Federal nonprofit employment tax form explained
After a nonprofit organization has decided on the proper classification of its workers, it must consider many other requirements for paying compensation to its employees and independent contractors. The following paragraphs outline important issues and requirements for dealing with the IRS and the Social Security Administration (SSA).
Federal Forms Completed by Employees
The following forms are completed by employees and retained by employers:
- Form I-9, Employment Eligibility Verification
- Form W-4, Employee’s Withholding Allowance Certificate
- Form W-5, Earned Income Credit Advance Payment Certificate
Form I-9, Employment Eligibility Verification
The Immigration and Nationality Act (8 U.S. Code section 1356 et seq.) requires employers – regardless of total number of employees – to verify that all persons hired after Nov. 6, 1985, are legally authorized to work in the United States and prohibits employers from knowingly hiring or employing persons not authorized to work.
Form I-9, used to verify employment eligibility, is available from U.S. Citizenship and Immigration Services (USCIS).
The law requires employers to ensure that every employee completes Section 1 of Form I-9 when hired. New employees also must complete Section 2 within 3 days of hire. This law requires employers to review documents establishing the employee’s identity and work eligibility. The documents that satisfy the verification requirements are listed on Form I-9.
Employers should not make hiring decisions based on applicants’ national origin or citizenship status when they are authorized to work in the U.S. Questions like “What is your national origin?” and “Are you a U.S. citizen?” may be considered discriminatory and should not be asked in an interview.
Employers may, however, ask whether an applicant is legally authorized to work in this country.
Form W-4, Employee’s Withholding Allowance Certificate
All new employees should complete Form W-4, and this form should be effective with the first pay date. It guides an employer in determining the proper income tax withholding rate for each employee. If a new employee does not provide a completed Form W-4, single status with zero withholding allowances should be assumed.
A Form W-4 remains in effect until the employee submits a new one. Employees who claim exemption from withholding must complete a new Form W-4 each year by Feb. 15. For the effective date of a replacement Form W-4, see IRS Publication 15, (Circular E), Employer’s Tax Guide.
Copies of the W-4 must be sent to the IRS if the employee:
- Claims more than 10 withholding allowances
- Claims an exemption from withholding and his or her wages would normally exceed $200 per week
Copies received during the quarter from employees still employed at the end of that quarter can be sent to the IRS with the quarterly Form 941 filing (see below). Employers must complete boxes 8 and 10 on any Form W-4 sent to the IRS.
Form W-5, Earned Income Credit Advance Payment Certificate
Employees eligible for the Earned Income Credit (EIC) who have a qualifying child living with them may receive advance EIC payments with their pay during the year. Employees who need advance EIC payments must provide a completed Form W-5, Earned Income Credit Advance Payment Certificate, which shows eligibility requirements.
Federal Forms Used for Independent Contractors
An organization using independent contractors must complete the following forms:
- Form W-9, Request for Taxpayer Identification Number and Certification
- Form 1099-MISC, Miscellaneous Income
Form W-9, Request for Taxpayer Identification Number and Certification
Use Form W-9, Request for Taxpayer Identification Number and Certification, for a TIN and to request certifications and claims for exemption from a U.S. person (including a resident alien), partnership, or corporation.
Organizations should keep this form and not send it to the IRS.
Reporting Non- Employee Payments on Form 1099- MISC
Organizations should use Form 1099-MISC, Miscellaneous Income, to report payments to independent contractors of $600 or more. This should include fees, salaries, commissions, wages, prizes, and awards for services performed as a non-employee.
Payments to a for-profit corporation need not be reported on Form 1099- MISC. However, employers must use Form 1099-MISC to report payments of $600 or more for medical or health care services provided by corporations, including professional corporations.
Forms 1099-MISC must be provided to payees by January 31 and filed with the IRS by February 28 (March 31 if filing electronically) for all payments made in the prior calendar year. Paper Forms 1099-MISC are transmitted to the IRS using Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
Penalties for Failure to Furnish Form 1099-MISC
Penalties may apply if organizations:
- Fail to file on time without reasonable cause
- Fail to include all information required
- Provide incorrect information
A $50 penalty per document is charged unless corrections are made within approved time frames.
Additional penalties apply if organizations:
- Fail to provide the statement to the payee by January 31
- Fail to include all information required
- Include incorrect information
A $50 per statement penalty is charged (with a maximum of $100,000 per year) regardless of how soon after the due date a correct statement is furnished.
