Running a nonprofit includes managing a complex workforce and an array of funding sources that can complicate payroll taxes, compliance, employee payroll, and more. Whether you’re leading a charitable organization, university, church, or political organization, a number of tax obligations and considerations apply.
From withholding and depositing FICA taxes to ensuring accurate submission of Form 990 and other IRS-required documentation, every type of nonprofit organization must successfully navigate these payroll, tax, timekeeping, and compliance concerns, especially since the IRS (and donors) require diligent recordkeeping.
Most commonly, nonprofits can claim tax-exempt status as one of the following organization types:
Organizations operating for scientific, religious, charitable, literary, educational, or public safety testing purposes may qualify for nonprofit status. After filing for an EIN and submitting Form 1024, nonprofits are typically granted 501(c)(3) status, though 501(a) or 501(c)(4) status may be granted based on the organization's type.
Since a nonprofit’s staff may include a mixture of employees, board members, executives, and volunteers, managing workforce payroll and employee classification can be a daunting task. This challenge is compounded by the range of funding sources most nonprofits utilize, including grants, fundraising, crowdfunding, private or corporation donations, and more.
To remain legally compliant and avoid payroll errors, inefficiencies, late payments, or miscalculated taxes, it’s important to understand how to pay different employee types within a nonprofit.
According to the IRS, board members and executives should be given “reasonable compensation” that is roughly equivalent to the pay they would receive from a comparable enterprise or organization. Compensation may include wages, benefits, perks, bonuses, and more – all factoring into total compensation.
Very often, compensation for executives and board members is in the six-figure range, though this is dependent on a number of factors including the following:
Volunteers are often integral to advancing a nonprofit’s mission. Although they offer unpaid time to participate in projects or tasks that support the nonprofit’s ground-level work, many nonprofits choose to incentivize participation by offering volunteers discounts, expense reimbursements, or even stipends. While this is an excellent way to encourage and sustain volunteerism, nonprofits also need to consider tax and liability consequences.
It’s important to keep these and other tax and liability concerns in mind as you craft a strategy for workforce management, payroll, and compliance for your nonprofit.
Since churches and religious organizations are a unique category of 501(c)(3) organizations, payroll protocols for ministers and religious figures are distinct from executives, board members, or volunteers. Periodically, ministers or religious figures are classified as self-employed, but for the most part, they are classified as nonprofit employees. If they do wish to be classified as self-employed, a minister must request a self-employment tax exemption from the IRS.
When religious figures and ministers are classified as employees, their pay is subject to income tax. In some cases, 501(c)(3) churches or religious organizations may be exempt from the employer portion of FICA (Social Security and Medicare) taxes on employee wages, assuming all employees either pay employee & employer portions of FICA taxes or self-employment taxes.
Any compensation given to a minister or religious figure – including housing or a housing stipend – must be reported using the IRS’ Form 990-T. Any housing-based compensation should be excluded from gross income calculations during income tax reporting.
Launching payroll for a nonprofit begins with applying for a federal employer identification number (EIN), a step which can now be completed online. During this process, Form 1024 should also be completed to file for tax-exempt status. Beyond this federal registration process, a nonprofit must also acquire a payroll tax identification number in their state (TIN).
In some cases, a local tax identification number will also be required to file/pay payroll taxes within the jurisdiction where the nonprofit operates.
After registering and obtaining tax-exempt status, gather various employee documents and payment preferences, including:
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A nonprofit must pay any employee the minimum wage that applies to their jurisdiction. In some cases, this may be the federal minimum wage, but many states have established minimum wages above this threshold, so it’s important to work with payroll and compliance experts to ensure a pay rate that meets or exceeds what is required.
Additionally, nonprofits must abide by overtime requirements that apply to nonexempt employees. Specifically, any nonexempt employee must be paid 1.5x their hourly pay rate for any hour of work beyond the standard 40-hour workweek.
Nonprofits also need to be wary of employee classification errors that could violate evolving FLSA rules regarding the misclassification of employees as independent contractors.
Funding from grants is eligible for use to cover the overall expenses of a grant-approved project, which includes payment to employees or payroll-related expenses. When grant funding is used to pay employees, each employee must diligently track their hours, activities, and completed work to demonstrate total time spent and the work’s relevancy to the grant-funded project. This process is greatly simplified with the use of leading-edge payroll and time and attendance software.
No. Most nonprofits must withhold and deposit funds to pay FICA (Social Security and Medicare) taxes on each employee’s behalf and complete tax returns accurately. In some cases, a nonprofit may also be obligated to pay state unemployment taxes or local taxes that apply to the jurisdiction where it operates.
A 501(c)(3) nonprofit could lose its tax-exempt status if it fails to submit Form 990 or pursues activities that either deviate from tax-exempt activities or benefit a private interest. For certain organizations, tax-exempt status could be rescinded for lobbying activities or participation in a political campaign.
Lastly, if a disproportionate amount of a nonprofit’s income is derived from activities that are not related to its mission, tax-exempt status could also be withdrawn.