From proper classifications to nonprofit-specific regulations, there’s a lot to consider. 🤔
Nonprofit organizations are unique in that they have a specific mission to fulfill rather than just making profits. As a result, their operations and finances are regulated differently than for-profit companies. This also means that the way they pay employees is different.
Whether you’re a seasoned nonprofit leader or new to hiring, these complexities can be overwhelming. But don’t worry—in this article, we’ll break down exactly how nonprofits pay employees, so you can get started with confidence. 🙌
How does a nonprofit pay employees?
Nonprofits must pay employees just like for-profit businesses do—through payroll. This means nonprofits need to have a business bank account to fund things like employee salaries. Keep in mind that nonprofits may have to follow certain rules when opening a bank account. 🏦
Misconceptions about how nonprofits pay employees 🧐
Before we dive into exactly how nonprofits pay their employees, let's address some misconceptions. There are quite a few, but we’ll stick to the most common ones:
❌ All nonprofit staff members are volunteers.
✅ Nonprofits not only have but depend on employees to operate.
❌ Employee salaries only come from donations.
✅ Nonprofit salaries can come from donations. They can also come from grants, program fees, or other income-generating activities.
❌ Nonprofits don’t have to pay payroll taxes.
✅ Nonprofits are exempt from federal unemployment taxes but still have to adhere to payroll tax regulations.
Now let's take a closer look at each of these misconceptions, so you can everything you need to know about how nonprofits pay employees.
Why nonprofits need volunteers AND employees
There’s no doubt that volunteers play an important role in nonprofit organizations. For example, many individuals on the board of directors are unpaid volunteers. Nonprofits need both volunteers and paid employees to do their work well and accomplish their goals. 🥅
Here are a few reasons why nonprofits need paid employees, in addition to volunteers:
Reliability and consistency: Employees provide a level of consistency and reliability that may be challenging to achieve with volunteers alone. Paid staff members may be more dedicated to their roles, which helps support the organization's operations and programs. 🤝
Expertise: Nonprofits, like any other organization, may require professionals with specific qualifications and experience to manage complex programs, handle finances, or oversee strategic initiatives. 🤓
Accountability and commitment: Employees typically have a higher level of accountability and commitment to their roles, since they are part of the organization's regular staff. This commitment is crucial for ongoing programs. 💪
Long-term sustainability and growth: Paid employees contribute to the organizational stability required for long-term planning and high community impact. 📈
Similarities in how nonprofits and for-profits pay employees
Nonprofit workers may earn less than those in the private sector because of limited funds. However, both nonprofit and for-profit organizations must adhere to the Department of Labor’s Fair Labor Standards Act.
This includes the federal minimum wage, the state minimum wage, overtime pay, and how employees are classified. Employees can be full-time or part-time, and they can be paid hourly or with an annual salary. 💸
Both kinds of organizations provide benefits like health insurance and retirement plans. They also follow payroll tax rules but with some important distinctions. For example, nonprofits classified as 501(3)(c) are exempt from the Federal Unemployment Tax Act (FUTA). ⚖️
How nonprofit employees are classified
Nonprofit employees have different classifications, like how much they work (full-time or part-time) and how they are paid (hourly or salary).
Here are a few of the most common federal employee regulations that nonprofits have to adhere to. (These do not account for specific state laws.) 📝
All employees must make at least the federal minimum wage, which is currently $7.25 per hour. Keep in mind different states, like California, will have different state requirements. 💵
The employer must pay overtime at one and a half times the base pay to any hourly employee (non-exempt) who works over 40 hours in a week. For example, if the employee normally makes $20 per hour, overtime pay is $30 per hour. 💰
The Department of Labor sets requirements for how to classify employees as salary (exempt) employees. These requirements include things like job duties and minimum salary. 👨💼
Consult with a human resources expert to help you determine employee classifications and other labor laws. 💼
Do nonprofit employees receive paid benefits?
It’s no secret that for-profit companies offer higher salaries than nonprofits. While nonprofits can’t offer the same monetary compensation, they do offer other perks and benefits. 👍
Competitive healthcare and retirement plans
Flexible work schedules
More vacation time
Tuition reimbursement and/or student loan forgiveness
Feeling good about making a difference in the lives of others
It’s important to note that these perks and benefits are not a substitute for fair compensation. Giving employees a fair salary will keep them happy and help them stick around longer. 😃
Funding sources for paying nonprofit employees 💰
Every year, nonprofits make a budget with expenses (like program costs and salaries) and income (funding). But which funding sources are appropriate to use for paying a nonprofit’s employees?
