Congratulations, your nonprofit organization is growing! As your operations scale up, you might find that it’s time hire some employees as well. While the process of locating the right people to staff your organization can be dynamic and flexible, when it comes to actually paying your employees, the rules are clear.
Unlike many areas of nonprofit operations, payroll is one area where nonprofit and for-profit organizations are subject to very similar regulations. Just like for-profit businesses, a not-for-profit organization must register for employer accounts, withhold the necessary payroll taxes, file returns and remit taxes. If your first thought is, “Taxes? But my organization is a nonprofit…we don’t have to pay taxes”, you would be in good company. It’s a common misconception that nonprofit organizations are exempt from all taxes. While nonprofits are typically exempt from federal income taxes and certain other types of taxes, nonprofit organizations are not exempt from payroll taxes.
Your tax obligations can vary depending on where you and your employees are located. To get you started, here are some tips to help your organization remain compliant and fulfil your tax obligations as an employer.
Registrations
Register with the Internal Revenue Service and obtain an Employer Identification Number (EIN). More than likely, your organization would have done this when it was formed. However, an EIN is required for filing returns and remitting federal employment taxes (Federal Withholding, Social Security Tax, Medicare Tax), so if you do not already have an EIN you must obtain one before hiring employees.
You will also need to register for employer accounts in state(s) that you will be hiring employees. With workforces going increasingly remote, this can be more complicated than it seems. One thing to think about during the hiring process is, “Where does my new employee live?” If the new employee lives in a different state, your organization may need register in that state as well. Registering for employer accounts can be time-consuming and confusing, but it’s well worth your attention. Registering incorrectly (or not at all!) can result in fines and penalties down the road.
Forms
Instruct your employees complete the federal Form W-4 and any state-specific withholding documentation. These forms tell you, as their employer, how much tax to withhold from their wages when you are running payroll.
Payroll Processing
Your nonprofit organization must have an established payroll schedule. The most common payroll schedules are semi-monthly (twice a month), bi-weekly (every other week), or weekly. It’s critical to run payroll on time, every time. When you process payroll, your organization is required to withhold a percentage of your employee’s paycheck. The employee’s portion is made up of the Medicare Tax (1.45%) and Social Security Tax (6.2%), as well as the federal withholding indicated on their W-4, plus any other employment taxes required by the state.
Remit the tax amounts withheld from employee, plus an additional 7.65% employer FICA (Medicare & Social Security Tax) match to the IRS. You will also need to remit any amounts withheld from employees for state taxes, as well as the associated employer taxes for that particular state.
Filing Tax Returns
File the required payroll tax returns with the respective government agency. For the IRS this could be the more common Quarterly 941/Annual 940 filing combo, or the less common Annual 944. State employer filing requirements vary widely. Refer to that particular state’s employer website for detailed requirements.
While this summary may help you get started with payroll compliance, it is by no means a comprehensive guide for not-for-profit employment taxes. If you have questions or need assistance with the payroll process, contact us today. Our CFO Solutions team can help you navigate your nonprofit payroll obligations and make sure your organization stays on the right track.