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Do I Need To Pay Taxes as a Nonprofit Employee?

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Jules

A nonprofit relies on more than just a solid volunteer base to achieve its goals. Staffed employees also contribute to these efforts. In contrast to the tax-exempt organization, however, the employees must abide by local and federal tax laws regarding any income they make. In addition, the nonprofit must also withhold payroll taxes from these staffed employees. 

Nonprofit payroll practices resemble those of for-profit businesses in many ways. There are some exceptions, though. For example, nonprofits that use grants for payroll must follow special reporting policies. Yet, these exceptions do not apply to run-of-the-mill employees. If you fall into this general employee category, this article has the answers you need. 

Here is what we will be looking at today: 

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How Do Taxes Work for a Nonprofit Employee?

Many people confuse the tax-exempt status of a nonprofit organization with the tax-filing status of the paid employees within that organization. While it is true that the organization itself earns a tax break, employees do not fall into the same category

Employee Requirement

Nonprofit employees must pay state and federal taxes on earned income, mirroring the requirements of for-profit employees. State and federal taxes include Social Security, Medicare, unemployment tax, and income tax. Nonprofits withhold these from the payments they make to their employees. 

Staffed employees must report these income and withholding figures to the IRS at tax time using Form 1040 from the IRS website. Those who overpay on their taxes receive a refund for that amount from the government. 

do-employees-of-nonprofits-pay-taxes-how-do-taxes-workEmily is in deep thought on paying taxes as a nonprofit employee.

Organization Requirement

Do nonprofits pay payroll taxes? Yes, they do. But when do nonprofits have to report salaries? According to nonprofit payroll laws, they must do so annually when they file taxes for the previous fiscal year using Form 990.

Nonprofits do not have to pay the Federal Unemployment Tax Act (FUTA) taxes, but they do need to withhold Social Security and Medicare. In addition, nonprofit organizations may have to pay State Unemployment Tax Act (SUTA) taxes and property taxes depending on the state requirements. 

Pro Tip: Nonprofit employees, volunteers, independent contractors, and other involved individuals who earn less than $100 in wages within a calendar year are not subject to tax withholdings.  

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How To Manage Payroll as a Nonprofit: 5 Softwares

Managing your nonprofit’s payroll can be a hassle unless you have the right tools to do it. Here are five of the best software programs that provide payroll services for nonprofits

#1: Patriot

Patriot Payroll is all about flexibility. It offers both DIY payroll and full-service payroll options. You also get free payroll setup, accounting software integration, and a penalty-free guarantee. It even pays all of your federal, state, and local taxes for you regardless of any complicated tax rules. 

Pros:

  • Low cost

  • 60-day free trial

  • Mobile-friendly app

Cons:

  • Expensive add-ons

  • No HR features

  • Four-day direct deposit period

Pricing:

  • Basic Payroll: $17 per month plus $4 per employee/contractor

  • Full Service Payroll: $37 per month plus $4 per employee/contractor

#2: ADP

Check out what ADP’s nonprofit payroll software can do for you and your team by choosing one of its four available plans. ADP offers ADP RUN, ADP Workforce Now, ADP TotalSouce, and ADP SmartCompliance. Each of these systems has its own list of features that turn the dreaded task of accounting into a dream come true. 

For small-to-medium-sized nonprofits, we recommend ADP RUN. This easy-to-use, full-service payroll software comes with 24/7 customer support. You also receive HR and hiring tools. 

Pros: 

  • Tax filing and support

  • Self-managed onboarding

  • Superior data security

  • Complete payroll assistance

Cons:

  • Hard-to-access pricing information

  • Costly plans

Pricing: 

The base price is $79 per month plus $4 per employee/contractor. However, you need to contact a representative to receive complete pricing rates. 

do-employees-of-nonprofits-pay-taxes-how-to-manageMatt is checking out some nonprofit payroll softwares!

#3: OnPay 

If your nonprofit is looking for just the basics, check out OnPay. This company is known for its superior customer service, a real boon in today’s world of automated responses and recordings. OnPay’s very basic features make it perfect for small nonprofits.

Pros: 

  • One-month free trial

  • Transparent pricing

  • Automatic tax filings and payments

Cons:

  • Difficult to customize

  • No mobile app

  • No automatic payroll processing

Pricing: 

OnPay has the most straightforward pricing out of all of our recommendations, costing $40 per month plus $6 per employee/contractor.

#4: Gusto

At nonprofits, many staffed employees perform numerous functions. For example, if your accountant also acts as your human resources manager, you need payroll software that accounts for that. Gusto is the solution. Gusto provides HR and payroll services.

Pros:

  • Free checking and high-yield savings accounts available

  • Automatic tax filing

  • Guaranteed tax compliance

Cons:

  • Expensive pricing

  • No invoicing feature

Pricing:

  • Independent Contractors: $6 per month per person

  • Simple: $40 per month plus $6 per person

  • Plus: $80 per month plus $12 per person

  • Premium: Contact Gusto for details.

#5: Square

Square fans will love its payroll feature. Though not technically coded for nonprofits, Square can help practically any business or corporation keep track of taxes. Square’s payroll service does speak directly to smaller entities, so larger organizations may find that they outgrow it quickly. 

Pros: 

  • Easy-to-understand pricing

  • Contractor-only option

  • Integration with Square’s point-of-sale app

Cons:

  • Limited features

  • Crude setup

Pricing: 

Square costs $35 per month plus $5 per employee/contractor.

Pro Tip: If you are not sure which software to choose, it can help to speak with representatives from your top picks. In addition to telling you how they have helped similar nonprofits in the past, they can also help you get the plan rates down, as this information can sometimes be hard to find. 

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Final Thoughts

Charities, foundations, religious organizations, and other nonprofits are tax-exempt entities. However, that does not mean that their employees can reap the benefits of tax exemption themselves. Just like for-profit employees, nonprofit employees have to pay taxes on the salaries, bonuses, commissions, and other income or compensation they receive.

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FAQ

💡Do employees at a nonprofit have to pay taxes?

Yes. Nonprofit employees have to pay taxes just like for-profit employees do. Find out more. 

🔑 What taxes does a 501(c)(3) have to pay?

A 501(c)(3) pays some of the same taxes as a for-profit organization, including Medicare and Social Security. Find out more. 

📝 How can nonprofits manage payroll?

Nonprofits can manage payroll with software. Some popular payroll programs include Patriot, ADP, OnPay, Square, and Gusto. Find out more.

 

Organization & HR
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Jules
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