Being a Nonprofit Employer
A nonprofit organization can hire:
a) Employees – Including full time, part time employees and/or officers
b) Independent Contractors – for availing one-time or specialized services
c)Volunteers – to execute programs and activities as outlined in the organization’s mission – though technically this does not constitue hiring.
The moment a Nonprofit organization hires its first employee, it is bound to comply to certain rules. Some of these rules are also applicable when hiring an Independent Contractor.
These include registering with a few Government departments, complying with a few federal and state rules and taking steps for employee protection.
The major compliances to be met by a nonprofit employer are as follows –
1) Obtaining a unique Employer Identification number – This is a on time activity to be undertaken by an organization. An employer Identification number can also be obtained online by U.S employers by simply filling in a few details. Overseas employers cannot apply online. Visit www.irs.gov for obtaining the EIN for your organization.
2) Complying with the provisions of the Fair Labor Standards Act –
Any nonprofit employer with a gross receipt of USD500,000 or more needs to comply to the rules laid under this Act. The rules are applicable for employees but not for independent contractors or volunteers. All employers including nonprofits need to comply to the minimum wage requirements of federal (USD7.25 per hour) ans state laws (this rate varies amongst states). All Nonprofit must also comply with the hour laws and rules pertaining to overtime.
3) Obtaining Worker’s compensation Insurance: As an employer, a nonprofit organization will have to purchase Worker’s Compensation Insurance to provides compensation for its employees who are injured in the course of employment. Obtaining this Insurance also protects the nonprofit employer from any possible litigations filed by a injured employee against the organization while simultaneously transferring the financial risks to the Insurer. The extent of Insurance coverage varies from state to state. Insurance cover can be obtained either from the State Compensation Insurance Fund (SCIF or also known as State Fund) or from private Insurers. (there are around 15 private Insurers that provide this cover)
4) Complying with the Federal Occupational safety and health administration (OSHA Act,1970) framework – This Act requires an employer (including nonprofit employers) to provide its employees with an safe, hazards free, sanitary work conditions and healthy environment.
The major reporting requirements as per OSHA include the duty of an employer to report any work related deaths, fatal on the job heart attacks or hospitalization of 3 or more employee within 8 hours of its occurance. An OSHA inspectors is also allowed to conduct inspections of work premises during the working hours. The Act also requires an Employers to communicate with employees about possible workplace hazards and their prevention methods. An employer is also required to maintain a record of every non-consumer chemical product used or lying at the workplace.
Employers are also required to report any injury or job-related illness in a prescribed format. An annual summary report also needs to be filed by all employers.
5) Complying with state Occupational safety and health laws – Besides OSHA, an organization needs to comply separately to its state laws.
6) Witholding Federal Income taxes – The federal tax laws requires an employer to ensure withholding of income taxes on payments made to its employees and pay it directly to the Internal Revenue services. The amount of tax that is required to be witheld by an employer differs from year to year with changes in tax rules for the year. The latest witholding tax rules can be obtained from www.irs.gov
7) Witholding FICA taxes (medicare and social security tax) – Besides Income tax, an employer is required to withold Social Security and medicare taxes before payment of wages to employees. The amount of witholding on Social security tax is to be calculated at a flat rate adusted every year for inflation and subject to a wage cap. Medicare tax on the other hand is not subject to any wage cap.
8) Providing disclosures of wages and witholding to all employees – As an employer, a Nonprofit organization is required to provide adequate disclosures to its employees with respect to the wages paid the amount of witholding and the basis of its calculation.
9) Filing Form W-2 with the IRS – The wages and the Witholding amount are to be reported to the IRS by the organization by duly filling and submiting form W-2 with the IRS.
10) Pay the Employers Contribution of FICA taxes –
All employers are required to pay their contribution of FICA taxes at a flat rate (6.2% of Wages as Social security tax and 1.45% of wages as Medicare taxes at the time of writing this) .
11) Witholding State Income tax from employee wages – The withoilding rates vary from state to state. Contact state tax department for more information on this.
12) Depositing the Witholding amount with the State tax department
13) Annually Paying and Filing of IRS form 940 on -Employers Federal Unemployment tax return – All Employers including Nonprofit organizations that employs are required to report this tax by annualy filing an this with the IRS by duly filing FORM 940. In some cases, the employer are required to pay the uemployment tax in installments during the tax year.
14) Paying and Filing State Employers Unemployment tax return.(if applicable to your state) –
Backup Witholding – When you are dealing with an Independent contractor, insist on the contractor to furnish his tax-payer ID number. In case the IC does not have this ID, you will have to withold the tax portion and subsequently deposit the same with the IRS, if the payments to the IC exceed USD600. This process is called ‘backup withholding’
As is evident, the formalitites to be undertaken increase manifold for a nonprofit organization the moment it employs a person.
Thus if an organization can continue with volunteers or an Independent contractors, there is no need to hire employees. Hire employees if the benefits accrued out of hiring are considerably more than the cost of these compliances.