Employers must withhold 28 percent of non-employee compensation payments if the payee fails to furnish his or her correct TIN. A state government tax agency may also require backup withholding. In some cases, the IRS requests backup withholding for other reasons. Backup withholding does not apply to wages paid to employees.
Depositing Federal Taxes
Employers deposit federal employment taxes using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order, or cash to an authorized financial institution. Some employers are required to use EFTPS.
Filing Federal Employment Tax Returns
The following are some employment returns or forms that are required of most organizations:
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 944, Employer’s Annual Federal Tax Return
- Form 945, Annual Return of Withheld Federal Income Tax (referring to nonpayroll payments and backup withholding)
- Form W-2, Wage and Tax Statement
- Form W-3, Transmittal of Wage and Tax Statements
- Form 5500, Annual Return/Report of Employee Benefit Plan
Organizations should refer to the instructions for each of these returns or forms as well as Publication 15, (Circular E), Employer’s Tax Guide, to determine the schedule for making deposits.
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax
FUTA, along with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. FUTA does not apply to the wages of employees of 501(c)(3) organizations, but wages paid by other tax-exempt organizations are subject to FUTA. Only the employer pays FUTA tax; it is not deducted from employees’ wages.
Form 940 is due on Jan. 31 for wages paid in the prior calendar year. However, if an employer deposited all FUTA tax when due, it may file on or before Feb. 10.
Form 941, Employer’s Quarterly Federal Tax Return
Each quarter, employers who pay wages subject to income tax withholding or Social Security and Medicare taxes must file Form 941, Employer’s Quarterly Federal Tax Return. (In some cases an employer is required to file Form 944 or an exception applies.) Form 941 must be filed by the last day of the month that follows the end of the quarter.
Form 944, Employer’s Annual Federal Tax Return
Employers who qualify file Form 944, Employer’s Annual Federal Tax Return, instead of Form 941. Those filing Form 944 have until January 31 after the end of the calendar year. An organization gets an additional 10 days if the taxes are paid in full by the due date.
Exceptions to Forms 941 and 944 Filing Requirements
The following exceptions apply to Forms 941 and 944 filing requirements:
- Seasonal businesses, such as a summer recreational camp, do not have to file for the quarters when they have no tax liability because they have paid no wages. An organization that will not have to file a return for one or more quarters during the year should check the seasonal employer box on line 17 of Form
- Agricultural employers use Form 943, Employer’s Annual Tax Return for Agricultural Employees.
- Income tax withholding on non-payroll items and backup withholding must be reported on Form 945, Annual Return of Withheld Income Tax.
Form 945, Annual Return of Withheld Federal Income Tax
Employers should use Form 945, Annual Return of Withheld Federal Income Tax, to report withholding from nonpayroll payments, such as pensions, annuities, IRA distributions and backup withholding. Organizations should check with their state’s tax department for details on state withholding and reporting requirements.
Form 945 is due by Jan. 31 following the calendar year in which the reportable payments were made.
Penalties for: Form 940, Form 941, Form 944, and Form 945
There are penalties for:
- Late deposits
- Insufficient deposits
- Failure to deposit using EFTPS (when required)
- Late filing, unless you can show reasonable cause. If you file late, attach an explanation to the
There are also penalties for willful failure to pay tax, file returns, and filing false or fraudulent returns.
Form W-2, Wage and Tax Statement
Employers should use Form W-2 to report wages paid to each employee. From these reports, the Social Security Administration (SSA) computes employees’ benefits at the time of retirement or disability or their families’ survivor benefits. Earnings are also used to determine eligibility for Medicare.
The IRS uses the reports to enforce income tax laws and to ensure that the FICA taxes that employers pay are properly credited to the Social Security and Medicare programs.
Employers must file Form W-2 for wages paid to each employee from whom:
- Income, Social Security, or Medicare tax was
- Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate.
Employers should do the following:
- File Copy A of Form W-2 with the SSA by February 28 (March 31, if filing electronically).
- Use Form W-3 to transmit Copy A of Form W-2.
- If required to file 250 or more Forms W-2, file them electronically unless the IRS grants a
- Furnish Copies B, C and 2 of Form W-2 to employees by January 31.
Organizations should file a final return if they terminate or cease to pay wages to an employee.
Penalties for Failure to Furnish Form W-2
If an employer fails to file a correct Form W-2 by the due date, and cannot show reasonable cause, it may be subject to a penalty of $50 per document unless corrections are made within specified time frames.
