Nonprofit board members, trustees, volunteers, and paid staff are the foundation for building a lasting organization to advocate your cause. Running a nonprofit requires planning and understanding of the tax benefits for the organization. When meeting all of the IRS guidelines, most nonprofits are exempt from state sales, property, and income tax. The nonprofit must still report and pay all employee-related taxes.
Helping Your Staff and Board Understand Your Nonprofit Tax Status
Damaging your nonprofit’s reputation, failure to pay taxes or follow proper procedures may result in costly fines. Along with your nonprofit receiving a fine, the IRS has the authority to go to each individual board member, trustee, or executive for repayment of taxes. Understanding the tax system in your nonprofit organization is the best way to avoid this situation.
Board of Directors
Often operating in a volunteer capacity, the board of directors is the governing body for the nonprofit organization. Acting as advocates, the board is responsible for the legal and ethical duties. The board has the option to create advisory boards or committees to handle specific events or programs.
Although rare, board members may receive reasonable compensation for services. Paying board members is often viewed as a conflict of interest. Instead, board members may receive reimbursement for expenses including travel, hotel costs, or conference fees. When reimbursing a board member, request documentation of expense. A verified expense may be a tax deduction for your nonprofit.
When doing the nonprofit’s business, board members should get into the practice of saving all receipts and documentation for expenses. If the nonprofit is unable to provide reimbursement, the uncompensated costs may be an individual tax deduction. Keeping a record of the amount spent is crucial for reimbursement or deduction.
Staff
Despite numerous individuals volunteering time and money, daily operation of a nonprofit organization requires paid staff members. Large nonprofits need numerous employees to keep the organization running in a smooth manner on a daily basis. Offering competitive pay and full benefits package attracts the best employees to the organization. Paying your workforce requires you to be compliant with IRS regulations for employee tax withholdings.
Each pay period you must withhold Social Security, Medicare, and Federal Insurance Contributions Act (FICA) taxes from your paid staff members. Keeping accurate records is the best way to ensure you meet IRS regulations. Each employee needs an up to date W-4 on file with proper identification and deduction status.
Separating the funds from your collected employee taxes is crucial. Your treasurer, bookkeeper, or accountant needs to follow all IRS regulations regarding the use of employee taxes. Using any of the funds for your nonprofit’s expenses is strictly forbidden. Spending the funds or failing to collect the taxes may result in severe penalties against your nonprofit.
Operating under the Internal Revenue Code Section 501(c)(3), the nonprofit is a tax-exempt organization providing a public benefit. Staying compliant with the tax status requires your organization to work together. Designating specific board members or employees to handle tax criteria helps to eliminate errors and avoid fines.
Ernst Wintter & Associates is a full service accounting firm, specializing in assisting nonprofits. Our CPAs are available to assist your organization with any questions and ensure you are in compliance with all regulations. Contact us today!