Understanding Non-Profit Organizations
What Is a Nonprofit Organization?
A nonprofit organization operates in the public sector but is not part of the government. Unlike private companies that aim to generate profits for owners, nonprofits fill gaps in public services, serving purposes beyond profit generation. These can range from providing basic needs to underserved communities to fulfilling religious or political missions. Nonprofits may have tax-exempt status like 501(c)(3), offering tax benefits to donors, but this status varies across different types of organizations.
The Uniqueness of Non-Profit Income
A key distinction for non-profits is that their income is not meant for distribution among executives or board members, but rather for furthering their mission.
Nonprofit Executive and Board Member Compensation
Nonprofit executives and board members require reasonable compensation for their skills, experience, and education. However, there are legal requirements for nonprofit executive compensation that private companies are not subject to.
The purpose of these regulations is to ensure that the nonprofit is held accountable to the community it serves, and that all decisions are made in the nonprofit's best interests. It's prudent to look at other nonprofit organizations and how they compensate their top employees and board members to have a baseline for what potential executive hires would expect.
Forming a compensation committee to review this information annually is an excellent way to ensure that top talent is paid commensurately while remaining transparent to the public.
Recent Blogs for Non-Profits
In the non-profit sector, managing funds is a delicate balancing act, especially regarding payroll.
In the heart of every non-profit organization lies a mission driven by passion and dedication.
How to Set Up Payroll for a Nonprofit
Tax Identification and Registration
Secure your nonprofit's unique Employer Identification Number (EIN) from the IRS, and register for any necessary state and local tax IDs. This foundational step is essential for legal compliance in payroll tax filing and payment.
Employee Documentation and Tax Withholding
Streamline the submission and management of critical employee tax documents. Ensure all employees complete their I-9 forms for work eligibility verification in the U.S. Collect and process Form W-4 for federal income tax withholding, along with any relevant state and local withholding forms, to align with each employee's filing status.
Benefits Management and Time-Tracking Integration
Establish and manage mandated benefit accounts, including workers' compensation and health insurance, to meet legal requirements and support your staff. Integrate effective time-tracking solutions into your nonprofit payroll software, crucial for maintaining grant eligibility and accurate payroll processing.
Navigate Payroll Regulatory Landscape
Understand and adhere to the specific payroll regulations that apply to nonprofit organizations. While similar to private companies in many respects, nonprofits benefit from exemptions like not having to pay Federal Unemployment Tax Act (FUTA) taxes. State Unemployment Tax Act (SUTA) exemptions vary based on state laws and factors such as the number of employees and hours worked.
FAQs on Nonprofit Tax Liabilities
Do nonprofits also have to pay sales and use tax?
Every state has different regulations regarding sales and use tax. Some states may exempt nonprofit organizations from paying sales tax entirely, or only on certain items with specific conditions.
Can nonprofits completely avoid taxes on activities like benefit concerts and merchandise sales?
Nonprofits may have to pay taxes on unrelated business income, which is the profit received from activities that are not considered related to the organization's mission. Fundraising activities like merchandise sales and events may fall into a gray area. The IRS exempts volunteer-run activities like bake sales and the sale of donated merchandise.
Do nonprofits have to pay state income tax?
Most states do not make nonprofits pay state income tax. However, payroll tax obligations still must be met like FICA and SUTA (if the state mandates these contributions). Employees also must have state income tax withheld from their paychecks if they live in a state with an income tax, and still need to pay these taxes at the personal level similarly to the employees of private companies.