When you think of a nonprofit organization, you might picture an army of volunteers graciously donating their time without pay. In reality, nonprofits run much like corporations with paid employees and regularly scheduled paydays. They face challenges similar to for-profit businesses, like accurately withholding payroll taxes, while also facing obstacles unique to nonprofits, such as staying within a tightly limited budget, using grant money for certain payroll expenses, and determining reasonable executive compensation. While all this may sound overwhelming, proactive research and preparation can help make understanding and implementing nonprofit payroll easier. Here’s a look at what leaders of nonprofit organizations need to know.
Withholding Payroll Taxes: What Still Applies
Tax-exempt status doesn’t exempt nonprofits from payroll taxes. In 2026, they must still withhold federal income tax, Social Security (6.2%), and Medicare (1.45%) from employee wages. The Social Security wage base will increase to $184,500, and those earning over $200,000 owe an extra 0.9% Medicare surtax.
501(c)(3) nonprofits are exempt from Federal Unemployment Tax Act (FUTA), but other nonprofit types are not. For State Unemployment Tax Act (SUTA), many nonprofits can opt out of regular payments and instead reimburse the state directly for unemployment claims. Because SUTA rates and wage bases vary by state and may change annually, it’s important to confirm your organization’s current requirements before processing payroll each year. Inova helps organizations manage these exemptions and reimbursements with built-in logic that aligns payroll configuration to your nonprofit’s tax status.
Nonprofits should also be cautious when recognizing volunteers. Only provide non-taxable perks needed to perform the role, like on-site meals or parking. Gifts or stipends may be taxable and must be reported. Inova helps clarify these boundaries so your organization can show appreciation without risking compliance.
Tracking Payroll Funded by Grants
Grants are a lifeline that comes with accountability strings for many nonprofits.
- Employees paid from grant funds must track time by project, ensuring only grant-related activities are charged.
- Time-tracking software that integrates with payroll helps automate accurate reporting.
- Payroll data should flow to designated general ledger accounts for easy reporting to funders.
For federal awards issued (or amended and incorporating the new rules) on/after Oct 1, 2024, the revised OMB Uniform Guidance applies, including a higher Single Audit threshold of $1,000,000. Inova connects employee time tracking directly to payroll and accounting, making grant reporting easier, faster, and audit-ready.
In Practice
A community health nonprofit uses Inova to track hours for staff funded by three separate grants. Each employee logs time by project in the mobile app, and payroll expenses are automatically allocated to the right funder in their general ledger.
Reviewing Compliance for Nonprofit Executive Compensation
The IRS requires nonprofits to provide “reasonable compensation” to officers and directors. That means:
- Wages and benefits must reflect what similar roles would earn in comparable organizations.
- Include salary, bonuses, PTO, insurance, retirement, and perks when reviewing total compensation.
- Document comparisons and rationale annually to avoid IRS scrutiny.
Under IRC §4958, excessive compensation can trigger excise taxes (including a manager-level 10% tax capped at $10,000 per transaction). Inova’s compensation reporting tools help nonprofits document and benchmark executive pay to stay aligned with IRS expectations.
Delegating Payroll Responsibilities to Mitigate Risk
Payroll isn’t always managed by HR pros in a nonprofit setting. But even when roles overlap, accuracy and oversight are non-negotiable. Assigning at least two people to the payroll process, one to enter and another to approve, can prevent errors and reduce risk. And if your team is stretched thin, outsourcing to a partner who understands nonprofit compliance can take a major load off your plate.
Inova offers secure role-based access so different team members or board-level approvers can safely collaborate on payroll. And with our nonprofit-specialized support, your organization gains a responsive partner who understands unique filing requirements, reimbursement models, and reporting expectations.
In Practice
Separating payroll entry and approval reduces the risk of errors, fraud, and compliance violations. Inova’s role-based access and nonprofit-specific support help ensure oversight, accuracy, and accountability.
What to Know when Filing IRS Forms
Nonprofits must file Form 990 series electronically. Use the correct version based on your organization’s size:
- Form 990-N: Gross receipts ≤ $50,000 (file online only)
- Form 990-EZ: Receipts < $200,000 AND assets < $500,000
- Form 990: Receipts ≥ $200,000 OR assets ≥ $500,000
- Form 990-PF: Required for private foundations, regardless of size
- Form 990-T: Reports unrelated business income
- Form 990-W: Used to estimate tax on unrelated business income
Note: Failing to file for three consecutive years results in automatic loss of tax-exempt status.
In Practice
If your nonprofit misses 3 consecutive Form 990 filings—even by accident—you lose your tax-exempt status. Inova tracks form thresholds and deadlines so you don’t have to.
With the right form and filing schedule in place, you reduce audit risk and protect your exemption. Inova Payroll gives nonprofits the tools to stay aligned with IRS expectations.
