A Guide To Nonprofit Payroll: Everything Your Business Needs To Know
As a nonprofit, your mission is your priority. However, if you’re like most nonprofits, you’ve likely noticed there are a lot of other things to worry about to keep your organization operating smoothly. One of the more important tasks to keep up with is running payroll. Just like for-profit businesses, there are several steps you need to take to ensure you properly pay your team, withhold and file payroll taxes, and submit annual returns. These nonprofit payroll tasks can be daunting and trip up even the most seasoned professionals.
To help you navigate the unique payroll challenges you face as a nonprofit, we’ll break down everything you need to know to stay in compliance, including:
- Nonprofit payroll taxes and withholdings
- Minimum wage and overtime
- Paying board members and officers
- Using grant money for payroll expenses
- Annual reporting
After reading our guide to nonprofit payroll, you’ll know how to set up accurate and compliant payroll so you can focus more of your time and energy on what matters most.
Do nonprofits pay payroll taxes?
Despite a common misconception when it comes to payroll for nonprofits, these organizations do pay payroll taxes, even though they hold tax-exempt status. So if you have employees, you’ll need to withhold certain taxes from their paychecks, including:
- Federal income tax
- FICA (Social Security and Medicare) taxes, unless you have an employee who earns less than $100 in a calendar year
- State income taxes
- Additional state and local taxes such as Temporary Disability Insurance or city income tax
You’re also responsible for paying the employer portion of FICA taxes. One exception to this is if you’re a religious body allowed a special exemption from the employer’s share of FICA taxes because you oppose such taxes on religious grounds.
One break you get as a nonprofit is that you don’t have to pay Federal Unemployment Tax Act (FUTA) taxes. FUTA tax is a payroll tax paid by employers on employee wages that funds unemployment compensation for workers who lose their jobs. However, you may still need to pay state unemployment tax. State Unemployment Tax Act (SUTA) tax rules vary by state so you’ll want to check if you’re responsible for paying SUTA or if you have the option to self-insure.
Do I have to pay workers minimum wage and overtime?
Just like workers employed by a for-profit company, there are certain nonprofit payroll laws you need to be aware of. If you’re a covered enterprise under the Fair Labor Standards Act (FLSA), you’ll need to follow the law’s minimum wage and overtime requirements. Generally speaking, if you have gross sales or business of $500,000 or more and compete substantially with other businesses, the FLSA applies. For example, if you operate a gift shop, you’re subject to the FLSA.
As a covered enterprise, that means you’ll have to pay at least minimum wage and pay overtime to non-exempt employees who work more than 40 hours in a workweek. When it comes to determining minimum wage for your workers, you’ll need to pay either the federal or state wage, whichever is higher. Currently, the federal minimum wage for businesses covered by the FLSA is $7.25 an hour.
It’s important to note that even if your nonprofit isn’t subject to the FLSA, you may still be subject to state or local minimum wage laws.
How do I handle pay to board members and officers?
You may or may not have a board of directors to manage your finances and other activities. In many cases, these are volunteer members. But if you pay them to attend board meetings or to perform their duties, you’ll need to make sure you do so correctly. There are no set rules on how much you can pay these individuals; however, the IRS says that payments must be “reasonable.” It’s a good idea to check salary amounts for similar positions in your area and have the compensation reviewed by unbiased individuals. If you pay them more than $600, you’ll need to issue them a Form 1099-NEC.
Similar to the rules for board members, the IRS allows nonprofits to pay “reasonable” salaries to officers. Form 990, which is a nonprofit’s annual tax return that we’ll talk about next, requires you to include the salary of your top employee and the rationale used for the amount, but there are no specifications other than that it be reasonable.
Can I pay volunteers?
If you’re like most nonprofits, you probably rely on the help of volunteers. But to be considered a volunteer and not an employee, certain rules apply. For example, to be considered volunteers, they must be part time and not displace regularly employed workers.
You also need to be aware that any monetary benefits to these individuals including living allowances, stipends, and in-kind benefits may be considered taxable income and, if so, you must withhold income tax and FICA taxes. And be sure the amounts of these are nominal or you risk having the volunteer look more like an employee for FLSA purposes.
Can I use grant money to pay workers?
As a nonprofit, there’s a good chance you’ll apply for grants from foundations to help fund specific projects that further your mission. Depending on the terms of the grant, as long as an employee’s work primarily supports these projects, you can use the money to cover their payroll costs. However, to ensure you’re accurately using the funds, you’ll need to track employees’ time and activities since some of the work they perform may not qualify for grant dollars especially if they split their time between multiple projects.
What nonprofit payroll reporting do I need to do?
While all businesses and organizations with payroll must file Form 941 quarterly tax returns, most nonprofits must file a Form 990 with the IRS each year. There are certain exceptions such as churches and schools below college level affiliated with a church so review the IRS list to determine if you must file.
Form 990 requires you to provide information about payroll taxes, executive compensation, and more. It’s due on the 15th day of the 5th month following the end of an organization’s taxable year. So if you are on a calendar year, it would be due May 15.
How to Get Payroll for Nonprofits Right
There are a lot of things to consider to ensure you properly handle payroll for your nonprofit. Often, nonprofit organizations don’t have the staff or expertise in house to manage all the tasks. In these cases, it may make sense to outsource payroll to a third party provider who can help ensure your payroll is on time, accurate, and compliant so you can avoid fines and penalties. If you’re wondering whether in-house or outsourcing your payroll is better for you, read our guide to help you decide. Interested in how Complete Payroll Solutions can help you? Visit our dedicated industries page to learn more about payroll services for nonprofits.