Non Profit Organizations have some unique situations when addressing payroll and payroll taxes for their employees. Here we are addressing here many of the common payroll situations for Non Profit Payrolls.
Non Profit Payroll: Employee Records
There are many state and federal laws and regulations concerning employee records that can be confusing and some times contradictory. What employee records should you keep to be safe? The following items if you actually have them (and you should) need to be kept in employee’s personnel files. We recommend for audit and IRS purposes that you keep them for at least seven full years.
- Employee job application
- Reference and background checks
- Offer of employment
- Job description
- IRS Form W4
- State W4 equivalent
- HLS Form I9
- Employee benefit enrollment or declining forms
- Annual performance evaluations
- Interim evaluations or disciplinary forms
- Exit Interview
Additional possible forms to keep
Non Profit Payroll: Payroll Pay Records
Non Profit Payroll: Employees
Officers and Directors
The Internal Revenue Code defines the officers of a corporation–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 he or she performs no services, or performs only minor services and neither receives nor is entitled to compensation.
By contrast, the Code defines the directors of a corporation–that is, members of the governing board–as nonemployees, 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 compensates them for performing their duties as directors.
From time to time, some 501(c)(3)s may provide volunteers with awards, or gifts. In general, if these are non-cash items of nominal value, such as a ham around 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 benefit, it must include these items in the volunteers 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 that pay wages to employees must pay Federal Employment taxes on those wages. These taxes include:
- Federal income tax
- FICA taxes (Social Security and Medicare)
Non Profit Payroll: Federal Income Tax Withholding
Your 501(c)(3) generally (except Statutory Employees) must withhold and pay Federal income tax from its employees’ wages.
To figure out how much Federal income tax to withhold, employers should ask employees to complete IRS Form W-4, Employee Withholding Allowance Certificate. Ask each new employee to complete and sign a W-4 by his or her 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 fails to provide a completed Form W-4, your 501(c)(3) should assume single status with no withholding allowances.
Non Profit Payroll: FICA Taxes
FICA taxes go toward 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 any calendar year, it need not 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 match of that amount.
Non Profit Payroll: Federal Unemployment Taxes
The following is a direct quote 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 determination letter from the IRS you don’t have to pay Federal Unemployment taxes.
Non Profit Payroll: State Unemployment Taxes
States vary on unemployment taxes on non profits and you should check with your State Unemployment Insurance Department for the rules in the States you have employees.
Non Profit Payroll: Paying Federal Income and FICA Taxes
Your 501(c)(3) must pay withheld income taxes, together with both the employer and employee portions of FICA taxes (minus any advance earned income credit [EIC] payments). These payments must be paid electronically using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order, or cash to an authorized depositary. Note that some taxpayers are required to exclusivly deposit using EFTPS. Check with a qualified non profit payroll tax professional for additional information.
Non Profit Payroll: Reporting Payroll Taxes
Once your 501(c)(3) deposits the Federal income and FICA taxes, it must submit returns reporting that it has withheld and paid them. Just as the 501(c)(3) pays Federal income and FICA taxes together, it must report them together on IRS Form 941Employers Quarterly Federal Tax Return. They must also be reported annually on IRS Form W2 a copy of which is also distributed to your employees
Non Profit Payroll: Conclusion
There are many similarities between Non Profit Payroll and For Profit Payrolls but several differences not all of which have been discussed here. We always recommend that you use a qualified payroll outsourcing company with CPA’s on staff. That way your questions can be answered professionally and any problems solved by a CPA who is eminently qualified by training and experience to work with the IRS on payroll tax problems.