Do Nonprofits Have to Report Salaries?
When it comes to the selfless work of nonprofits, salary is not usually the first word that comes to mind. And yet, most of them have salaried staff that are vital to forwarding their charitable missions. Given the fact that they often struggle to strike a balance between giving and taking, managing payroll can get complicated, especially when your organization is just getting started.
Many nonprofit organizations benefit from tax exemptions, but the question is, which of them affect salaries? And how do you report salaries when filing with the IRS? In this article we will cover everything concerning nonprofit payroll, from the rules of reporting to the ins and outs of declaring taxes on salaries. We hope you find this information useful!
- What is the Difference Between a Nonprofit and Traditional Business?
- Tax-Exemption for Nonprofits
- Nonprofits and Payroll Taxes
- How to Report Salaries for a Nonprofit: A Step by Step Guide
- Final Thoughts
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What is the Difference Between a Nonprofit and Traditional Business?
Let’s start at the very beginning by comparing nonprofits to for-profit businesses. There are a lot of similarities in how they operate: both have assets, earn revenue, and pay their employees. However, a nonprofit organization exists to benefit the general public, while a business can benefit a shareholder, individual, or group.
This means that all profits of a nonprofit must be reinvested into the organization and its mission. Tax-exempt charitable organizations are monitored on a federal, state, and local level, and if they are found to be in violation of this regulation, they are at risk of losing their tax-exempt status.
Tax-Exemption for Nonprofits
When a nonprofit is referred to as tax-exempt, it means their organization is not required to pay federal income tax. There are a variety of tax-exempt nonprofits, including 501(c)(3)’s, private foundations, and public charities. Each of these offer services that benefit the community - services like healthcare, the arts, education, poverty prevention, religious guidance, economic development, and more. There is also a category of nonprofits that are not charitable but are tax-exempt through 501(c)(27); this type includes labor unions, civic leagues, rec clubs, and chambers of commerce.
Tristan is looking forward to learning about tax-exemptions!
Your nonprofit 501(c)(3) status may be procured by completing the following steps:
Create a business entity following your state guidelines
Apply for and receive a federal employer identification number (EIN)
Figure out which tax classification your corporation is eligible for, and what form is appropriate
Fill out either Form 1023, or Form 1023-EZ and submit to the IRS for approval. (Form 1023 is for larger organizations, while the EZ may be submitted by smaller organizations. See the IRS website for qualifiers.)
Once you receive your 501(c)(3) determination letter from the IRS, keep it on file for as long as your entity exists
Obviously not having to pay federal and state income tax is an enormous perk of being classed as a tax-exempt organization, but there are some additional benefits, including:
Many 501(c)(3) associations become eligible for grants. This money is set aside by both government agencies and private foundations to fund causes that benefit social welfare.
For 501(c)(3) organizations, donations received are tax-deductible for the donor.
Nonprofits can receive discounts on bulk mailing through the United States Postal Service.
Depending on your state and municipality, your nonprofit may be exempt from local sales and property taxes.
Nonprofits and Payroll Taxes
You may be wondering how far tax-exemption goes. For example, do nonprofits pay payroll taxes? The short answer is: yes. Any organization that pays salaries to its employees pays payroll taxes. But some exemptions do exist. Here is a brief breakdown of the payroll taxes for nonprofits.
Federal Income Tax. Your organization must collect a W-2 from all new employees, and withhold the appropriate amount of federal income tax each pay period.
State and Local Income Tax. Depending on your state law, you may be required to withhold state income tax. There are some municipalities (such as NYC) that require a local income tax as well.
FICA. This includes Social Security and Medicare. Your organization pays 7.65% from its nonprofit account, and then withholds the same amount from the employee paycheck.
FUTA. Tax-exempt nonprofits are generally not required to pay federal unemployment benefits.
SUTA. On a state level, unemployment may be paid in one of two ways. An organization may either pay into their state program through taxes, or opt out. If they decide to opt out, they are then responsible for paying out any unemployment benefits that are received from any terminated employee. This latter option can save an organization money, but can also be an issue if they have high turnover.
Pro Tip: Payroll can be pretty complicated, even for smaller nonprofits. It is best to look into getting some help. This can mean hiring a payroll specialist if you are able to fit this expense into your budget. If you cannot then take some time to research the best payroll services for nonprofits. There are many reliable companies who can take on your payroll management and offer a variety of tools and features to make staying on top of payroll easy at a reasonable price.
