Payroll taxes are an employers worst nightmare. Withholding, matching and filing taxes properly can be an administrative burden and costly proposition for all businesses. But, what if your business is a nonprofit organization? Are nonprofits still required to pay payroll taxes? Continue reading for the answer.
What is a nonprofit organization?
First, let’s establish what a nonprofit business is. Most businesses are for profit, meaning that they are in business to make money. A nonprofit is an organization whose goal is to provide a service, like charity, education, or religion, as opposed to turning a profit. Some examples are The American Red Cross, Cancer Research Institute, and Feeding America.
What payroll taxes are business responsible for?
Once a business hires its’ first employee, it begins its’ responsibility of withholding and matching payroll taxes. The taxes that businesses are responsible for are:
- Federal Income Tax
- State Income Tax (where applicable)
- Social Security Tax
- Medicare Tax
- Federal Unemployment Tax (FUTA)
- State Unemployment Tax (SUTA)
Some of these taxes, such as federal and state income tax, just need to be withheld from employees pay and filed quarterly. Other taxes, such as Social Security and Medicare Tax, need to be withheld from employees pay and also matched by the employer. Finally, FUTA and SUTA are 100% employer paid taxes.
Are nonprofits required to pay payroll taxes?
While there are exemptions, most nonprofit organizations are required to pay payroll taxes. Nonprofits that have paid employees, must withhold federal and state income tax on those employees. They are also required to withhold the 7.65% employee portion of Social Security and Medicare tax and match that exact amount. Non-exempt organizations must also pay Federal Unemployment Tax to the federal government.
State Unemployment Tax works a little bit different for nonprofits. Each state has their own requirements on SUTA taxes for these organizations. Should the state that a nonprofit operates require them to pay SUTA taxes, the nonprofit will be given an employer experience rating to determine the tax liability. In Maine, nonprofit employers with more than 2 employees are required to pay SUTA. Be sure to check your state’s requirements to determine if your nonprofit is obligated to pay SUTA.
Which nonprofits are exempt from payroll taxes?
While most nonprofits are required to pay payroll taxes, there are some that are exempt from certain taxes. To be exempt from these taxes, businesses must be classified as a 501(c)(3) nonprofit organization under certain IRS guidelines and file Form 1023. To be a 501(c)(3) organization, a business must operate in one of the following categories:
- Arts, culture, and humanities
- Education and research
- Environmental and animals
- Health or human services
- International and foreign affairs
- Public and societal benefit
- Religion
Once given the 501(c)(3) classification, a business is no longer required to pay federal income tax. The business still must withhold and file federal income tax for any employees that they business employs. 501(c)(3) organizations are also exempt from paying Federal Unemployment Taxes. While these businesses are exempt from federal income tax and FUTA tax, they are still required to pay FICA and, depending on the state, SUTA taxes.
What to do if you need help with nonprofit payroll taxes
Knowing whether your business is a nonprofit or for profit organization can be tricky. Setting up proper tax withholdings is another burden for business owners. If you believe your business is a nonprofit organization that qualifies for certain tax exemptions, it is best to work with a trusted payroll vendor. We can assist your business in filing for 501(c)(3) nonprofit organization status. Furthermore, we can ensure your business will maintain federal and local tax compliance. Contact us today to get started!