Our Pain-Free Guide to Nonprofit Payroll Taxes
If you’re a business owner, you likely dread having to learn all the ins and outs of payroll taxes. It also likely costs you. However, if you have a nonprofit, the good news is that you could qualify for an exemption.
Even if you’ve run a business before, a nonprofit has different rules you need to know and play by. You can use this to your advantage, as is the case when it comes to Payroll taxes.
Payroll taxes are funds withheld either from the employee or the employer based on wages and paid to the state or federal government. One type of payroll tax is unemployment insurance, which is paid to the state by the Employer as a set percentage rate up to a certain amount of wages per employee, per calendar year.
Unemployment Insurance is then used by the state to pay for Unemployment benefits to employees who have lost employment under qualifying circumstances. Certified 501(c)3 nonprofit organizations may not be required to pay into state unemployment insurance programs.
To take advantage of your status as a nonprofit and save your organization some money, continue reading below.
Step 1: Apply for tax exempt status for your nonprofit.
To establish any type of business, including a nonprofit, you must first register for a Federal Employer Identification Number (FEIN) with the IRS. Then you may need to incorporate your organization with your state.
Once you’ve established your business, you can apply for tax exempt status for your nonprofit. A business attorney can assist with all of the necessary steps to get you to this point.
Step 2: Provide an IRS Determination Letter showing tax exempt status to your payroll system.
Once you’ve received formal recognition from the IRS of your nonprofit’s tax exempt status, you’ll need to share the letter you received from the IRS determining your tax exempt status with your payroll system. Sharing this letter ensures compliance with state and federal unemployment insurance programs.
Step 3: Determine when you are required to register and remit unemployment insurance.
After you’re federally tax exempt, you’ll need to understand the registration requirements for the state your nonprofit is based in or you have employees working in. If you’re feeling overwhelmed already, it’s understandable! FlexHR can now step-in and guide you through state nonprofit compliance, registering you in states where you’re liable.
Each state has different requirements regarding registration and payment of unemployment taxes. You’ll have to familiarize yourself with these to know when your nonprofit is required to pay unemployment insurance.
For example, Illinois has an entire handbook dealing with unemployment insurance with a section dedicated specifically to nonprofits.
FlexHR’s Director of Payroll Tax, Jessica Stafford, notes that Georgia and other states “have thresholds for nonprofits, such as not being required to pay into the system until you have 4 employees for 20 weeks.”
She also observes that though nonprofits are not required to participate in the UI system if the above threshold has not been reached, “Nonprofits may choose to voluntarily participate so that their employees are eligible for benefits if they lose their position with the company.”
Step 4: Once your nonprofit is liable, pay state unemployment insurance taxes.
Once you’ve hit the liability threshold, you may be required to pay the state unemployment insurance taxes like profitable businesses do, on a recurring schedule at a set percentage rate as a Contributory Employer. The rate is determined by state. If you pay unemployment insurance as a Contributory Employer, track and update your rate annually when letters are received.
Or, instead, you could elect to become a Reimbursable Employer. This means that instead of paying contributions, you would “reimburse the State for the actual amount of regular benefits and one half the amount of extended benefits that are charged to it.”
If you elect to become a Reimbursable Employer, know you are typically required to hold this status for a set amount of time, which varies by state. The average is 3 years.
Additional Tips:
- Learn about the “base period” and benefit year in each state to set aside amounts to cover all employees eligible for unemployment benefits (typically 26 weeks).
- Track your annual unemployment taxes versus your annual unemployment claims to determine if Contributory or Reimbursable status is right for your business in each state.
We Can Help!
If you’re feeling lost and overwhelmed, it’s understandable! Tax law is not for the faint of heart. We would love to help you understand how to best save money for your nonprofit while protecting your employees.
You can participate in our Payroll Tax Webinar to get you started now, or ask about our consulting services.
Our tax department can assist in properly registering Nonprofit Employers in their respective states, offer guidance on typical SUTA rates by state for projecting expenses, and assist with the election of reimbursable status.
Contact Flex HR today to be your HR support at info@FlexHR.com.