Non- Profit Payroll and Church Payroll is very different from most industries and has special rules and exemptions. Non – Profit Payroll and Church Payroll o are similar but have distinct differences between the two that make each one unique. Church Payroll has special Clergy exemptions that Non-Profit Payroll does not have.
Federal Unemployment Exemption
Non Profit Payroll and Church Payroll are different from normal payroll due to the payroll exemptions allowed. Most Non Profit Payroll and Church Payroll have the option to exempting themselves from Federal Unemployment Taxes (FUTA). This requires a letter from the IRS stating that your organization is not required to file or pay Federal Unemployment Tax. In order to be exempt the IRS requires the organization to be a 501(c)(3) tax exempt status.
“Non-Profit Payroll has the option of opting out of FUTA.”
State Unemployment Exemption
It is a common misconception that Non Profit Payroll and Church Payroll are exempt from State Unemployment because they are exempt from Federal Unemployment. Most States require both Non Profit Payroll and Church Payroll to choose between registering as a contribution or reimbursement based account. A contribution based account is a standard unemployment account where you will receive an Unemployment Rate and be taxed based on the State’s Taxable Wage Limit. A reimbursable account is an account where the Non Profit Payroll and Church Payroll will be required to put up collateral in the form of a cash deposit, bond, CD or letter of credit from a bank in exchange for not having an Unemployment tax rate. The State will then require additional deposits or “reimbursements” from the Non Profit and Church for any Unemployment Claims. A standard Contribution based account should be used for any Non Profit or Church where turnover of staff is of consideration. A reimbursable account should be used where turnover of staff is not an issue and best used for small staffed entities.
Organizations that are currently running payroll and operating from a “State Exemption” viewpoint should contact the State Unemployment agency and register as a reimbursable or contribution based account. Have more questions? Contact us today.
“The majority of non-profit payroll’s State Unemployment accounts, are setup incorrectly.”
403(b) the 401(k) of the Nonprofit World
A Non Profit or Church has only two options for retirement planning, a 403(b) and a Simple IRA. The 403(b) is the equivalent of a for profit company’s 401(k). A 403(b) operates almost identical to a 401(k) as far as plan design and contributions allowed, however a 403 (b) is exempt from certain administrative duties. Learn more about employee benefits.
“Non Profits utilize 403(b) plans instead of a 401(k)”
Certain Non Profit Payroll and Church Payroll pay their staff a housing allowance, also known as a parsonage allowance. This amount is not taxable for Federal or State Income Tax but is subject to SECA tax. Housing Allowance, although not required, should be documented in Box 14 of the W-2 for convenience come tax time. Housing Allowance should be reported at the end of the year to Payroll Services in order for proper documentation on the W-2. Contact us for more information on housing allowance.
“Housing Allowance is a non taxable item and should be displayed in box 14 of the W-2”
“Religious Organizations can opt out completely from FICA taxes.”
Churches Exempt from Social Security and Medicare
Religious Organizations have the option of exempting their organization from paying the Employer share of Social Security and Medicare. In order to exempt their organization, Religious Organizations need to file IRS Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption from Employer Social Security and Medicare Taxes.
This may sound like a good thing however Religious Organizations must understand the impact on their employees. If a church has elected the exemption, the employees will face the burden of paying both sides of Social Security and Medicare – Self Employment Tax. They are not allowed to deduct any type of “business expenses” against this amount and will be taxed on all incomes over $108.28
“The IRS extends special exemptions to members of the Clergy.”
Clergy may exempt themselves from Social Security and Medicare tax by filing form 4361 with the IRS. This allows the individual to exempt themselves from Social Security and Medicare tax coming out of their paycheck. When this occurs the individual is only taxed on their paystub by Federal and State Income Tax. Individuals that exempt themselves from Social Security and Medicare are instead taxed on SECA.
“SECA Tax is a variant of Self Employment Tax. Payroll Services can withhold extra SECA tax on behalf of the employee.”
SECA for Religious Organizations
SECA tax, derived from the Self-Employment Contribution Act, which is a variant of Self Employment Tax comprises of Social Security and Medicare tax. This tax is paid at the end of the year on the individual’s personal tax return and may be subject to additional tax deductions and rules. Many exempt clergy members want to have SECA tax withheld from their paychecks. Payroll Services can withhold fixed deductions for SECA tax and remit them on behalf of the individual. Contact us to start withholding SECA tax.