll taxes that are withheld by nonprofits need to be submitted to the IRS. However, they won’t be automatically transferred when they are withheld by the nonprofits. Instead, payroll taxes are recognized as business liabilities until the deadline by which the nonprofit must transfer the funds.
To assist you and your nonprofit with payroll processing, consider opting in to an accredited payroll service. Another option is to implement HR software. For the greatest peace of mind, hire an accountant instead.
Third-party services with experience in the world of nonprofits can ensure that your nonprofit is entirely tax-compliant. Just keep in mind that payroll services can be expensive. Most of them are priced in ways where you have to pay a flat-rate monthly fee in addition to a per-employee monthly fee.
Since many nonprofits are operating within limited budgets, it’s typically easier to establish an in-house payroll process instead. If this is what you decide to do within your nonprofit, make sure nobody has isolated access to payroll-related information. Whenever someone is entering, approving, or processing payroll, a second person must be present to verify the payroll data prior to processing and issuing checks or direct deposits. This is necessary for security reasons.
When it comes to payroll for nonprofits, one of the most challenging aspects is learning how to balance budgets while maintaining payroll compliance. This can help your nonprofit simultaneously minimize penalties and save money.
If you decide to use a third-party payroll platform, it’s wise to ensure that the platform works with your existing bookkeeping and time-tracking software. Also, double-check that it updates alongside tax laws and regulations as they change.