Employment Taxes and Nonprofits

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From time to time someone new to the nonprofit world is surprised to learn that their “tax exempt” organization is still responsible for paying many kinds of tax. In most cases, the term “tax exempt” specifically refers to state and federal rules that excuse organizations from paying income taxes. Other forms of tax are often unaffected by the exemption process, including employment taxes.

What employment taxes does a nonprofit pay?

Employment tax is an umbrella concept that captures several different categories of tax. Taken together, they can add up to a substantial sum, especially for organizations with large payrolls. The categories include these:

  • Social Security withholding, which in 2019 was 6.2% of an employee’s wages up to $132,900.
  • Medicare withholding, which in 2019 was 1.45% of wages. Together, Social Security and Medicare are sometimes referred to as the FICA tax, after the Federal Insurance Contributions Act that created both programs.
  • State and federal unemployment insurance programs.
  • Other state programs, like California’s Employment Training Tax (ETT).

Note that California provides exemptions from some employment taxes for qualified nonprofits. The exemptions include wages paid to employees of churches. It’s important for an organization to be clear about what exemptions it qualifies for, and when it must take steps to comply. For example, most organizations will be responsible for personal income tax withholdings for employees.

Compliance is a matter of getting good advice

Most organizations that will carry a payroll will benefit from using a service to handle the mechanics of employment taxes. A comprehensive analysis of the organization’s tax obligations is essential for ensuring that mistakes aren’t made. Nonprofits need to be especially mindful of their compliance obligations, because failing to comply with the obligations that do exist could put exemptions at risk. The Church Law Center of California provides governance and organizational counsel to churches and secular nonprofits. We can assist your organization with all manner of compliance issues, including those around employment. Call us at (949) 689-0437 or reach out to us through our contact page.

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