The penalty applies if the organization:
- Fails to file on time
- Fails to include all information required
- Includes incorrect information
- Files on paper when required to file electronically
- Reports an incorrect TIN
- Fails to report a TIN
In order to facilitate timely and accurate returns on unresolved topics or issues, an organization should permit the IRS to speak with their third-party designee (employee or tax preparer) to discuss the form by checking the appropriate box on the Form 940, 941, 944, or 945.
If an employer fails to provide correct W-2 payee statements to employees and cannot show reasonable cause, it may be subject to a penalty. The penalty applies if the employer:
- Fails to provide the statement by January 31
- Fails to include all information required
- Includes incorrect information on the statement
The penalty is $50 per statement, regardless of when a correct statement is furnished, with a maximum of $100,000 per year.
Form 5500, Annual Return/Report of Employee Benefit Plan
Any administrator or sponsor of an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 (ERISA) must file information about each plan every year using Form 5500, Annual Return/Report of Employee Benefit Plan.
The IRS, Department of Labor (DOL), and Pension Benefit Guaranty Corporation have consolidated certain returns and report forms to reduce the filing burden for plan administrators and employers. By complying with the Form 5500 instructions, employers and administrators will satisfy the annual reporting requirements for the IRS and DOL.
Employers must file all required forms and schedules with the Employee Benefits Security Administration by the last day of the seventh month after the end of the plan year. For a calendar year plan, the due date will be July 31.
Penalties: Form 5500
ERISA and the Code empower the DOL and IRS to impose penalties for giving incomplete information and for not filing statements or returns.
Various penalties may be imposed for not meeting the Form 5500 filing requirements, including:
- A penalty of up to $1,100 a day for each day a plan administrator fails or refuses to file a complete report
- A penalty of $25 a day (up to $15,000) for not filing returns for certain plans of deferred compensation, trusts and annuities, and bond purchase plans by the due date
- A penalty of $1 a day (up to $5,000) for each participant for whom a registration statement is required but not filed
- A penalty of $1,000 for not filing an actuarial statement
Income Tax Records to Retain for Employees
Exempt organizations must keep accurate and complete records for income tax, Social Security and Medicare taxes, and FUTA paid for each employee. These records should be kept for 4 years.
Examples of the types of income tax records that should be kept include:
- Name, address, and SSN
- Amount and date of each wage payment and the period of time the payment covers
- Amounts subject to withholding (for each wage payment)
- Amount of withholding tax collected on each payment and the date collected
- If the taxable amount is less than the total payment, the reason for the difference
- Copies of any statements furnished by employees relating to nonresident alien status, residence in Puerto Rico or the Virgin Islands, or residence or physical presence in a foreign country
- Fair market value and date of each payment of noncash compensation
- For accident or health plans, information about the amount of each payment
- Withholding allowance certificates (Form W-4) filed by each employee
- Any agreement between employer and employee on Form W-4 for voluntary withholding of additional amounts of tax
- If necessary to figure tax liability, the dates in each calendar quarter on which any employee worked outside the course of your trade or business, and the amount paid for that work
- Copies of employee statements that report tips received, unless the information shown on such statements appears in another item on this list
- Requests by employees to have their withheld tax calculated on the basis of their individual cumulative wages, and any notice that such a request was revoked
- Form W-5, Earned Income Credit Advance Payment Certificate, and the amounts and dates of the advance payments
Social Security and Medicare Tax Records to Retain for Employees
Examples of the types of Social Security and Medicare tax records that must be kept:
- Amount of each wage payment subject to Social Security tax
- Amount of each wage payment subject to Medicare tax
- Amount of Social Security and Medicare taxes collected for each payment and the date collected
- Reason for any difference between the total wage payment and the taxable amount
Federal Unemployment (FUTA) Tax
Records to Retain for Employees
Examples of the types of FUTA records that must be kept:
- Total amount paid to employees during the calendar year
- Amount of compensation subject to the unemployment tax and the reason for any difference between that amount and the amount of total compensation
- Amount paid into the state unemployment fund
- Any other information required to be shown on Form 940 (or Form 940- EZ)
- Nonprofit Articles of Incorporation,
- Nonprofit Bylaws,
- Nonprofit Conflict of Interest Policy,
- Conflict of Interest Policy Acknowledgment,
- Form 1023 Attachment with all the answers,
- Form 1023 Expedite Letter template,
- and Donor Contribution Form
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