The Nonprofit FAQ

What employee taxes do nonprofits pay

On the IRS website, a single page brings together information and links to federal tax requirements and other regulations that employers need to pay attention to. See the Exempt Employers Toolkit at http://www.irs.gov/charities/article/0,,id=172794,00.html In the Spring of 2006, there were many reports that nonprofit organizations were among the many employers who had not paid employment taxes properly. Steve Miller, Commissioner of Exempt Oreganizations at the IRS, testified in detail about this problem before the House Ways and Means Committee on May 25, 2006. His written testimony is on http://www.irs.gov/pub/irs-tege/miller_5229_pm_testimony_wm_oversight_cfc_tax_compliance_1a(2).pdf">the IRS website (.pdf file). In it, he reports that 501(c)(3) organizations made up about two-thirds of the cases of exempt organizations that seemed to be handling employment taxes wrong. Toward the end of the testimony, he describes the plans the IRS has to improve matching of various records in ways that will make it more likely that unreported or misreported employment taxes do not go unnoticed. In 2009, the IRS published a discussion of how to determine whether someone is an employee or a contractor. It's online at http://www.irs.gov/businesses/small/article/0,,id=209413,00.html The government penalties for mishandling employment taxes are severe. But the damage to employee and community confidence in the organization's leadership may be even more important. The IRS discussed the employment tax obligations of "exempt organizations" in the Emplyer's Supplemental Tax Guide (Pub. 15-A) at http://www.irs.gov/pub/irs-pdf/p15a.pdf. Therules and procedures for state unemployment taxes vary from state to state. Some cities may have further requirements. It's important to register as an employer and keep current on all taxes, and the penalties for nonpayment can be very severe (and take precedence over other obligations). On the question of whether someone is an independent contractor or an employee, see the IRS webpage at http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html and the links suggested there. -- PB