With the New Year comes new responsibilities. Similar to how we all anxiously await for our employers to issue us our W-2s at the beginning of the year to get our taxes and out of the way (and hopefully not owe the IRS anything), nonprofits are required to do the same if they have employees. And while we don’t assist directly with issues involving payroll taxes, it is critical that you understand what’s required of your nonprofit. We’ve got some other year-end filings to discuss as well, so here we go!
If this is the first year you’ve ever had employees with your nonprofit, don’t forget that as employees, they need to get federal paperwork from you for their personal taxes. The nature of being a nonprofit, 501(c)(3) tax-exempt organization does not exclude it from having to follow the same rules that applies to a for-profit company in these regards. Because whether your employees work for a nonprofit or a for-profit, they all still have the same tax form filing requirements. They also have the same tax filing due date requirements, too, which means that you must get your employees their tax forms on time.
The nonprofit organization must furnish a copy of Form W-2, Wage and Tax Statement, to each employee who received wages during the year. Form W-2 must show total wages and other compensation paid (even if not subject to withholding); total wages subject to social security and Medicare taxes; allocated tips (if any); amounts deducted for income, social security and Medicare taxes; and the total advance EIC payment. In all cases, the tax-exempt organization must give each of its employees Form W-2 by January 31 following the end of the calendar year covered. Since January 31 falls on a Sunday this year, that due date is Monday, February 1, 2021.
The nonprofit must file Form W-3, Transmittal of Wage and Tax Statements, to transmit Copy A of Forms W-2 to the Social Security Administration by the last day of February after the calendar year for with the Forms W-2 are prepared. (If the organization files electronically, it may file by March 31.) The Social Security Administration will process these forms and provide the IRS with the income tax data that it needs.
A tax-exempt organization must file Form 941 quarterly. Some small employers are eligible to file an annual Form 944 instead of quarterly returns. Form 941 and 944 both report to the IRS the total amount of payroll issued during the time period addressed, as well as reconciling the amount of payroll taxes withheld and matched. Whether you file a 4th quarter Form 941 or an annual Form 944, these are due by February 1, 2021 since January 31 falls on a Sunday this year.
Form 940 is another IRS form due by February 1. Form 940 also reports total wages paid, but is used to calculate unemployment taxes due (FUTA). 501(c)(3) nonprofits are exempt from FUTA, so no Form 940 should be filed. If your nonprofit is tax-exempt under a 501(c)(4), 501(c)(6), or some other 501(c) code section, your nonprofit is NOT exempt from FUTA, and Form 940 will be required.
If your nonprofit has paid any non-corporate vendors, then you may have the responsibility to file either Form 1099-MISC or Form 1099-NEC for each person whom you have paid during the year.
Form 1099-MISC will be used for the following:
- Prizes and awards
- Other income payments
- Payments to attorneys
- Medical and health care payments
- Non-qualified deferred compensation
An important change beginning with Tax Year 2020, you must use Form 1099-NEC, Nonemployee Compensation, to report payments of nonemployee compensation (for independent contractors) previously reported in box 7 on Form 1099-MISC. If you paid someone who is not your employee, such as a subcontractor, $600 or more for services provided during the year, a Form 1099-NEC needs to be completed, and a copy of 1099-NEC must be provided to the independent contractor by January 31 of the year following payment. You must also send a copy of this form to the IRS by January 31. Again, given how the days on the calendar fall this year, that due date is February 1, 2021.
While it’s not a legal requirement for the nonprofit to issue year-end donor receipts, a donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgment of the contribution from the recipient organization. Equally as important, this is also a matter of best practice for donor relations.
While the donor needs to receive a receipt for $250 or more, it is best for the nonprofit to acknowledge all the donations the donor gave during the year. The year-end donor receipt is a list of how much a donor has contributed to your nonprofit organization. List the donations and sum them up, so it shows how much the donor gave each time (assuming more than one donation) and so that they know the total amount they gave. These are typically issued sometime in January, if the organization does not receipt the donor per gift throughout the year, so as to include any end of year donations. However, it never hurts to do both. This will also serve as your last opportunity to thank them for their donations during the previous year, so don’t miss out on that final chance to make them feel good about giving to your nonprofit. This will hopefully encourage them to continue giving in the coming year.
This may be your first year to have employees, or it may be that you’ve had employees for many years. Don’t let time get away from you. There’s a lot of paperwork involved with running a tax-exempt organization, which means there’s a lot of paperwork to get submitted, both to the government and to your employees. They all need their tax forms on time.
Equally as important are your donors. They’re always a precious asset, even more so in tough times!
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