Nonprofit organizations have some unique situations when dealing with payroll and payroll taxes for their employees. Here we are addressing many of the common payroll scenarios 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 actually have them (and you should) should be kept in the employee’s personnel files. We recommend for IRS and auditing 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 evaluations
- Interim Evaluations or Disciplinary Forms
- exit interview
Possible additional ways to maintain
Copies of any statements provided by employees regarding nonresident alien status, residence in Puerto Rico or the Virgin Islands, or residence or physical presence in a foreign country
Any agreement between you and the employee on Form W-4 for voluntary withholding of additional amounts of tax
Employee requests to have tax withheld based on their individual accrued wages and any notice that such request was revoked
IRS Form W-5, Earned Income Credit Advance Payment Certificate, and the amounts and dates of the advance payments
Nonprofit Payroll: Payroll Records
The name, address, and Social Security number of each employee
The total amount and date of each wage payment and the time period the payment covers
The amounts subject to withholding for each salary payment
The amount of withholding tax collected on each payment and the date of collection
The reason, if the tax base is less than the total payment
The fair market value and date of each non-monetary compensation payment
Information about the amount of each payment for accidents or health plans
The dates in each calendar quarter on which any employee worked for you, but not in the course of his or her trade or business, and the amount paid for that work, if necessary to calculate tax liability.
Copies of statements employees give you when reporting advice received at work, unless the information shown on the statements is elsewhere on this list.
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, that is, 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, for non-cash items of nominal value, such as a holiday ham, 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.
Staff
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: Federal Income Tax Tenure
Your 501(c)(3) generally (except statutory employees) must withhold and pay federal income tax from your employees’ wages.
To calculate how much federal income tax to withhold, employers must require employees to 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) should assume single status with no withholding.
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 employee wages and the organization’s match for 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 tax-exempt under section 501(a) are not subject to FUTA tax and are not required to file the Form 940”.
What it all boils down to is that 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 nonprofit organizations and you should check with your state Unemployment Insurance Department 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 FICA taxes (minus any advance earned income credits). [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 Return
Once your 501(c)(3) deposits federal income and FICA taxes, you must file returns saying 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 Tax Return for Employers. They must also be reported annually on the IRS Form W2, a copy of which is also distributed to your employees.
Non-Profit Payroll: 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 CPAs 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.
