What You Need to Know about Nonprofit Payroll

Nonprofit tips for meeting federal and state tax requirements
Running a nonprofit is a lot of work and it doesn’t end when it comes to payroll. Many nonprofits face a number of payroll challenges compared to for-profit businesses. For example, many nonprofits mistakenly believe that because they are exempt from paying income taxes that they are exempt from payroll taxes too. Regardless of whether a company is a nonprofit, offering services for charity, religion or education, its employees are still required to pay their income taxes, so nonprofits are not exempt from payroll taxes.

Nonprofit Tax and Payroll Compliance

Volunteer Compensation: When your nonprofit organization is compensating volunteers, the rules are specific:

• Cash items or fringe benefits, including gift cards, are considered taxable wages.
• Non-cash gifts are not considered taxable wages.

FICA Taxes: Nonprofit exempt organizations that pay workers are required to pay employment taxes if they compensate employees. Some exemptions apply:

• Exemption of payments for some services by ministers or members of religious orders from FICA.
• Churches and specific church-controlled organizations may take an elective exemption from FICA, such as Social Security and Medicare
• Exclusion for compensation that is paid to students

FUTA Taxes: According to the IRS, “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.” They need to pursue a “favorable determination” letter from the IRS in order to qualify for this specific exemption.

But to make things a little more gray, states have different rules when it comes to nonprofits, such as state unemployment taxes. Refer to your state’s rules to determine which taxes you are required to pay.