Running a nonprofit means wearing many hats — one minute you’re fundraising to aid in your organization’s mission, the next you’re juggling business duties like human resources, accounting, taxes, and payroll. Because nonprofits usually don’t have a surplus of funds for outsourcing business services, they often try to tackle payroll and other bookkeeping duties on their own. But nonprofit payroll can be tricky due to various state laws, as well as tax regulations that may change from year to year. Read on to find out more about nonprofit payroll, and whether outsourcing can benefit your organization.
The Facts About Nonprofit Payroll
While a nonprofit organization’s vision and goals may differ from that of a for-profit company, many of the business practices and processes are similar. Like a for-profit company, nonprofits are required to withhold state and federal taxes, Medicare, and Social Security from their workers’ payroll. Nonprofits must also match Medicare and Social Security, as well as pay federal and state unemployment insurance. In the state of California, nonprofits organized under the 501(c)(3) tax laws have the option of choosing whether to pay the same unemployment insurance rate as for-profit entities, or reimburse the state’s unemployment office for benefits paid to former employees. Some states also require nonprofits to pay disability taxes, and must follow their states’ workers’ compensation laws.
In order to be eligible for tax-exempt status under IRS Section 501(c)(3), your nonprofit must be considered a charitable organization — that’s how nonprofits are able to provide tax deductions to the people who donate to them. Charitable organizations are still required to pay state sales and use taxes, but do not pay taxes on profits. In order to be eligible for tax-exempt status, a nonprofit company’s net profits cannot benefit the private interests of the company, its employees, or its stakeholders. The nonprofit cannot be an “action organization,” meaning it may not attempt to influence legislation as a core activity, or participate in any campaign activity for or against political candidates. Different types of nonprofit organizations have specific criteria involved with determining tax-exempt status. Check out the IRS website for more information.
Focus On Your Mission, Not Your Books
Nonprofits require steadfast dedication to the mission of the organization. Adding nonprofit payroll management — with all the specific standards and laws that regulate it — to your list of duties, and you may find that you’re in over your head. Thankfully, outsourcing your nonprofit payroll can alleviate the headache of additional responsibility, save time and money, and reduce inefficiencies.