A nonprofit organization is a legal non-business entity that works for social welfare. The mission of a nonprofit organization is to work for public or social benefit than generating profit. A nonprofit organization might not make a profit but they run much like corporations with paid employees and regularly scheduled paydays. Many people work for a nonprofit organization and receive a paycheck. So sometimes it is a bit confusing to understand and implement the nonprofit payroll.
Nonprofit organizations are exempt from federal income taxes as well as sales tax and property tax. Under subsection 501(c) of the Internal Revenue Service (IRS) tax code, nonprofit organizations are exempt from federal income taxes but nonprofit organizations have to pay employee taxes. So if you are working for a nonprofit organization and receiving a salary then you have to file income tax.
Withholding Payroll Taxes
There is a misconception that nonprofits don’t pay employees and therefore they don’t have to pay payroll taxes. But, the truth is, nonprofits have employees on staff and they have to pay the employee tax despite having tax-exempt status. In fact, nonprofit organizations are subject to the same payroll taxes as the profit organization. So nonprofit organizations have to withhold federal income tax and FICA (Social Security and Medicare) taxes from employee paychecks. On the other hand, nonprofits without 501(c)(3) status are required to pay FUTA taxes to the federal government. When it comes to a nonprofit organization, there are a few other considerations –
1. If the nonprofit organization, pays an employee less than $108.28 in a calendar year then the organization doesn’t need to withhold FICA taxes from that employee’s wages.
2. When you are rewarding the volunteers make sure you offer rewards that are not taxable. For example, you can reward your volunteers, with parking passes, on-site meals, educational training, etc. However, if you are giving expensive gifts then the organization must withhold taxes, and the volunteer must report the value to the IRS as taxable income.
If you are working in a nonprofit organization then it is very important for you to understand subsection 501(c) of the United States Internal Revenue Code (IRC). Over the years this IRC code has expanded to include more types of organizations. According to the IRS Publication 557, in the Organization Reference Chart section, the following is an exact list of 501(c) organization types and their corresponding descriptions –
|501(c)(1)||Corporations Organized Under Act of Congress, including Federal Credit Unions and National Farm Loan Associations|
|501(c)(2)||Title-holding Corporations for Exempt Organizations|
|501(c)(3)||Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations|
|501(c)(4)||Civic Leagues, Social Welfare Organizations, and Local Associations of Employees|
|501(c)(5)||Labor, Agricultural and Horticultural Organizations|
|501(c)(6)||Business Leagues, Chambers of Commerce, Real Estate Boards|
|501(c)(7)||Social and Recreational Clubs|
|501(c)(8)||Fraternal Beneficiary Societies and Associations|
|501(c)(9)||Voluntary Employee Beneficiary Associations|
|501(c)(10)||Domestic Fraternal Societies and Associations|
|501(c)(11)||Teachers’ Retirement Fund Associations|
|501(c)(12)||Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies|
|501(c)(14)||State-Chartered Credit Unions, Mutual Reserve Funds|
|501(c)(15)||Mutual Insurance Companies or Associations|
|501(c)(16)||Cooperative Organizations to Finance Crop Operations|
|501(c)(17)||Supplemental Unemployment Benefit Trusts|
|501(c)(18)||Employee Funded Pension Trust (created before 25 June 1959)|
|501(c)(19)||Post or Organization of Past or Present Members of the Armed Forces|
|501(c)(20)||Group Legal Services Plan Organizations|
|501(c)(21)||Black Lung Benefit Trusts|
|501(c)(22)||Withdrawal Liability Payment Fund|
|501(c)(24)||Section 4049 ERISA Trusts|
|501(c)(25)||Real Property Title-Holding Corporations or Trusts with Multiple Parents|
|501(c)(26)||State-Sponsored Organization Providing Health Coverage for High-Risk Individuals|
|501(c)(27)||State-Sponsored Workers’ Compensation Reinsurance Organization|
|501(c)(28)||National Railroad Retirement Investment Trust|
|501(c)(29)||Qualified Nonprofit Health Insurance Issuers|
Usually, the tax law changes frequently so it is very important to check and monitor the laws every time there is an update.
Using Grants To Pay Employees
On many occasions, nonprofit organizations apply for grants to fund specific projects and support the overall mission. Organizations can use grants to pay the payroll expenses for a certain number of employees. In this type of situation, employees must track their time and activities for that specific grant. Some of the activities might be done during the normal pay and others might be done during the grant. Therefore, it is very important to keep the track of the activities. This will help you easily report on payroll expenses connected with a specific grant. Moreover, the authority can check the reports to see payroll expenses allocated to the grant and then enter the data in their accounting system.
Filing Annual Returns
All the tax-exempt nonprofit organizations are obligated to file an annual information return with the IRS. Though there are exceptions for certain religious organizations, schools, and political organizations. Nonprofit organizations need to file the return because it allows the IRS and the general public to audit nonprofit operations and it also helps the organization to maintain tax-exempt status. The nonprofit organizations have to fill the Form 990 and it requires a considerable amount of data to be filled including payroll taxes, number of employees, and executive compensation. Depending on the size, different organizations have to fill out different forms.
|Form Type||Organization Type|
|Form 990||Organizations with gross receipts greater than or equal to $200,000 or total assets greater than or equal to $500,000 at the end of the tax year|
|Form 990-EZ||Organizations with annual receipts of less than $200,000 and total assets at the end of the year less than $500,000.|
|Form 990-N||Small organizations with annual receipts less than or equal to $50,000|
|Form 990-PF||Private foundations, including nonexempt charitable trusts, are treated as private foundations, regardless of financial status|
|Form 990-T||Business income tax return to report unrelated business income|
|Form 990-W||Report the estimated tax on unrelated business taxable income|
FAQs About Nonprofit Payroll
1. Do Nonprofit Employees Pay Income Tax?
Yes, nonprofit employees have to pay the income tax. Though the organization is exempt from the tax the employees are subject to payroll taxes. Moreover, nonprofit organizations have to withhold federal income tax and FICA taxes from employee paychecks
2. How Do Nonprofits Pay Employees?
Usually, nonprofit organizations pay the employees from the gross revenues of the organization. These salaries are considered as the operational cost of the organization.
3. What Is The IRS Tax Code For A Nonprofit Organization?
The IRS tax code for a nonprofit organization is “501(c)(3) Organizations”
4. What Is The Difference Between A 501(c) And A 501(c)(3)?
Both 501(c) and a 501(c)(3) exempt organizations from paying corporate income taxes however, there are significant differences between these two tax codes. The 501(c) tax code won’t allow the donors to write off donations but the 501(c)(3) tax code allows the donors to take tax deductions on their contributions.
5. What Are The Examples Of Nonprofit Organizations?
There are many nonprofit organizations available in the world. For example:
1. The AARP
2. Audobon Society
3. Boys and Girls Clubs of America
4. Boy Scouts of America/Girl Scouts of America
5. Council on Foreign Relations
6. Habitat for Humanity
9. Planned Parenthood
10. The Red Cross
11. The Salvation Army
12. Save the Children
14. Teach for America
15. TED Talks
16. The Trevor Foundation
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.