Non-Profit Payroll Compliance: Key Legal Considerations for Non-Profit Organizations

Nonprofits have a unique standing in the economy. Rather than generating profit for shareholders, they have a mission that qualifies them for the unique 501(c)3 status with the IRS.

While this status changes how the organization will file some of its taxes and paperwork, those within this category need to firmly understand what regulations apply to them regarding employees and their applicable payroll taxes. These laws are critical for non-profits. Let’s explore the regulations that your business needs to know for your non-profit payroll compliance.

Non-Profit Payroll Compliance_ Key Legal Considerations for Non-Profit Organizations

What Makes Nonprofits Unique?

When an organization obtains nonprofit status, the IRS says that it does not have to pay certain taxes. However, to obtain this status, the group needs to file paperwork demonstrating that it works in a non-profit qualifying field and organizes its business according to non-profit structures.

Keep in mind that even though nonprofits do not have to pay certain taxes, they still have to abide by all the laws related to federal and state payroll taxes. These legal considerations for non-profit payroll systems can get complicated for many businesses, so many will elect to work with a partner specializing in payroll services.

Nonprofits need excellent bookkeeping to track all their sources of funding and how they use those funds. Without proper bookkeeping practices, nonprofits can easily make mistakes like commingling funds. When nonprofits fail to accurately track where their funds come from and where they are used, it becomes easy to make mistakes regarding fund allocation and accidentally use restricted funds outside their allowed scope.

As nonprofits begin to work on their payroll, they often have unique considerations. Let’s look at a few key areas where 501(c)3 businesses need to be attentive.

Sources of funding and non-profit payroll regulations

Nonprofits often have unique sources of income, such as grant money. In these situations, an organization receives grant money for specific purposes.

Sometimes, the funds can be used for operational costs, including paying employees, but the company has to know precisely what restrictions apply. These restrictions might have qualifications about the types of expenses the money can be used for. The nonprofit then needs to plan how they will use the money according to these regulations.

The nonprofit will also have to carefully document how they use the grant money, including how it was used to support or pay employees. This ensures the nonprofit can clearly demonstrate how they abided by the grant stipulations.

Working with volunteers and payroll compliance for non-profits

For many nonprofits, volunteers are an excellent asset. Volunteers want to help the nonprofit and contribute to the overall mission and they contribute their effort and labor for minimal costs. Quality volunteers can help nonprofits achieve significantly more than they would have if they only had paid employees. However, sometimes your volunteers can also impact your payroll, so you need to track how they interact with the business.

Specifically, if you give your volunteers any kind of stipend or allowance, you need to report it as taxable income. Also, if you ever begin to transition your volunteers towards paid employees, the state and federal minimum wage laws will apply and you need to make sure your payroll reflects these regulations.

Paying attention to human resources and responsibilities

As a nonprofit, you will often find yourself looking for ways to save money whenever possible. Many nonprofits operate on a very tight budget, particularly compared to standard for-profit businesses.

This makes it tempting to take shortcuts, like miscategorizing independent contractors who really end up working for your business, like employees. This can happen accidentally, as independent contractors take on more responsibilities for the organization.

Knowing how to categorize your employees and how to treat them based on their classification is critical. If you need to shift your internal practices or change an employee's classification, speak to them and make the change to ensure that you remain fully compliant with all labor and non-profit payroll laws.

Within the human resources department, you also want to pay close attention to your board. The board of the nonprofit has important duties and responsibilities, not only to the mission of the nonprofit but also to make sure that your organization abides by all the legal and financial duties that apply. Ensure the board and leadership know what’s expected of them, meet frequently enough to fulfill these responsibilities, and ensure compliance with non-profit payroll legal requirements.

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Building Your Nonprofit with Payroll Compliance

Your nonprofit organization benefits from tax breaks, but ensuring payroll tax compliance is crucial. Workforce PayHub can help manage your nonprofit's payroll requirements and ensure legal compliance. Contact us for expert guidance and a free consultation.


The information provided in this blog is for general informational purposes only and should not be construed as legal advice. Workforce PayHub does not provide legal services or legal advice. Always consult with a qualified legal professional for specific legal guidance.



Eric Jones
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