What employee taxes do nonprofits pay

Summary:

Income taxes withheld from employees' pay and the employer's share of social security and medicare are due from any employer. Unemployment taxes are more complicated. The IRS has a page that can help.

Answer:

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 the IRS website (.pdf file). In it, her 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.

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.

Sandy Deja has a useful page on her website with a summary of the employment taxes that nonprofits pay. See http://members.aol.com/irsform1023/status/emptax.html
As she points out there, the rules 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.

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Posted 8/5/04; Miller testimony added 6/9/06; toolkit added 3/14/08 -- PB