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Top 5 Things to Know about Payroll for Non-Profits

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Payroll providers like BenefitMall offer services to both businesses and non-profits alike. Their services are arguably more important to non-profits, as payroll and tax laws can be quite complex for such organizations.

Needless to say that non-profit employment is subject to quite a few more rules and regulations. To illustrate the point, the top five things to know about payroll for non-profits are listed below. If you run a non-profit organization and any of these things seem confusing to you, it might be time to consider outsourcing your payroll to a company like BenefitMall.

1. FLSA Rules for Non-Profits

The Fair Labor Standards Act (FLSA) protects American workers by way of a number of rules governing minimum wage and overtime pay. All employers with a minimum of $500,000 in annual business must adhere to FLSA rules. This includes non-profits. The only question is what constitutes annual business.

An organization like the United Way doesn’t necessarily sell products or services. Yet the amount of money they receive and disburse as part of their annual operations far exceeds the $500,000 threshold. Therefore, all their non-exempt employees are covered by FLSA rules.

2. FLSA and Named Entities

Non-profits whose business operations do not meet the $500,000 threshold are still subject to the FLSA if they are classified as named entities under the law. What are named entities? They are entities the Department of Labor has specifically named as being subject to the FSLA. They include schools, not-for-profit hospitals, government agencies, etc.

3. FSLA and Individual Employees

Next, an individual employee may be covered by the FLSA even if the non-profit employer is not. The work an individual employee does determines FLSA coverage. Any worker engaged in activities that can be considered interstate commerce is afforded FLSA protection. Making fund-raising phone calls or sending e-mails to out-of-state recipients are just two examples of such activities.

4. Income Taxes and FICA

Non-profit organizations are, by definition, exempt from income taxes on their business activities. However, they are still obligated to withhold both income taxes and FICA from employee paychecks except under certain circumstances. They are also required to pay their portion of FICA.

The one exception here goes to churches and religious organizations with a legitimate objection to paying Social Security and Medicare taxes. They can file certain forms that exempt them from withholding. However, their employees have to pay self-employment tax to cover their FICA contributions.

Ordained ministers with a legitimate objection to Medicare and Social Security taxes, or who work for a religious organization with a legitimate objection, can file IRS Form 8274 to declare themselves exempt from FICA. The only downside to this is that such ministers are not eligible to collect Social Security benefits or utilize Medicare in retirement.

5. Federal and State Unemployment Tax

Non-profits organized as 501(c)(3) organizations are exempt from federal unemployment tax (FUTA). No special forms need be filed. Non-profits organized under other chapters of the IRS code are not exempt from FUTA. They must still file forms and pay the tax.

In terms of state unemployment tax, that is something non-profits have to look at themselves. Laws vary by state, so that’s not something that can be addressed in this post. Needless to say that some states still require non-profits to pay state unemployment tax.

Payroll for non-profits can be complicated depending on how they are organized, where they are located, and how much business they do. It is for this reason that BenefitMall recommends non-profits contract their payroll to a service provider with the appropriate knowledge and experience.