Payroll can feel like a pain for nonprofit organizations.
There are many nuances regarding payroll, labor laws, benefits, income taxes - and most of those laws have exceptions and addendums when it comes to nonprofits and charities as compared to regular for-profit businesses.
It’s a lot, we know!
And most charities don’t have full-time payroll experts to handle all of the details. Since mistakes can be too risky, payroll can be an internal weight and add stress and distractions from the real mission.
But payroll doesn’t have to be complicated.
Simplifying nonprofit payroll can help you get it done right, freeing your staff and volunteers to concentrate on the more important details of making your charity successful.
Simplifying Payroll for Charities
We provide payroll solutions for small businesses, for both nonprofits and for-profits. Most charities that come to us just want to get back to the cause and leave the paperwork and tax details to a specialist.
If that’s what you’re after, you can take a shortcut and schedule a consultation with us. We’ll help you simplify your payroll and get it done affordably and accurately. If you want to learn more about payroll for charities, keep reading.
Nonprofit Payroll Taxes
For charities, nonprofits, and 501c3 organizations, there are payroll taxes you are exempt from, and some you are still subject to pay. When it comes to the Federal Unemployment Taxes (FUTA), most nonprofits are exempt.
Regardless of federal exemptions, all charities and nonprofit organizations could still be subject to state unemployment insurance taxes (SUI). Of course, this depends on the laws and exemptions in your state.
Nonprofits with employees are still required, in most cases, to withhold federal income taxes, Social Security and Medicare (FICA), as well as state and local taxes in the same way for-profit companies do. There are a few exceptions for faith-based organizations.
It’s important to have access to a tax expert when handling payroll and taxes. At ConnectPay, we have an in-house tax team that our clients have access to at all times.
Using Grant Money for Payroll
Most charitable organizations rely on grants to fund their mission and organization. But when it comes to using grant money for payroll, there are some things to consider.
First, some grants contain specific language and guidelines on how the money must be used. In some cases, it’s specifically forbidden for the money to be spent on payroll of any kind. So, it’s critical to understand when and how the money from each grant can be used to fund the organization’s payroll.
As a general rule, though, grants are often used to fund payroll when work is being done on projects and initiatives in relation to the grant. After all, without a budget to maintain at least a small, professional staff, not much can be done.
When grant money is being used to pay employees, the work and time spent must be tracked and documented. It’s quite possible the same employee in the same pay period may do some work that is covered by the grant and some that are not. In these cases, keeping good records is critical to protecting your organization, your employees, and your ability to qualify for future funding.
As always, exceptions and “gray areas” can make compensating volunteers confusing. As a general rule, any compensation paid to volunteers is considered the same as paying an employee. That means things like income taxes, FICA, and local taxes must be reported and withheld. Living expenses, housing allowances, and stipends are, in most cases, considered normal wages (26 U.S.C. § 3402).
Charities should also be careful about “benefits” given to their volunteers, as just about anything could be considered compensation. If something is more expensive, or if the volunteer takes advantage more frequently, the most likely it would be considered more than just a “perk.”
At the end of the day, it’s better to be safe rather than sorry. Having a tax expert at your disposal will ensure you get reliable advice anytime there’s a question.
Executive and Board Member Compensation
When it comes to tax-exempt organizations, the IRS really just wants to make sure the organization is operating legitimately. One area that is often a matter of importance is the compensation for executives and board members. The IRS has a three-step process to ensure nonprofit executive compensation is not overly excessive.
Most 501c3 charities are required to file IRS Form 990. These organizations must document the process used to submit and approve compensation for their executives. Even nonprofits exempt from Form 990 should include this documentation in their bylaws and annual business meetings.
Understanding Annual Filings
As stated above, most 501c3 organizations are required to submit an annual report, the IRS Form 990. Even if your organization is exempt from the Form 990 requirement, most states require annual reports regardless of federal exemptions or status.
As a general rule, charities should be prepared for four different types of annual filing requirements:
- Corporate Filings
- Financial Reports
- Fundraising Registrations
- State Tax-Exemption Filings
Nonprofits and Workers’ Compensation
Typically, volunteers are not considered paid employees, which means, in most states and with most insurers, they’re likely not covered by workers’ compensation insurance. In this case, covering volunteers may require additional coverage, like accidental medical insurance or general liability insurance.
For paid employees, workers’ compensation requirements are the same as for-profit businesses.
Getting Payroll Help
As is with just about everything in terms of operating a nonprofit, there are general rules, and there are outliers. A lot of states may do things similarly, while others do not.
When it comes to payroll for charities, it just makes sense to outsource the headache of payroll to an affordable expert. Outsourcing frees up your employees and volunteers to focus on the mission while simultaneously reducing the risk of filing something incorrectly.
If you would like to talk to a charity payroll expert, you can schedule an appointment with us. We would love to talk to you about your mission, your needs and requirements, and help you get a payroll package that makes good sense for your organization.