This topic provides general information and suggestions for setting up your 501(c)(3) organization in your Payroll product. If your organization is listed as company type 501(c)(3) in our service, all employees are automatically exempt from FUTA, and you will not be prompted to file an annual Form 940.
To confirm that you are listed as a 501(c)(3) Corporation in our service:
- Click the Setup tab.)
- Find Payroll & Services > Taxes and click General Tax Information.
- At Company Type, make sure 501(c)(3) Corp is selected. If it isn't, click the drop-down arrow and choose 501(c)(3).
- Click OK.
Note: Because nonprofit organizations and churches often have differing tax treatments, you will need to know the specific tax requirements for your company and your employees to set up withholdings in your Payroll product.
- For organizations registered as 501(c)(3) with the IRS, all employees are exempt from Federal Unemployment (FUTA). If you chose 501(c)(3) during the payroll setup process, the service automatically exempts all employees from FUTA.
- For state unemployment, employees might be subject to, reimbursable for, or exempt from paying. You will need to know which of these categories applies to your organization, and then make adjustments to your payroll setup to match.
- There are many nonprofit organization types (other than 501(c)(3) status) that pay all payroll taxes . If your organization is a nonprofit, but not a 501(c)(3) corporation, consult with an accountant for specifics about your tax liabilities, and then setup your payroll service according to the recommendation.
- Churches are exempt from Federal Unemployment (FUTA) and, in most cases, also state unemployment (SUI). If you chose 501(c)(3) during the payroll setup process, the service automatically exempts all employees from FUTA. You will need to manually set up any additional tax withholding. If you're not sure about additional state or federal exemptions, consult your state tax agency or your accountant.
- Clergy, pastors and other religious officials can elect to be tax exempt from all taxes. If so, be sure to set up your taxes to reflect this in our service.
- Clergy and pastor housing is a special payroll item specific to churches and requires special setup. Again, you must tell us how the housing allowance should be treated for taxes and W-2 purposes.
- Ministers are generally considered self-employed, and therefore, not subject to Social Security and Medicare taxes (FICA). Mark the employee exempt from Social Security and Medicare taxes. The minister (or the church on the minister's behalf) must file a Self-Employment Contributions Act (SECA) return and pay self-employment taxes. your Payroll product does not support SECA reporting. If they choose, and the church agrees, they can have additional amounts withheld as PIT from their salaries to cover their SECA tax. In your Payroll product, enter the amount of additional tax to be withheld as federal PIT additional amounts. All withheld amounts are reported in box 2 on Form W-2.
- All other church employees are subject to Social Security and medicare.
Exempting employees from additional types of withholding (other than FUTA)
If your employees are also exempt from state unemployment (SUI) taxes, make sure you select the appropriate state taxes as you follow these instructions.
To exempt an employee from additional federal or state withholding types:
- Click the Employees tab.
- Click the employee's name.
- In the Taxes and Exemptions section, click Edit.
- In the Exemptions section, click Edit.
- Select the checkboxes for the appropriate federal or state tax exemptions.
- Click OK.
Setting up reimbursable state unemployment
Some states allow 501(c)(3) nonprofit and church organizations to elect not to pay into the state unemployment insurance fund, but rather to reimburse the state if an employee files an unemployment claim. If you choose this option for your organization, you will be billed by the state agency if an employee files for unemployment benefits.
To set up your organization for reimbursable SUI:
- Click Setup > Tax Setup and then State Tax Information.)
- In the state unemployment insurance (SUI) section, select the checkbox for Check here if you pay unemployment claims by reimbursement, and enter your SUI rate as 0.
- Click Change or add new rate. You might need to delete the old rate before you can add the new one.
- In the New box, enter 0.00 as the percentage. Be sure to enter the effective date as the first day of the current quarter: January 1, April 1, July 1, or October 1. (In other words, if today is February 23, enter January 1.) Use the date format DD/MM/YYYY.
After entering zero as the current SUI rate, no state unemployment taxes will be withheld from employees.
For additional information about nonprofit status for your organization, see IRS Publication 557.