There are a few different funding sources nonprofits can use to fund payroll:
Donations: individual donors that provide money, goods, or services to the organization. 🦸
Grants: money given to nonprofits from the government or other institutions for a specific purpose. 🏛️
Income-generating activities: include paid speaking engagements, consulting services, and selling a product, among others. These activities generate income independently of donations and grants.) 📈
Nonprofits may get restricted funding, which means they can only use it for specific programs or purposes. Sometimes this purpose can be to pay staff members, but often the funding is for specific programs or services. Nonprofits must only use these restricted funds for their intended purposes. ❌
As a nonprofit, it can be tough to juggle multiple streams of revenue and different expense categories. With Relay (that’s us! 👋), nonprofits can open 20 individual, no-fee business checking accounts. Then, you can organize your money across accounts and get total visibility into cash flow.
For example, if your nonprofit receives restricted funding that’s only to be used for payroll, you can open a dedicated payroll bank account. That means you’ll never have to worry about accidentally spending restricted funds again. 🤩
Payroll taxes and other regulations for paying nonprofit employees
Despite their tax-exempt status, nonprofits are not completely free from tax obligations. Let's dissect the rules and regulations around payroll taxes to help you navigate these murky waters with confidence and compliance. 🙌
Payroll taxes
A common misconception is that nonprofits are exempt from all taxes. That is simply not the case. They are still subject to payroll taxes like federal and state income tax withholding, social security, and Medicare. Nonprofits must match employee withholdings on these taxes and deposit them to the IRS. ⚖️
Keep in mind, that even employees earning cash are still subject to these payroll taxes. Therefore the organization must match their taxable contributions. 💵
Exemptions
Nonprofits that are classified as 501c are not required to pay federal unemployment tax (FUTA). However, states have their specific regulations. Some states do not require nonprofit organizations to pay state unemployment taxes (SUTA). While others, like California, generally require nonprofits to pay. You can consult with a tax expert to determine which rules apply to your nonprofit. 🤓
Other regulations
In addition to these rules and regulations, nonprofits must follow regulations to keep their tax-exempt status with the IRS. 🔑
For example:
Leadership salaries, such as executive directors, must be considered reasonable compensation. 💰
The IRS Form 990 federal tax return has to include executive compensation, which must be transparent. 🔍
Not all fundraising funds can be used to pay staff members. Some funding is restricted, meaning it can only be used for specific programs or uses. 🚫
Nonprofits have a lot to consider when paying employees. There are a ton of rules, regulations, and exemptions. It’s enough to make your head spin. Remember, as a nonprofit you’re making a huge impact on the communities you serve, and employees are the heart of your organization. You’ve got this. 🫶
Relay: Paying your employees... made easier 🙌
There’s no doubt there are a lot of nuances nonprofits face with how they pay their employees. Knowing everything from the different classifications, to what taxes they need to pay (or the ones they’re exempt from) is stressful.
The good news is that the right banking platform can make it easier.
Relay is an online banking and money management platform that helps nonprofits get total visibility into their income and expenses—including employee salaries. From no-fee checking and savings to powerful accounting integrations, Relay is uniquely built to serve nonprofits. 👐
Here are a few reasons why nonprofits love banking with Relay:
✅ Open 20 individual checking accounts: Organize income, expenses, and cash reserves with multiple checking accounts. You can create individual accounts to set aside grants, budget for day-to-day operating expenses, and beyond.
✅ No account fees or minimum balances: With no monthly fees, overdraft fees, or minimum balance requirements, Relay helps nonprofits avoid unnecessary costs.
✅ Entirely online banking: Open checking and savings accounts, issue debit cards, and send and receive payments completely online—no in-person branch visits required.
✅ 50 virtual or physical debit cards: Create new debit cards for specific projects and expenses, and get instant access to virtual debit cards for online and mobile payments.
✅ Built for teams: Relay lets you set debit card spending limits and receive detailed data for all team spending. You can also invite your accountant, assistant, and other team members to Relay with secure, role-based logins.
✅ Streamlined bookkeeping: Relay lets you sync detailed banking data directly into QuickBooks Online or Xero, making bookkeeping a breeze.
Ready to get started? It just takes ten minutes to apply online. Sign up for Relay here!