How to Report Salaries for a Nonprofit: A Step by Step Guide
Step One: Make Sure that Your Organization is Compliant with Nonprofit Payroll Laws and Guidelines
This is an imperative part of annual reporting. If your organization is found to be out of compliance with any IRS standard, you can lose tax-exempt status. So be sure that you are doing the following:
Annual Approving Executive Compensation. The board of directors should not only be aware of the director/CEO’s salary, but they should approve it annually. When doing an analysis of gross income for tax purposes, be sure to take into account benefits like health and/or life insurance, paid leave, professional development, and continuing education. The directors of nonprofit organizations are subject to scrutiny, and their salaries should be held to the IRS standard of "reasonable compensation".
Paying Out Minimum Wage and Overtime. Federal and state minimum wage can differ, and you should pay your employees the highest one. Also, if your employees (not independent contractors) work over 40 hours during the work week, they may be required to receive overtime. This is typically 1.5 times their regular hourly rate.
Matt is getting everything in order to report his organization's salaries!
Know the Guidelines for Offering Bonuses to Employees. A nonprofit is allowed to pay out bonuses as part of the overall compensation of employees. However, know that the IRS will scrutinize these bonuses to make sure that there is no private benefit. Also be careful to let your employee know that the bonus is an add-on to their salary for excellent performance, and will not be a regular occurrence. The IRS has a set of guidelines a nonprofit can follow for paying out bonuses.
Step Two: Determine the Due Date of Your Filing and Fee
To find the due date for filing, you will need to know the date of the formation of your organization. If you do not know, you can search your state government’s database for the information or talk to your nonprofit’s lawyer to find out. Many state systems also allow you to subscribe to emails that notify you before your annual report is due.
Step Three: Fill Out Your Annual Filing Report
You will need to file a yearly report with the IRS called a Form 990. Small nonprofits, which have annual receipts of $50,000 or less, can use the truncated Form 990-N to report to the IRS.
In most states, your nonprofit will have to file one or more additional annual reports. There are four kinds of filing requirements, including:
State tax-exemption filings
The requirements for both federal and state reporting can vary between different types of organizations, their size, and earned revenue. Make sure to read up on your state and municipality requirements to avoid incurring penalties.
Pro Tip: A best practice for a small nonprofit filing a Form 990 is to hire an accounting or tax professional to do the filing for them. This ensures that you are meeting all filing requirements, and are kept up to date on any changes to tax code that may impact your filing.
Step Four: Submit Your Report and Pay the Fee
Make sure that you submit your report and pay your fee on time. It is no small thing to have achieved tax-exempt status, and it can be taken away easily if you are not careful to stay compliant. Besides paying payroll taxes and adhering to other rules already mentioned in this article, your nonprofit organization must be sure to avoid any of the following:
Devoting too much of its time or resources to influencing legislation on a federal or state level, or within one’s local government
Benefiting any private interests
Attempting to influence the outcome of any political race
Becoming involved in any activities that are illegal or violate public policy
Transparency is an important value for a nonprofit organization. Not only does transparency inspire trust in your donors and the public at large, but it keeps your tax-exempt status alive and well. A common misconception about nonprofits is that they are not really run like businesses. And yet, when you hire staff, many of the same rules apply to a nonprofit as they do to a traditional business. If you do not already have a payroll or human resources employee on staff, take a look at your budget to see if hiring one is feasible. This person can ensure that payroll management does not get too involved and complicated.
If hiring an individual to assume this role is impossible, then look into finding a good payroll management system like ADP nonprofit. Having this kind of oversight is invaluable to remaining compliant with payroll tax laws, and ensuring that your employees are paid regularly.
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💡Is it mandatory for a nonprofit to report salaries?
Absolutely. Like any other business, a nonprofit must report its payroll. Failure to do so can lead to loss of nonprofit status. Find out more.
🔑 Which taxes apply to nonprofits on payroll?
A nonprofit must file a W-2 for each employee and withhold federal income tax. Most states and some municipalities also require income tax. Nonprofits are also subject to FICA and SUTA, although they are exempted from FUTA. Find out more.
📝 How to report your nonprofit’s salaries?
You will have to report your nonprofit salaries by filing Form 990 or 990-N with the IRS annually. Find out more.