Tax-exempt organizations have important responsibilities as employers while operating and managing their activities. Before an organization becomes an employer and hires employees, it needs a federal Employer Identification Number (EIN).
If the organization has employees, it is responsible for several federal, state, and local taxes. As an employer, the organization must withhold certain taxes from employees’ pay checks. Employment taxes include the following:
Federal income tax withholding (FITW)
Social Security and Medicare taxes (FICA)
Federal unemployment taxes (FUTA)
An organization generally must withhold federal income tax from its employees’ wages. To figure how much to withhold from each wage payment, the organization should use the employee's Form W-4 (PDF) and the methods described in Publication 15, (Circular E), Employer’s Tax Guide (PDF) and Publication 15-A, Employer’s Supplemental Tax Guide (PDF).
Social Security and Medicare taxes pay for benefits that workers and families receive under FICA. Social Security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA.
Generally, meals, lodging, clothing, services and other payments in kind are subject to Social Security and Medicare taxes, as are wages paid in cash. However, meals are not taxable wages if furnished for the employer’s convenience and on the employer’s premises. Lodging is not taxable if furnished for the employer’s convenience, on the employer’s premises and as a condition of employment.
The organization, as the employer, must withhold and deposit the employee’s part of the taxes and pay a matching amount. The Social Security tax is withheld from the employee’s gross wages until the employee’s cumulative wages for the year reach the wage base limit. Wages above the wage base limit are not subject to Social Security tax withholding. However, there is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax. Report federal income taxes, Social Security, and Medicare taxes on Form 941, Employer’s Quarterly Federal Tax (PDF).
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. The federal unemployment program was enacted to encourage states to provide payment to workers who have lost their jobs. FUTA tax should be reported and paid separately from FICA and FITW. FUTA tax is paid only from an organization's own fund. Employees do not pay this tax or have it withheld from their pay.
An organization that is exempt from income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA. This exemption cannot be waived. An organization that is not a section 501(c)(3) organization is not exempt from paying FUTA tax. Report FUTA taxes on Form 940, Employer’s Annual Federal Unemployment Tax Return (PDF).
IIn general, the organization must deposit income tax withheld and both the employer and employee portions of FICA taxes (minus any advance EIC payments). Beginning January 1, 2011 federal tax deposit (FTD) coupons can no longer be used for submitting depository taxes. Regulations now mandate that Forms 8109/8109-B (the FTD coupons) will no longer be accepted, and that deposits must now be made electronically. Consider using EFTPS for making FTD payments. See e-file for Exempt Organizations for more information.
Learn more about the benefits, limitations and expectations of tax-exempt organizations by attending 10 courses at the online Small to Mid-Size Tax Exempt Organization Workshop.