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Nonprofits face unique situations when dealing with payroll and payroll taxes for their employees. Here we address many of the common payroll situations for non-profit payroll.

Nonprofit Payroll – Employee Records

There are many state and federal laws and regulations about employee records that can be confusing and sometimes contradictory. What employee records should you keep to be safe? The following items, if you really have them (and you should) should be kept in the employee personnel files. We recommend for audit and IRS purposes that you keep them for at least seven full years.

  • Job application for employees
  • Background checks and references
  • Job offer
  • Work description
  • IRS Form W4
  • Equivalent to W4 status
  • HLS Form I9
  • Enrollment or denial forms for employee benefits
  • Annual performance evaluations
  • Interim evaluations or disciplinary forms
  • Exit interview

Possible additional ways to keep

  • Copies of any statement provided by employees related to nonresident alien status, residence in Puerto Rico or the Virgin Islands, or residence or physical presence in a foreign country
  • Any agreement between you and the employee on Form W-4 for voluntary withholding of additional tax amounts
  • Employee requests to have withheld taxes calculated based on their individual accrued wages and any notice that such request was revoked
  • Internal Revenue Service (IRS) Form W-5, Earned Income Credit Prepayment Certificate, and Advance Payment Amounts and Dates
  • Nonprofit payroll: payroll records

  • The name, address, and social security number of each employee
  • The total amount and date of each salary payment and the period of time the payment covers.
  • The amounts subject to withholding for each salary payment.
  • The amount of withholding tax collected on each payment and the collection date.
  • The reason, if the tax base is less than the total payment
  • The fair market value and date of each non-cash compensation payment.
  • Information on the amount of each payment for accident or health plans
  • The dates of each calendar quarter that an employee worked for you, but not in the course of their trade or business, and the amount paid for that work, if necessary to calculate the tax liability.
  • Copies of statements that employees provide to inform you of suggestions received at work, unless the information displayed on the statements is elsewhere on this list.
  • Nonprofit Payroll: Employees

    Officers and directors

    The Internal Revenue Code defines the officers of a corporation (president, vice president, secretary, and treasurer) as employees, and their 501 (c) (3) must classify them as such for tax purposes. This applies if your organization pays these officers to perform their duties as officers.

    A 501 (c) (3) should not classify a corporate officer as an employee if he or she does not perform any services, or performs only minor services and does not receive or is entitled to compensation.

    Rather, the Code defines the directors of a corporation, that is, the members of the board of directors, as non-employees, and its 501 (c) (3) must classify them as such for tax purposes. This applies if your organization pays board members to attend board meetings or compensates them for performing their duties as directors.


    From time to time, some 501 (c) (3) may provide volunteers with prizes or gifts. In general, for non-cash items of face value, such as a ham on vacation, your organization should not count these items as taxable wages.

    If your 501 (c) (3) gives volunteers cash items, such as gift certificates or any other taxable perks, you must include these items in the volunteers’ taxable salaries.


    If a person is not an officer, director or volunteer and you compensate him for work performed and he is not an independent contractor, he is an employee. Like other employers, 501 (c) (3) who pay wages to employees must pay federal employment taxes on those wages. These taxes include:

    • Federal taxes
    • FICA taxes (Social Security and Medicare)

    Nonprofit Payroll: Federal Income Tax Withholding

    Your 501 (c) (3) generally (except for statutory employees) must withhold and pay federal income tax from your employees’ wages.

    To determine how much federal income tax to withhold, employers must ask employees to complete IRS Form W-4, Employee’s Withholding Allowance Certificate. Ask each new hire to complete and sign a W-4 before their first day on the job. Keep the form on file and send a copy to the IRS if the IRS instructs you to do so in a written notice.

    If a new hire does not provide a completed Form W-4, their 501 (c) (3) must assume bachelor status without withholding.

    Nonprofit Payroll: FICA Taxes

    FICA taxes go to Social Security and Medicare. Your 501 (c) (3) must withhold and pay these taxes from employee wages, with one exception: if your organization pays an employee less than $ 100 in any calendar year, you do not need to withhold FICA taxes for that employee. . A 501 (c) (3) must pay both the amount of FICA tax withheld from employee wages and the organization’s match for that amount.

    Nonprofit Payroll: Federal Unemployment Tax

    The following is a direct quote from the IRS 940 instructions available at the link below:

    “Religious, educational, scientific, charitable and other organizations described in section 501 (c) (3) and exempt from tax under section 501 (a) are not subject to FUTA tax and do not have to submit the Form 940 “.

    It all comes down to that if you are a 501 (c) (3) and have received your favorable determination letter from the IRS, you do not have to pay federal unemployment taxes.

    Nonprofit Payroll: State Unemployment Tax

    States vary in unemployment taxes for nonprofits and you should check with your state’s Department of Unemployment Insurance for the rules in the states where you have employees.

    Nonprofit Payroll: Paying Federal Income Tax and FICA

    Your 501 (c) (3) must pay withheld income taxes, along with the employer and employee portions of the FICA taxes (less any upfront earned income credit). [EIC] Payments). These payments must be paid electronically using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order, or cash to an authorized depositary. Please note that some taxpayers must deposit exclusively using EFTPS. Consult with a qualified nonprofit payroll tax professional for additional information.

    Nonprofit Payroll: Payroll Tax Report

    Once your 501 (c) (3) deposits federal income taxes and FICA, you must file returns stating that you have withheld and paid them. Just as the 501 (c) (3) pays federal income taxes and FICA together, you must report them together on IRS Form 941, Quarterly Federal Income Tax Return for Employers. They must also be reported annually on IRS Form W2, a copy of which is also distributed to your employees.

    Nonprofit Payroll: Conclusion

    There are many similarities between non-profit payroll and for-profit payroll, but several differences have not all been discussed here. We always recommend that you use a qualified payroll outsourcing company with CPA on staff. That way, your questions can be professionally answered and any issues resolved by a CPA who is eminently qualified by training and experience to work with the IRS on payroll tax issues.

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