Like any company, your nonprofit needs to file payroll correctly. You could get into serious legal trouble if you don’t do so.
However, if you’ve recently started your nonprofit organization, or if you’re operating on very limited funds, you may not have an HR professional or team to help. This means you may be running payroll on your own, with little or no guidance.
It might feel daunting—but nonprofit payroll isn’t as complicated as you may think. We’re going to break down everything you need to know.
The Basics of Payroll
Payroll is, simply, the process of paying your employees. To run payroll correctly, you need to know what you owe each employee for the pay period.
While your nonprofit will likely be tax-exempt, this does not mean that you pay no taxes at all. You’re exempt from federal income taxes, but you still need to pay applicable payroll taxes.
Your pay period is the schedule on which you pay your employees. Normally, this will be one of the following:
- Biweekly (every other week)
- Semimonthly (twice a month)
Biweekly is the most common option in America, followed by weekly.
The minimum wage usually applies to nonprofit organizations as well as to for-profit companies. The federal minimum wage is $7.25/hour—but many states have minimum wages above this level. If your state’s minimum wage is higher than the federal minimum wage, you need to pay the state minimum wage instead.
There are some exemptions. For instance:
- If you hire employees with disabilities, you may be able to pay less than minimum wage (but only if the disabled person’s capacity for the job is impaired).
- If you hire workers aged 19 or under, you can pay $4.25/hour for their first 90 days of employment.
- Some nonprofits (including colleges and universities) can pay as little as 85% of minimum wage. You’ll need a DOL certificate in order to do this.
- Seasonal workers (e.g. in agriculture) are exempt from minimum wage laws.
Your employees will be classed as either “exempt” or “non-exempt”. This relates to the Fair Labor Standards Act (FLSA). Essentially, exempt employees aren’t entitled to overtime pay but non-exempt employees are.
Federal law requires that you pay non-exempt employees overtime at 1.5 times their regular pay rate, once they work more than 40 hours per week. Some states have different overtime rules: e.g. if an employee exceeds 8 hours in a day, that may be counted as overtime, even if they’re still within 40 hours across the whole week.
Exempt employees usually work in upper-level positions, such as in executive roles in nonprofits. Employees may be considered exempt if they are paid a salary, earn at least $35,568/year, and perform specific job duties (normally under the umbrella of executive, professional, or administrative).
While it’s possible to run payroll manually, in practice, almost all nonprofits use payroll software or services to streamline the process.
You need to make sure you process payroll sufficiently ahead of time for your employees to get their paycheck at the right point in time. With most payroll software, it will take 2 days between running payroll and the paychecks going out.
You can normally set payroll to be paid on specified dates. This means you can run payroll well ahead of time, e.g. if you’re going to be on vacation.
Being late with payroll will seriously harm your relationship with your employees and potentially also with your donors if disgruntled employees complain publicly.
One difficulty for nonprofit organizations is establishing whether the people working for you are employees, contractors, or volunteers. Each is treated differently for tax purposes.
You control how and where they do their job and they likely receive some benefits (such as insurance, sick days, and paid vacation). In general, you provide their tools and supplies, such as a laptop computer. They won’t be at liberty to subcontract out their work to others.
If you have full-time staff members, they’re very likely to be employees.
They pay their own taxes, so you don’t need to withhold any tax on their behalf. You simply pay them the rate you’ve agreed upon with them. (This might be on a regular basis or you might be paying them a lump sum on a per-project basis.) They normally provide their own tools and supplies. They might complete the work themselves, subcontract it out, or use their own employees.
Independent contractors might work for you full-time for months, but more often, they’ll be working for you part-time or on specific projects. For instance, you might hire a freelance designer to create your nonprofit’s logo and website.
(Note that it’s not possible to—legally!—volunteer for a for-profit company.) Volunteers shouldn’t expect or receive compensation for their services and they also shouldn’t displace any genuine employees. While you might give volunteers travel expenses or “thank you” gifts, the value of these (a) should not exceed $500/year and (b) should not exceed 20% of what you’d pay an employee for the same services. In general, it’s safest to give non-monetary compensation, such as free meals, training, or parking passes.
When you run payroll, you need to withhold some money from employees’ paychecks in order to pay certain taxes. (You don’t need to withhold money from contractors—and you shouldn’t be giving your volunteers enough of value for them to need to pay taxes on it.)
If your nonprofit is structured as a 501c3, then it’s exempt from federal unemployment taxes (FUTA).
You still need to withhold Federal Insurance Contributions Act (FICA) taxes from payroll. This covers social security and medicare. 50% is paid by the employer (your nonprofit) and the other 50% is taken out of your employees’ paychecks.
In most cases, you’ll also need to pay Workers’ Compensation Insurance. This provides pay for staff members who are injured while on the job. (They don’t need to be working out in the field to be eligible. They could be hurt while driving to meet with donors or while setting up for an event.)
Some withholdings vary from state to state, so it’s important to check your own state’s laws to be sure exactly what you need to withhold—and which organizations you need to pay it to.
To process all the necessary withholdings and taxes, you’ll normally want to run payroll reports. A payroll tax liability report will show you how much tax you’ve already withheld from your employees’ wages, what you’ve paid to government agencies, and what you still owe.
Payroll can seem daunting, and if you’re part of a small nonprofit, you might be worried about making mistakes.
Take your time over running payroll, make sure you check your state laws about any withholdings, and use software that can help you speed up the process and avoid mistakes. That way, you’ll be sure that you’re running you are nonprofit in accordance with the law, and that you’re not going to face the shock and expense of a sudden IRS fine.
Frequently Asked Questions (FAQs) about Nonprofit Payroll
Yes. Nonprofit organizations can pay bonuses as part of their compensation package. However, the overall package (bonus plus wages) needs to be considered “reasonable and in furtherance of the organization’s exempt purpose.” The bonus shouldn’t reduce the charitable services or benefits that the organization would otherwise provide.
Yes, a nonprofit organization can hire employees and pay staff members. Most nonprofits will need at least a small number of employees in order to fulfill their mission. Many will also rely on volunteer support as well. For instance, a church might hire a part-time administrator, but might also have volunteers who clean, serve refreshments, offer pastoral support, and so on.
It’s important to note that board members are typically volunteers, who may receive expenses (such as for travel) but who will not normally receive compensation.
Typically, nonprofits spend between 15% and 40% of their revenue on salaries, buildings, equipment, utilities, supplies, fundraising, and so on. However, the Better Business Bureau recommends that nonprofits keep administrative costs to 35% or less of their contributions. Foundations recommend that administrative costs should come to just 10% to 15% of your revenue. Obviously, if your nonprofit is spending 90% of donations on salaries and other administrative costs and only 10% of donations toward its mission, there’s a worrying imbalance there.
Yes, nonprofit grants can be used to cover payroll expenses so long as the staff is working on projects related to the grant. It’s important that employees track their time and activities — as not all the work they perform during a specified pay period may relate to the grant. You may want to use software to make it easier for them to track different tasks.
This blog post was written by donorbox’s guest author, Jessica Parker and published on the donorbox website here.