The following information has been gathered from the IRS to help non profit organizations understand their responsibilies when it comes to playing employment taxes.
What Are Employment Taxes?
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.
Tax-exempt organizations have great responsibilities while operating and managing their activities. Before an organization becomes an employer and hires employees, it needs a federal Employer Identification Number (EIN).
If the organization has employees, it is responsible for several federal, state, and local taxes. As an employer, the organization must withhold certain taxes from employees’ pay checks. Employment taxes include the following:
- Federal income tax withholding (FITW)
- Social Security and Medicare taxes (FICA)
- Federal unemployment taxes (FUTA)
An organization generally must withhold federal income tax from its employees’ wages. To figure how much to withhold from each wage payment, the organization should use the employee’s Form W-4 and the methods described in Publication 15, Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide.
Social Security and Medicare taxes pay for benefits that workers and families receive under FICA. Social Security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA.
Generally, meals, lodging, clothing, services and other payments in kind are subject to Social Security and Medicare taxes, as are wages paid in cash. However, meals are not taxable wages if furnished for the employer’s convenience and on the employer’s premises. Lodging is not taxable if furnished for the employer’s convenience, on the employer’s premises and as a condition of employment.
The organization, as the employer, must withhold and deposit the employee’s part of the taxes and pay a matching amount. The Social Security tax is withheld from the employee’s gross wages until the employee’s cumulative wages for the year reach the wage base limit. Wages above the wage base limit are not subject to Social Security tax withholding. However, there is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax. Report federal income taxes, Social Security, and Medicare taxes on Form 941, Employer’s Quarterly Federal Tax Return.
Note: Some small employers are eligible to file an annual Form 944, instead of quarterly returns. See the instructions to Form 944 for more information.
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. The federal unemployment program was enacted to encourage states to provide payment to workers who have lost their jobs. FUTA tax should be reported and paid separately from FICA and FITW. FUTA tax is paid only from an organization’s own fund. Employees do not pay this tax or have it withheld from their pay.
An organization that is exempt from income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA. This exemption cannot be waived. An organization that is not a section 501(c)(3) organization is not exempt from paying FUTA tax. Report FUTA taxes on Form 940, Employer’s Annual Federal Unemployment Tax Return.
In general, the organization must deposit income tax withheld and both the employer and employee portions of FICA taxes (minus any advance EIC payments) by mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for Federal taxes. However, some taxpayers are required to deposit using the Electronic Federal Tax Deposit System (EFTPS). See e-file for Exempt Organizations for more information.
Independent Contractors vs. Employees
Are the workers for a tax-exempt organization independent contractors or employees? Before the EO can know how to treat payments it makes for services, the EO must first know the business relationship that exists between the organization and the person performing the services.
The person performing the services may be–
A common-law employee ( employee),
A statutory employee, or
In determining whether the person providing the service is a common law employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
It is critical that the EO, as the employer, correctly determine whether individuals providing services are employees or independent contractors. Generally, the EO must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The EO does not generally have to withhold or pay any taxes on payments to independent contractors.
Caution: An EO can be held liable for employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor. Also, see Paying Independent Contractors for information on reporting requirements for payments to independent contractors.
Refer to Who Are Employees? in Publication 15-A, Employer’s Supplemental Tax Guide, for more information.
See Employment Tax Resources for Exempt Organizations, for more information
Electronic Filing and Payment Options for Employment Tax Returns
Electronic filing and payment options are available to exempt organizations for the employment tax and information returns required if they pay workers.
A quick, easy, smart way to get your taxes where you want them to be — Done!
- Quick – Just hit Send! Or tell your preparer “I want the safety and speed of e-file.”
- Easy – There is a 99 percent accuracy rate.
- Smart! – In 48 hours IRS sends an official acknowledgment that your return was received. Owe money? The exempt organization can authorize an electronic withdrawal from your savings or checking account.
Electronic Filing Options for Business and Self-Employed Taxpayers
Employment Taxes (Forms 940, 941 and 944)
Excise Tax Returns (Form 720 and Form 2290 and Excise Claim Form 8849 (Schedule 3 and 6))
Filing Information Returns Electronically (FIRE) (Forms 1099, 1098, W-2G & more)
Modernized e-File (MeF)
MeF Internet filing is available for charities and non-profits, corporations and partnerships.
Electronic Payment Options
EFTPS – Electronic Federal Tax Payment System
Convenient Payment Options Using Credit Card and Electronic Funds Withdrawal
e-file for Business Providers & Partners
Find a listing of companies who offer IRS e-file for Business products and services including direct links to each companies’ Web site. Be sure to check the special offers and discounts from our IRS e-file for Business Partners.
Social Security Administration (SSA) Employer Web Site
Learn how to submit your Forms W-2 electronically.
Electronic Payment Options are convenient, safe and secure methods for paying taxes. If you have a balance due, you can e-file and pay in a single step by authorizing an electronic funds withdrawal from your bank account. Self-employed filers can also pay by credit card.
Electronic Federal Tax Payment System – A free service offered by the U.S. Treasury. Pay all federal taxes electronically – on-line or by phone 24/7. EFTPS is ideal for making recurring payments such as estimated tax payments and federal tax deposits (FTDs). Visit www.eftps.gov to enroll.
Electronic Filing Options for Employment Taxes: Form 940, Employer’s Federal Unemployment (FUTA) Tax Return; Form 941, Employer’s Quarterly Federal Tax Return; Form 944, Employer’s Annual Federal Tax Return.
Online Application – Form SS-4, Employer Identification Number (EIN)
If you’ve determined that you need an EIN, then use the EIN online application to submit your information. However, be aware that not all entity types may apply online.
Social Security Administration’s (SSA’s) Employer Information Website : Learn how to submit Form W-2 data electronically.
Federal Tax Deposits
A tax-exempt organization (EO) can make deposits either electronically, using the Electronic Federal Tax Payment System (EFTPS), or by taking its deposit and Form 8109-B, Federal Tax Deposit Coupon, to an authorized financial institution or Federal Reserve bank serving the area. Five to six weeks after the EO receives its employer identification number (EIN) (EIN), the IRS will send the EO a coupon book. If the EO has a deposit due and there is not enough time to obtain a coupon book, blank coupons (Form 8109-B) are available at most local IRS offices. You cannot use photocopies of the coupons to make your deposits.
NOTE: If an EO does not have an EIN by the time a return is due, the EO should write “Applied for” and the date it applied for the EIN in the space shown for the number. Also, for faster service in obtaining an EIN, an EO may now apply for your EIN using the online EIN application.
Tip: For simplicity, an EO may wish to consider depositing employment taxes each payday (which is the day the employer becomes liable), to ensure deposit requirements are met without having to remember IRS deposit requirement dates.
Refer to ABCs of Federal Tax Deposits for more information.
The basic requirements for tax and wage reporting compliance, including determining if an EIN is necessary, calculating withholding, making deposits, and keeping tax and reporting records.
Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
The Trust Fund Recovery Penalty (TFRP) may be assessed against any person, including a an officer, director, employee or a member of a board of trustees of a tax-exempt organization, who is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them.
A listing of the common employment tax forms that a tax-exempt organization would need.
Two key publications on employment tax issues are Publication 15, Circular E, Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide. This section provides a listing of, and links to, these and other common employment tax publications that a tax-exempt organization would need.
A listing of IRS notices on employment tax issues that may be of interest to tax-exempt organizations.
Employment Tax Resources for Exempt Organizations
Additional resources on employment tax issues for tax-exempt organizations.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.