Payroll for Non-Profits: A Guide

Filing payroll correctly is crucial for your nonprofit to avoid legal trouble. If you’re a new nonprofit or operating with limited funds, you may not have an HR professional to help you. However, managing nonprofit payroll isn’t as complex as it seems. In this article, we will break down everything you need to know.

Payroll is the process of paying employees. To ensure accurate payroll, you must calculate each employee’s earnings for the designated pay period.

Although your nonprofit may be tax-exempt, you are still required to pay applicable payroll taxes. While the federal government exempts you from income taxes, you must still fulfill payroll tax obligations.

How does non-profit payroll work?

Nonprofit payroll operates similarly to payroll in for-profit companies. It involves the process of paying employees for their work. However, there are certain distinctions and considerations specific to nonprofits. Nonprofits still need to ensure that they calculate wages accurately, withhold and pay appropriate taxes, and comply with labor laws. The key difference lies in the organization’s tax-exempt status.

Are non-profit employees taxed differently?

Nonprofit employees are subject to the same federal and state tax regulations as employees in for-profit companies. They are typically taxed based on their income, and payroll taxes such as Social Security and Medicare are withheld from their paychecks. However, there may be some variations in certain tax exemptions or credits available to nonprofits, which can reduce their overall tax liability.

Here are some key points about nonprofit payroll:

1. Pay Period:

– Your pay period is the schedule on which you pay employees.

– Common pay periods include weekly, biweekly, semimonthly, and monthly. Biweekly is the most common in America.

2. Minimum Wage:

– Nonprofit organizations are subject to minimum wage laws, just like for-profit companies.

– The federal minimum wage is $7.25/hour, but some states have higher minimum wages that you must adhere to.

– There are exemptions for employees with disabilities, workers aged 19 or under, certain nonprofits, and seasonal workers.

3. Exempt vs. Nonexempt Employees:

– Employees are classified as either exempt or non-exempt based on the Fair Labor Standards Act (FLSA).

– Exempt employees are not entitled to overtime pay, while non-exempt employees are.

– Federal law requires overtime pay at 1.5 times the regular rate for non-exempt employees who work over 40 hours per week. Some states have different overtime rules.

4. Running Payroll on Time:

– Most nonprofits use payroll software or services to streamline the process.

– Process payroll ahead of time to ensure employees receive their paychecks on time.

– Delaying payroll can harm your relationship with employees and donors.

5. Employee, Contractor, or Volunteer:

– Different tax rules apply to employees, independent contractors, and volunteers.

– Employees are under your control, receive benefits, and use your tools.

– Independent contractors are self-employed and pay their own taxes.

– Volunteers should not be compensated beyond certain limits.

6. Understanding Withholdings:

– Withhold taxes from employee paychecks to fulfill payroll tax obligations.

– Exempt nonprofits do not have to pay federal unemployment taxes but need to withhold FICA taxes for social security and Medicare.

– Additional withholdings may vary by state, so check state laws for specific requirements.

By taking your time, complying with state laws, and using payroll software, you can effectively manage payroll for your nonprofit. This ensures legal compliance and helps avoid unexpected fines from the IRS.

Frequently Asked Questions

1. Can Employees Receive Bonuses?

Yes, nonprofit organizations can provide bonuses to employees as part of their compensation package. However, it’s important to ensure that the overall compensation remains reasonable and aligns with the organization’s exempt purpose. Bonuses should not hinder the organization’s ability to deliver its charitable services or benefits.

2. Can Nonprofits Hire Employees?

Absolutely! Nonprofit organizations can hire employees to help fulfill their mission. While many nonprofits rely on volunteers, having a dedicated staff is often necessary. For example, a church may employ a part-time administrator while also utilizing volunteers for various tasks like cleaning, serving, and providing support. It’s worth noting that board members are typically volunteers and are not usually compensated beyond reimbursable expenses.

3. How Much Should Nonprofits Spend on Salaries?

Nonprofit organizations typically allocate a portion of their revenue (typically 15-40%) to cover salaries, buildings, equipment, and other administrative costs. However, it is recommended by the Better Business Bureau and foundations to keep administrative costs to 35% or less of contributions, with some foundations recommending a range of 10%-15%. It’s important to strike a balance where a significant portion of donations goes towards the organization’s mission rather than being heavily allocated to administrative expenses.

4. Can Grants Cover Payroll Expenses?

Yes, nonprofit grants can be used to cover payroll expenses, if the funded staff members are working on projects directly related to the grant. It’s vital that employees accurately track their time and activities, as not all work performed within a given pay period may be directly connected to the grant. Consider utilizing software to streamline time-tracking and ensure accurate allocation of expenses.

5. Does Tesseon work with non-profits?

Tesseon provides payroll and HR services to a wide range of clients, including non-profit organizations. They understand the unique needs and requirements of non-profits and offer tailored solutions to assist these organizations in managing their payroll effectively and efficiently. By partnering with Tesseon, non-profits can focus on their mission while relying on their expertise and support in handling payroll and HR matters.