Non-profit payroll

Nonprofits have some unique situations when addressing payroll and payroll taxes for their employees. Here we cover many of the common payroll situations for nonprofit payrolls.

Nonprofit Payroll: Employee Data

There are many state and federal laws and regulations regarding employee records that can be confusing and sometimes contradictory. What personnel files should you keep to be safe? The following items, if you actually have them, should (and should) be kept in the employee’s personnel files. For audit and IRS purposes, we recommend keeping them for at least seven full years.

  • Employee application
  • Reference and background checks
  • Job offer
  • Job description
  • IRS Form W4
  • State W4 equivalent
  • HLS form I9
  • Employee benefits application or rejection forms
  • Annual Performance Reviews
  • Interim evaluations or forms of discipline
  • exit call

Additional possible forms to save

  • Copies of employee statements regarding nonresident alien status, residency in Puerto Rico or the Virgin Islands, or residency or physical presence in a foreign country
  • Any agreement between you and the employee on Form W-4 for voluntary withholding of additional tax amounts
  • Requests from employees to have withholding tax calculated based on their individual cumulative wages and any notice that such request has been withdrawn
  • IRS Form W-5, Prepayment Certificate for Earned Income and the amounts and dates of the advance payments
  • Nonprofit Payroll: Payroll Pay Records

  • The name, address and social security number of each employee
  • The total amount and date of each wage payment and the period of the payment
  • The withholding amounts per wage payment
  • The amount of withholding tax collected on each payment and the date of collection
  • The reason, if the taxable amount is less than the total payment
  • The fair market value and date of each payment of non-cash fees
  • Information on the amount of each payment for accident or health plans
  • The dates in each calendar quarter that an employee has worked for you, but not in the course of your profession or business, and the amount paid for that work, if necessary to calculate the tax liability
  • Copies of statements that employees give you about reporting tips they have received on the job, unless the information on the statements is in another item on this list
  • Non-Profit Payroll: Employees

    Officers and Directors

    The Internal Revenue Code defines a company’s officers — president, vice president, secretary, and treasurer — as employees, and your 501(c)(3) must classify them as such for tax purposes. This applies if your organization pays these officers to perform their duties as officers.

    A 501(c)(3) may not classify a company official as an employee if he or she performs no services, or performs only minor services and is not receiving or entitled to compensation.

    In contrast, the Code defines a company’s directors—that is, members of the board of directors—as non-employees, and your 501(c)(3) must classify them as such for tax purposes. This applies if your organization pays its directors to attend board meetings or otherwise remunerates them for performing their duties as directors.


    From time to time, some 501(c)(3)s may give awards or gifts to volunteers. In general, if these are non-monetary items of face value, such as a holiday ham, your organization should not count these items as taxable wages.

    If your 501(c)(3) gives volunteers cash items, such as gift cards or other taxable fringe benefits, those items must be included in the volunteer’s taxable pay.

    Staff members

    See also  Puerto Rico Payroll - Updated Puerto Rico payroll reporting and filing requirements

    If a person is not an officer, director or volunteer and you compensate them for the work done and they are not an independent contractor, then they are an employee. Like other employers, 501(c)(3)s who pay wages to employees must pay federal employment taxes on those wages. These taxes include:

    • Federal Income Tax
    • FICA Taxes (Social Security and Medicare)

    Nonprofit Payroll: Federal Withholding Tax

    Your 501(c)(3) must generally (except for statutory employees) withhold and pay federal income tax on its employees’ wages.

    To find out how much federal income tax to withhold, employers must ask employees to complete IRS Form W-4, Employee Tax Withholding Certificate. Ask every new employee to complete and sign a W-4 on their first day of work. Keep the form on file and send a copy to the IRS if instructed by the IRS in writing.

    If a new employee fails to provide a completed Form W-4, your 501(c)(3) must assume sole status with no withholding fees.

    Nonprofit Payroll: FICA Taxes

    FICA taxes go to Social Security and Medicare. Your 501(c)(3) must withhold and pay these taxes from the employees’ wages, with one exception: If your organization pays an employee less than $100 in a calendar year, it does not have to file FICA taxes on that employee. to keep. A 501(c)(3) must pay both the amount of FICA tax withheld from the employees’ wages and the organization’s match to that amount.

    Nonprofit Payroll: Federal Unemployment Taxes

    The following is a direct quote from the IRS 940 instructions available at the following link:

    “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 are not required to file Form 940. “

    The bottom line is that if you’re a 501(c)(3) and you received your favorable determination letter from the IRS, you don’t have to pay federal unemployment tax.

    Nonprofit Payroll: State Unemployment Taxes

    States differ when it comes to unemployment taxes on nonprofits, and you should check with your state unemployment insurance department for the rules in the states where you have employees.

    Nonprofit Payroll: Paying Federal Income and FICA Taxes

    Your 501(c)(3) must pay withheld income tax along with both the employer and employee portion of FICA taxes (minus any advances on earned income [EIC] payments). These payments must be made electronically using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order or cash to an authorized custodian. Please note that some taxpayers are required to deposit exclusively with EFTPS. Contact a qualified nonprofit payroll tax professional for more information.

    Nonprofit Payroll: Reporting Payroll Taxes

    Once your 501(c)(3) has filed federal income and FICA taxes, it must file returns stating that they withheld and paid them. Just as the 501(c)(3) pays federal income and FICA taxes together, it must be reported together on IRS Form 941Employers Quarterly Federal Tax Return. They must also be reported annually on IRS Form W2, a copy of which is also distributed to your employees

    Non-profit payroll: conclusion

    There are many similarities between Non-Profit Payroll and For Profit Payrolls, but there are several differences that are not all discussed here. We always recommend that you engage a qualified payroll outsourcing company with staff CPAs. That way, your questions can be professionally answered and any issues resolved by a CPA who is ideally qualified through education and experience to work with the IRS on payroll tax issues.