If you run a nonprofit organization, you likely know that you are exempt from federal income taxes because nonprofits are not held to the same tax standards as other entities. However, if you have employees, this doesn’t mean that your nonprofit is exempt from payroll taxes altogether. Here’s an overview of what your nonprofit needs to know about payroll and some frequently asked questions.
What is required
Your nonprofit will need to withhold Federal Insurance Contributions Act taxes when calculating and distributing payroll because these taxes cover the Social Security and Medicare contributions of employees. To run payroll, you’ll need to have a federal employer identification number and a state payroll tax identification number for your nonprofit. Similarly, you may need to obtain local tax identification numbers to take care of your payroll tax responsibilities as well. We recommend collecting I-9 forms and W-4 forms for IRS tax purposes.
Frequently asked questions
How do FICA taxes work for employees of nonprofits?
To fulfill your FICA tax obligation, you’ll need to pay 50% of each employee’s taxes. The other half will be withdrawn from each employee’s paycheck. Look into whether or not your company is required to pay workers’ compensation insurance as well. As always, withholdings can vary from one state to another, so research your state to learn what is mandated by law in your area.
Are nonprofits liable for other tax responsibilities?
If your nonprofit is not classified as a 501(c)(3), you could still be liable for FUTA taxes. Likewise, your organization might be responsible for certain state or local taxes, like the State Unemployment Tax Act. There are some payroll tax exceptions for charitable organizations, so be sure to read about specific tax requirements in your city and state as they pertain to nonprofits like yours.
How do I classify my nonprofit’s workers?
In the world of nonprofits, these are the three types of workers:
- Employees
- Contractors
- Volunteers
If you employ full-time staff members, they are considered employees. On the other hand, independent contractors are those who either work part-time or focus solely on specific projects, but they do not receive benefits. You also do not need to withhold any money for taxes when paying freelancers. With volunteers, payroll isn’t involved whatsoever because they do not receive compensation for their time or assistance. You should not extend stipends or allowances to volunteers as these are viewed as taxable income in the eyes of the IRS.
How do I ensure compliance with minimum wage requirements?
Your nonprofit is required to comply with minimum wage requirements just like other business structures and entities that employ workers. Keep in mind that the federal minimum wage might differ from your state’s minimum wage requirements, so double-checking these values is key. Also, take note that these rates are subject to change in relation to an increase in inflation and higher costs of living. We recommend staying current with any adjustments to minimum wage on both a state and a federal level to ensure that you’re appropriately compensating your employees for their time.
Can I apply money from grants to payroll expenses?
It’s possible! First, your nonprofit will need to apply for grants from foundations or for-profit organizations. In doing so, you’ll have to denote how the grants would assist your nonprofit’s projects and further your organization’s mission. Sometimes, funds from grants can cover payroll costs if those expenses are associated with work on the project for which you received the grant. Keep a documented record of how much time each employee spent on the project to ensure that the pay they receive is reflective of their efforts. Note that administrators of your nonprofit organization must report these payroll expenses to the grantor.
What does a payroll tax liability report indicate?
A payroll tax liability report shows the amount of taxes you have already withheld from your employees’ wages. It also denotes the money you paid to government agencies as well as how much you still owe. There are resources available to ensure that your nonprofit is compliant with your relevant laws to avoid consequences.
Additionally, as part of your responsibilities, process payroll on time to ensure that employees receive their paychecks as promptly as possible. This is a must for maintaining your status as a nonprofit organization.
Have questions?
If you have any questions about payroll at your nonprofit, our team is here to help. Contact us via the form on this page to learn more.
© 2026
