An important aspect of accounting for nonprofits is mastering the rules and regulations of nonprofit employee payroll. Even though nonprofit organizations may be tax-exempt, you must still contribute payroll and other taxes at the federal and state level. It’s time to master nonprofit payroll accounting, so get your pencils sharpened or your tablet ready and take notes. This is something you really don’t want to make a mistake with when you’re handling payroll.
But We Are Tax Exempt!
A tax-exempt organization is one that has been granted tax-exempt status by the federal government. Your organization does not have to pay federal corporate taxes, but your employees are still responsible for filing and paying state and federal income tax. Both you and your employees are also required to file and pay the appropriate federal, state, and local Medicare and social security taxes. Tax exempt does not mean you are forever free from paying all taxes – just exempt from certain ones.
Exemptions
If you must file Medicare, social security, and other payroll taxes, are any exempt? Yes, some organizations may be exempt from paying specific payroll taxes. These include:
- Some churches and church-controlled organizations may take an elective exemption from paying FICA (social security and Medicare) taxes.
- Some services performed by ministers or members of religious orders may be exempt from FICA.
- Compensation paid to students may be exempt from FICA.
FUTA Taxes
The IRS has stated that “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.”
But before you celebrate, keep in mind that you must receive a favorable determination letter from the IRS to qualify for this exemption. State and local laws may also disregard the exemption, so you should check with your local government offices to ensure you are in full compliance with local tax laws.
What About Volunteer Compensation?
Volunteer compensation falls into a bit of a gray area. Thank-you gifts to volunteers that hold little cash value, such as a goody bag for helping out with a charity event or a plaque to honor volunteers isn’t taxed. Gift cards, cash awards, and other types of remuneration may be taxable. When in doubt, speak with an experienced firm that specializes in accounting for nonprofits.
What If I Don’t File Payroll Taxes?
Ignorance may be bliss for many people, but not when you’re running a nonprofit organization. Don’t remain ignorant of your duties to file and pay taxes on your employees’ payroll.
If you do neglect to file and pay important taxes, the responsibility ultimately lies on the shoulders of your board of directors. Voluntary board members can be held liable for unpaid taxes and the resulting consequences, so if you serve on a nonprofit board, it’s wise to pay attention to accounting for nonprofits and to pay attention to how payroll taxes are determined and filed.
Keeping Payroll on the Right Track
To keep your nonprofit payroll running smoothly, consider investing in accounting for nonprofits software, payroll software, or a combination software product that provides you with both accounting and payroll functions. Such software can be customized with local, state, and federal tax information so that if your nonprofit operates across multiple states, you can manage local laws easier.
Accounting for nonprofits can be complex, but fortunately, with the right diligence and research, you can ensure that your organization’s payroll is handled correctly.
Beck & Company
Beck & Company are Washington DC nonprofit advisors. We also are Virginia certified nonprofit accountants. We work with nonprofits of all sizes serving many different constituents nationwide, providing a variety of consulting, auditing, and accounting services. For more information, please contact us at 703-834-0776 x8001.