If your nonprofit organization employs people (and most do)—you’ll need to be familiar with the ins and outs of payroll liabilities: what they are, how to pay them, and how to save money on these costs. Here’s what you need to know:
What are payroll liabilities?
Payroll liabilities are costs that your organization must pay to employees, government agencies, and benefit plan providers. Employers must carefully track which payroll liabilities they are responsible for and ensure that they stay on top of deadlines for forwarding those payments to the appropriate agencies.
There are many different types of payroll liabilities. These include:
- Employee compensation: these are wages owed to salary or hourly employees and may also include bonuses and commissions.
- State and federal tax withholdings: employers are responsible for withholding state and federal taxes from employees’ paychecks and forwarding them to the IRS and state tax agencies.
- Employer-sponsored benefits: employers may deduct health care premiums from employee wages, as well as retirement plan contributions and retirement plan employer matches, from each payroll.
- Workers’ compensation insurance: organizations may pay premiums for workers’ compensation insurance. These payments are either made annually as a lump sum or paid for every payroll period.
- Wage garnishments: these are court-ordered deductions—such as child support or credit garnishment—taken from an employee’s pay to satisfy a debt or legal obligation.
- Union dues: union dues (for unionized employees) are deducted from employees’ paychecks and deposited to the union each month.
- Payroll processing costs: organizations that use utilize payroll processing services must account for monthly or yearly fees associated with those services.
- Accrued Paid Time Off (PTO): employers in some states may be required to pay employees for accrued PTO when they leave the organization.
How to calculate employee compensation
Wages owed to employees and independent contractors are the primary payroll liability that employers must account for. Employee wages are calculated differently based on whether the employee is salaried or hourly.
- Salaried employees are paid their annual salary divided by the number of pay periods in a year.
- Hourly employees are paid based on the agreed-upon hourly rate and the hours worked in a pay period.
- Independent contractors are paid based on their hourly rate or flat fee agreement.
Do nonprofits pay payroll taxes?
Despite being “tax-exempt,” charitable organizations are still on the hook when it comes to payroll taxes.
In addition to withholding taxes from employees’ paychecks, employers must also pay their share of taxes on their employee’s wages. However, these withheld taxes aren’t immediately deposited to the Internal Revenue Service (IRS) (or state tax agency). Instead, they become an employer’s tax liability to be paid at the end of the year, come tax season.
Nonprofits are responsible for paying the following employment taxes:
- Federal Income Tax Withholding (FITW)
- State income tax, if applicable
- Social Security and Medicare taxes (FICA)
- Unemployment taxes*
*501(c)(3) charity organizations have the option to opt out of paying into state unemployment systems (SUTA). 501(c)(3) charities are exempt from federal unemployment taxes (FUTA).
Federal Income Tax Withholding (FITW) Taxes
Employers are responsible for withholding federal income taxes from employees and sending them to the IRS. The IRS bases FITW taxes on the total amount of taxable wages, as well as marital status, and the number of allowances stated on their W-4 form. Employers can determine federal income tax withholding using either Publication 15-T’s wage bracket method, or its percentage method.
Federal Insurance Contribution Act (FICA) taxes
Taxes under the FICA include social security taxes (also called old age, survivors, and disability insurance) and Medicare. Employers are responsible for withholding these taxes from employees’ paychecks and paying them to the federal government on time.
The current FICA tax rate is 15.3%, split evenly between employers and employees to amount to 7.65% each, per payroll cycle.
What is the annual wage base limit for Social Security taxes?
The Social Security tax has an annual wage base limit. After an employee earns above the annual wage base limit, Social Security taxes won’t be withheld. For earnings in 2023, this base is $160,200.
What is the Additional Medicare Tax?
The Additional Medicare Tax is levied on high-income earners who make more than $200,000 per year. In 2023, the Additional Medicare Tax was 0.9%.
Unemployment Insurance Taxes
All employers are assigned an annual SUTA tax rate, largely based on past layoff history, also called “experience rating,” and other economic factors. The revenue collected through these taxes is pooled together and used to fund state unemployment systems and pay benefits to workers who qualify for unemployment benefits.
How nonprofit organizations can save money on State Unemployment Insurance Taxes
Under federal law, registered 501(c)(3)s can opt out of the SUTA system and reimburse the state for any paid benefits instead of paying a flat state tax rate. After the state pays benefits (claims) to an unemployed employee, it then bills the past employer(s) for reimbursement.
A recent analysis of 501(c)(3) nonprofits found that nearly 86% of those paying SUTA are overpaying—meaning they pay more money in taxes than they ever cost the state in unemployment claims. This means that these organizations are funding the benefits of other employers in their state—including for-profit employers.
Employers who pay only for their unemployment charges save money by not paying into a government pool that pays claims for everyone else’s unemployed employees.
How do employers pay their payroll liabilities?
How employers pay their payroll liabilities depends on the type of liability and applicable regulations.
- Gross wages: Employers commonly pay employees on a weekly, bi-weekly, and semi-monthly basis, either through paper checks, direct deposit, or a payment card.
- Federal taxes: Federal taxes are typically paid to the IRS via the Electronic Federal Tax Payment System (EFTPS). Organizations can also use Form 941 to determine and report and submit federal tax withholdings and pay their employer portion. Deposit requirements for paying federal taxes vary based on the organization and amounts withheld.
- State and local taxes: Deposit requirements for state and local taxes vary based on an organization’s jurisdiction and the type of taxes owed. Organizations should check with their state tax agencies to ensure tax obligations are filed and paid on time.
How to manage payroll liabilities
Managing payroll liabilities requires creating successful record-keeping systems and staying on top of owed payments and deadlines. Here are some tips:
- Know your deadlines. State and federal tax agencies and third-party benefit providers require payments to be submitted at different times of the year. It’s critical to determine these schedules ahead of time and make payments on time to avoid penalties.
- Save payroll records. Under the Fair Labor Standards Act, employers are required to save payroll records for at least two years.
- Save money on payroll liabilities where you can. 501(c) Agencies Trust is a national organization that helps nonprofit organizations leave the state unemployment tax system, stop paying unemployment taxes, and become reimbursing employers. A typical employer can realize potential savings of more than 20% per year versus paying SUTA.
Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others. She writes nonprofit-specific content for 501c.com.
(Image by Robert Owen-Wahl from Pixabay)
