How to Do Nonprofit Payroll: The Nuances of Paying Taxes and Workers

Charlette Beasley

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Although nonprofits differ from traditional businesses in that they aren’t focused on turning a profit or responsible for paying income taxes, they still have to pay employees and payroll taxes. If your nonprofit has 501c3 status, it’s exempt from paying federal unemployment taxes. You’ll still need to withhold taxes from employee pay though and be careful not to overpay volunteers.

To make paying your nonprofit employees and taxes easier, consider partnering with Cirrus Payroll. Without services, you can pay employees via direct deposit and trust that your nonprofit payroll taxes will be paid and filed. Sign up to learn more today.

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Nonprofit Organizations & Payroll Taxes

The biggest question most nonprofit leaders have about nonprofit payroll is whether or not they have to pay taxes. And the answer is yes, but not all taxes that for-profit businesses pay. 

There are two types of taxes employers pay: income taxes and payroll taxes:

  • Business Income taxes are charged on the money an organization earns; since nonprofits aren’t in the business of earning profit, the IRS exempts them from this tax. 

 

  • Payroll taxes are charged on the money your nonprofit employees earn for working at your organization. This includes Social Security and Medicare (both your portion and the employees’), income taxes for employees, and unemployment taxes.

 

As a nonprofit employer, you’re responsible for collecting and paying payroll taxes. The only caveat is unemployment tax insurance. 501c3 nonprofits aren’t required to pay federal unemployment taxes (FUTA). And state unemployment tax (SUTA) requirements vary depending on the state. For instance, in Oklahoma, if you have four or more employees, you must register with the Oklahoma Employment Security Commission and both file and pay SUTA. If you have less than four employees, you’re not responsible for paying.

In some states, paying for SUTA upfront is optional for nonprofits. They give organizations the choice to pay SUTA in the same manner that for-profit companies do or agree to refund the state for any approved claims it pays to the nonprofit’s former employees.

**If you’re responsible for paying SUTA or just opt to, there are some steps you can take to keep your tax rate low. Learn more in our state unemployment tax article.

How to Pay Nonprofit Volunteers

Aside from taxes, another major payroll concern nonprofits face that businesses do not is the legality of paying volunteers. Volunteers are typically unpaid, but many nonprofits prefer to provide some form of compensation when possible, even if it’s in-kind. There are a few best practices you must be aware of to ensure you’re complying with payroll regulations, but let’s first review how the Department of Labor defines “volunteer.”

An individual who performs hours of service…for civic, charitable, or humanitarian reasons, without promise, expectation, or receipt of compensation for services rendered

To ensure you can’t be penalized for misclassifying an employee as a volunteer, you should follow the rules below:

  • Any pay you provide volunteers cannot be tied directly to any benefits or money received as a result of the work they performed; the work they perform must typical volunteer work
  • If you opt to pay your volunteers, the amount must be nominal
  • You cannot replace any employees with volunteers who perform the same or similar work.
  • Volunteers must work less than full-time.
  • Do not force or coerce employees to spend extra time “volunteering” after their work hours or at any other time.

Volunteer Payment Options

You can pay volunteers in cash or check, but be sure the amount doesn’t exceed 20% of the total you’d pay an employee to complete the same work. You can also choose to provide non-monetary gifts, like season passes to a nearby theme park, but you’ll need to make sure the value follows the same rules as monetary gifts. 

Keep in mind, you’ll still need to withhold income and FICA taxes from monetary and some non-monetary payments. If you give a volunteer an inexpensive gift, like a coffee mug or a t-shirt, it may qualify as a de-minimis fringe benefit. And you’re not required to withhold taxes on the value of items that fall into this category.

*If you’re making multiple payments to volunteers, it’s important that you’re aware of the total payout at all times. Volunteers shouldn’t receive more than $500 a year; if they do, the IRS can classify them as an employee and charge you numerous late fees and penalties.

Workers’ Compensation Requirements for Nonprofits

Most states require nonprofits to provide workers’ comp (insurance that covers employees who get hurt or ill on or due to the job) for their employees, except Texas. It’s not typically required for volunteers, unless they’re a long-term volunteer. Some states also exempt certain nonprofit board members from coverage. And if you have only one or two employees, your organization might also be exempt.

To learn more about workers’ compensation coverage in your state along with rates, consider working with Cirrus Payroll. It partners with AP Intego, so you have access to pay-as-you-go workers’ compensation that syncs with your payroll. Request a free quote today.

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