Keeping abreast of payroll taxes can be difficult, but nonprofit payroll taxes can be especially challenging. Some nonprofit organizations mistakenly think that obtaining the tax-exempt status exempts them from recording and paying all payroll taxes. The truth may be more nuanced and complicated than that, with variances according to worker status and more. Get the facts about nonprofit payroll taxes in order to maintain compliance with local, state, and federal law.
Need help setting up or processing payroll in your Abila MIP Fund Accounting™ system? Join us for our hands on training event, “Payroll in MIP.”
Nonprofit Payroll Taxes: Tax Status
Tax exempt status is obtained by completing the appropriate forms and receiving notification from the IRS that it has been granted to a nonprofit organization. This is a federal tax exemption and not a blanket exemption from paying all taxes. That’s an important distinction.
You may be exempt from paying federal corporate income taxes, but your employees must still pay their payroll taxes. Social Security and Medicare taxes are also not exempt and are important contributions that must be made and recorded to remain compliant with the law.
The IRS states 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.” You must receive and keep on file a designation from the IRS.
States, however, can have different rules from the federal ones, so you may be required to pay taxes on the state level. Check with your state taxation department or your accounting firm to determine state taxation requirements.
Like for-profit corporations, nonprofits are required to pay employment taxes on compensation to employees. There are a few exceptions to this which include:
- Churches and some religious organizations can elect an exemption from FICA (Social Security and Medicare).
- Ministers and other members of the clergy or religious organizations can exempt certain services from FICA taxes.
- FICA compensation paid to students may be excluded.
By the nature of volunteer work, it is usually uncompensated time. However, many nonprofits give gifts to volunteers. Small gifts of appreciation such as an award plaque are usually untaxed, but major gifts such as gift cards, gift certificates and any gifts of significant value may be subject to taxes. Generally speaking, non-cash gift items with token value only or sentimental value aren’t taxed, but anything that can be construed as cash or the equivalent of, like a gift certificate, may be taxed.
Who Is In Charge?
Who is on the hook if mistakes are made on taxation? You may be surprised to learn that it is the Board of Directors. The Board has ultimate oversight on all financial matters, and that includes taxes paid. If mistakes are made, the responsibility lies with the Board.
Board members should be aware of this requirement and take precautions to ensure that all employment taxes are paid accordingly. Reviewing this information with your nonprofit’s accounting and financial management staff is vital to ensure compliance.
Although it may seem, by virtue of being a nonprofit organization, you should not have to pay any taxes, there are still some which might need to be paid. A bit of research now and prudent oversight from your Board can ensure that you are in good standing with federal and state taxation laws.
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.