Calculating payroll taxes for a nonprofit organization is consistent with payroll tax calculations for profit organizations. The IRS states, “If a tax-exempt organization (EO) has employees, the EO is responsible for Federal Income Tax Withholding and Social Security and Medicare taxes. In addition, some EOs are responsible for Federal Unemployment Tax.”
Things You'll Need
- Federal W4 from employees
- State W4 from employees
- IRS exemption letter
Use the IRS tax tables to calculate federal withholding tax. The tables provide the federal withholding tax by payroll periods for weekly, bi-weekly, semimonthly, monthly and annual and grouped by Single and Married. Find the employee’s gross wage for the period. Using the number of exemptions on the W4, read across the chart to find the correct federal withholding amount.
To calculate the FICA tax, the combined Social Security and Medicare tax, multiply the payroll period gross wage by 7.65%. This amount is withheld from the employee and an equal matching amount is due from the employer.
To calculate the state withholding tax, use the state links provided by the IRS to access the payroll tax tables for your state.
Municipalities throughout the US have local taxes that apply both to the employee and the employer. Check your city’s website for these rules and withholding calculations. For example, the City of St. Louis has a payroll tax in place of .05% for employees living and/or earning wages in the City of St. Louis. In addition, the employer is taxed an additional 1% on these earnings.
Employers who offer employees health insurance and withhold the employee’s portion of the contribution may offer these pretax. Subtract the health insurance withheld from the gross wage before calculating the federal, FICA and some state tax.
When retirement plans include an employer match, both the employee contribution and the employer match are liabilities. The employee contribution is deducted from the gross wage before calculating the federal tax and some state tax. Do not reduce the FICA wage for the retirement contribution.
Employee deductions for union dues, alimony, garnishments and child support are not deducted before tax. The court order for alimony, garnishment and child support will contain the percentage of the employee’s net pay available for payroll deduction.
Nonprofit organizations whose organization is 501(c) 3 are exempt from FUTA tax, Federal Unemployment Tax. In most states, the organization will be exempted from SUTA, State Unemployment Tax. The state will request the IRS exemption letter as proof of the organization's nonprofit status.
Tips & Warnings
- Keep the copy of the IRS exemption letter on file with your organization.
- Check the IRS Circular E for each new payroll year to remain up to date on Social Security wages and changes in payroll tax requirements.
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