Nonprofit Payroll Taxes

In many ways, nonprofit and for-profit organizations are different. Payroll procedures, however, is one area where they must adhere to very similar rules and regulations. Wait…nonprofit organizations are tax-exempt, right? Well actually, this is a common misconception and although nonprofits are typically exempt from federal income taxes and certain other types of taxes, they are NOT exempt from payroll taxes.  

If your nonprofit organization is growing and it becomes time to scale up and hire employees, you will need to register for employer accounts, withhold payroll taxes, file returns and remit taxes. The rules and regulations that you must follow will depend on the area(s) where you and your employee(s) are located. Let’s go over some tips to make this process easier for you:

First of all, if your organization is not yet registered – now is the time. Register with the IRS to obtain your EIN (Employer Identification Number). This is necessary before hiring any employees and is required for filing tax returns, as well as remitting federal employment taxes.

Once you have registered your organization, you will also need to register for employer accounts in any state(s) where you will be hiring employees. Ensure that you pay close attention to this process, so as not to incur any penalties. Make sure that as new employees come in, you check to make sure you are registered in that state and if not, proceed to do so.

Just like a for-profit organization, you will not have your employees fill out the federal Form W-4 and any state specific tax withholding documents.

You will also need a payroll schedule. This typically happens bi-weekly or weekly. As you run payroll, your organization is required to withhold a percentage of your employee’s paycheck. This amount is made up of Medicare Tax, Social Security Tax, the federal withholding indicated on their W-4 and any other state specific employment taxes.

Remit the tax amounts withheld from the employee, plus an additional 7.65% employer FICA (Medicare & Social Security Tax) match to the IRS. You will also need to remit any amounts withheld from employees for state taxes, as well as the associated employer taxes for that state.

Lastly, file your organizations payroll tax returns either quarterly or annually. Refer to the particular state’s employer website for detailed requirements, as they vary widely from state to state.

Now you are on your way to having employees at your nonprofit organization!