Nonprofit Payroll Laws: 5 Key Points for Employers to Guarantee Compliance
Even though nonprofits have some differences in how payroll rules apply, such as some tax exemptions, there are still laws to regulate employee payroll. Here’s what you need to have in mind to keep your organization safe and compliant!
- What is a Payroll, and What are Payroll Laws?
- Understanding For-Profit vs Nonprofit Payroll Laws
- 5 Key Points to Keep in Mind with Nonprofit Payroll Laws
- Final Thoughts
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What is a Payroll, and What are Payroll Laws?
To keep things clear, let’s start at the very beginning. Payroll is compensation that a business or nonprofit is required to pay to its employees over a given time. Typically the task of managing nonprofit payroll is handled by the human resources (HR) department, although in smaller companies or nonprofits it is often directly managed by the founder or an associate.
Payroll laws are regulations set in place by the federal and state governments that ensure fair and equal pay for employees, implementation of required benefits, and appropriate taxation of income.
Understanding For-Profit vs Nonprofit Payroll Laws
While nonprofits absolutely should be run like a business in certain ways to ensure that they remain solvent, there are some differences in how payroll laws apply. A common question that gets asked about nonprofit organizations is: do nonprofits pay payroll taxes? The short answer is "yes." To clear up any confusion, here are a few of the variations between for-profit and nonprofit organizations related to payroll tax laws.
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Nonprofits that have 501(c)(3) tax-exempt status obviously do not have to pay certain taxes, but a common misconception is that 501(c)(3) nonprofits are exempt from paying all taxes. The truth is that most nonprofits must withhold federal income taxes and others, with some slight variations in the rules. Tax-exempt nonprofits are responsible for filing:
Federal Income Tax Withholding (FITW)
Social Security and Medicare Taxes (FICA)
Federal Unemployment Taxes (FUTA)
While Federal Income Tax Withholding (FITW) and Social Security and Medicare Taxes (FICA) are automatically withheld from employee paychecks or paid by employees, Federal Unemployment Taxes (FUTA) are paid directly by the organization itself.
If a nonprofit organization is registered as 501(c)(3), then it is exempt from FUTA and does not have to file a Form 940 with the IRS. However, most nonprofits must still comply with their state’s unemployment program requirements.
At the state level, a 501(c)(3) can do this in two ways: either contribute to their state’s unemployment program in accordance with local laws, or opt out and pay an annual dollar-for-dollar amount to reimburse the state for paid unemployment benefits. The second option is considered to be a potential money-saver for most organizations.
According to the U.S. Department of Labor, the Fair Labor Standards Act "enterprise coverage" does not apply to nonprofit charitable organizations unless they are engaged in commercial activities (like running a gift shop, or charging for services like veterinary care).
Individuals that are employed by a nonprofit may be entitled to protections if they are involved in interstate commerce, in the production of goods for interstate commerce, or even adjacent to the production of goods for interstate commerce. Examples of this include shipping material goods to another state, transporting property across state lines, or communicating via interstate phone calls.
Additionally, nonprofit employees are not allowed to volunteer their time for services that they are normally paid for by the organization. Non-employee volunteers are also not allowed to provide commercial services for an organization (such as working in a nonprofit’s gift shop) that would otherwise be performed by an employee.
5 Key Points to Keep in Mind with Nonprofit Payroll Laws
Now that we’ve covered the basics of payroll for nonprofits, and the payroll taxes that nonprofit organizations are required to pay, let’s review these key takeaway points for success.
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#1: Always Contact a Tax Attorney Before Getting Started
If you are just launching a nonprofit and don’t have experience with tax law, we cannot stress this enough: Consult with a tax attorney! Payroll laws are complicated and ever-changing, and you must protect your nonprofit by staying compliant.
Pro Tip: We highly recommend consulting with an expert, or you may risk losing your tax-exempt status. Although this might seem like an unnecessary investment, it’s better to catch potential issues early on and avoid legal complications that can result in costly expenses over time. Better safe than sorry!
#2: Constantly Monitor for Updates in Laws and Regulations
Check in at least annually with the IRS and Department of Labor to see whether there have been any changes to regulations. These annual check-ins will help become familiar with updates that will be implemented in the following tax year. The IRS website regularly shares important changes and updates for taxpayers, but it’s also a good idea to follow relevant social media accounts where updates are posted as well.
#3: Know Your State and Local Tax Laws
Tax laws vary by municipality, so it’s important to become familiar with the expectations laid out in state laws and local tax laws. This information can usually be found on local and state government websites, or by requesting additional info from your state’s department of revenue.
#4: Plan Your Reporting and Filing Schedule
Do nonprofits have to report salaries? Absolutely. Even with the exceptions and exemptions offered to nonprofit organizations, employment is employment. In fact, reporting is one of the most essential tasks of a nonprofit as any scrutiny by the IRS can lead to losing tax-exempt status.
#5: Hire a Payroll Specialist if Possible
Small non-profit agencies don’t have a robust budget, but hiring a payroll specialist can be a worthwhile investment in your organization. This professional can keep you compliant with current payroll laws. If you are unable to eke out enough to hire on someone full time, there are independent contractors that can be brought in to support your accounting and payroll operations.
Pro Tip: If a full time hire or an independent contractor just isn’t in your budget, you may consider subscribing to a payroll management software like ADP nonprofit. This is one of the best payroll services for nonprofits; it automatically manages payroll and keeps records compliant to all existing payroll laws.
Nonprofit payroll laws are complicated and changeable. Even seasoned nonprofit professionals can find themselves researching certain points, so it can be downright overwhelming for someone new to the game.
There are resources available, so use one that makes the most sense for your own nonprofit. If you have the budget for it, a payroll specialist is great to have. If not, investing in consulting services or payroll software can make life easier. If you are a very small nonprofit, you may have to consult the IRS website for regulations, as well as federal and state laws. Compliance is survival, so do what you need to do to keep your nonprofit thriving for years to come.
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💡What is payroll?
Payroll is the money that you are required to pay your employees over a given amount of time in compensation for work provided. Find out more.
🔑 What are the most important nonprofit payroll laws?
The most important nonprofit payroll laws are the ones that pertain to income tax and benefits. While many nonprofits are considered tax-exempt, employees are entitled to certain benefits provided by income taxes. Find out more.
📝 Where can I get more information on nonprofit payroll?
The best place to get the most detailed information on nonprofit payroll is the IRS website. The information can be a bit dry, but it is meticulously categorized and easily searchable for specific questions. Find out more.