Laws and Needs by Nonprofit Expertise Type
While all nonprofits share a core set of payroll responsibilities, certain industries face unique requirements. Below are some important differences nonprofit organizations should be aware of based on their structure and mission.
1. Educational Institutions (Nonprofit Schools, Colleges, and Universities)
Educational nonprofits have payroll rules that differ significantly from their for-profit counterparts:
- Student Workers and FICA: If your nonprofit school is a 501(c)(3) and the student is enrolled and regularly attending classes, their wages can be exempt from Social Security and Medicare taxes.
- Tuition Discounts: Nonprofit educational institutions may offer tax-free tuition reductions to employees and their families under IRS §117(d).
- Work-Study Programs: If your nonprofit participates in a federally funded work-study program, student earnings may be FICA-exempt and partially subsidized.
What This Means for Educational Nonprofits
If your school is a nonprofit, your payroll strategy should account for FICA exemptions for students, qualified tuition discounts, and grant-funded work-study programs. Inova helps educational organizations stay compliant while simplifying reporting and exemption tracking.
2. Healthcare & Long-Term Care Nonprofits
Healthcare nonprofits may qualify for specific payroll advantages unavailable to for-profit healthcare organizations:
- In some states, nonprofit healthcare employers may be exempt from state unemployment taxes (SUTA) or allowed to self-insure for unemployment costs.
- Certain volunteer roles may be filled by unpaid individuals in nonprofit healthcare settings, provided they meet legal thresholds and compensation limits.
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- Donations or grant funding for payroll may come with use restrictions, such as allocating staff hours by funding source or activity type.
What This Means for Healthcare Nonprofits
If your nonprofit provides healthcare or long-term care services, understanding your state’s exemptions and fund-use rules is essential. Inova enables you to configure payroll by funding source, manage state-specific exemptions, and distinguish between paid and volunteer labor with confidence.
3. Payroll Compliance for Government-Funded Nonprofits
(Nonprofits receiving local, state, or federal funding)
When nonprofits receive government funding, they’re subject to more rigorous compliance standards:
- Federal grants require adherence to OMB Uniform Guidance (2 CFR Part 200), including detailed timekeeping, effort reporting, and cost allocation rules. Payroll must be accurately tracked and attributed to specific funding sources.
- Some nonprofits may be exempt from certain federal contractor rules, like minimum wage requirements or affirmative action plans, depending on the type of contract or grant.
- In times of emergency or under specific public service programs, nonprofits may be eligible for federal reimbursement of payroll expenses, a benefit rarely extended to for-profits.
What This Means for Government-Funded Nonprofits
If your nonprofit receives government grants or contracts, your payroll system must support strict documentation and reporting standards. Inova aligns payroll, time tracking, and integrates with top accounting/financial integrations like Sage Intacct, Acumatica, and QuickBooks Online for accurate reporting with federal compliance requirements so your funding remains secure and auditable.
4. 501(c)(4), (c)(5), and (c)(6) Organizations Handling Political Activity and Executive Compensation
(Advocacy groups, labor unions, chambers of commerce, and trade associations)
These types of nonprofits face distinct compliance responsibilities related to political activity and compensation:
- Staff time spent on lobbying or political work must be carefully tracked and reported. This impacts their tax-exempt status and what is disclosed on Form 990.
- Labor unions (501(c)(5)) must report officer stipends and certain payments on forms like the LM-2 and Form 990.
- These organizations are subject to IRS intermediate sanctions rules under IRC §4958, which scrutinize excessive executive compensation and fringe benefits.
What This Means for 501(c) Nonprofits
If your organization engages in lobbying or political advocacy, or represents labor or industry groups, your payroll system should track time allocations and benefits accurately. Inova supports detailed time reporting and compensation benchmarking to help you meet disclosure and compliance standards
5. Nonprofits Employing Volunteers, Interns, or Stipend Workers
(Organizations utilizing unpaid labor or service-based stipends)
Nonprofits often rely on volunteers and interns, but they must be careful not to misclassify compensation or create tax liabilities:
- Volunteers must meet the IRS definition of unpaid service providers acting without coercion and aligned with the mission. Their services cannot replace paid staff.
- Stipend programs such as AmeriCorps or VISTA allow nonprofits to offer tax-advantaged stipends or education awards to eligible participants who are not employees.
- In-kind benefits such as meals, housing, or transportation may be provided to volunteers and interns under specific conditions. These may be non-taxable if aligned with the organization’s mission and not considered compensation.
What This Means for Nonprofits Managing Compensation Boundaries
If your nonprofit relies on volunteers or offers stipends, you need to carefully document roles, taxability of benefits, and compliance with labor laws. Inova helps nonprofits distinguish between employee and non-employee roles, track stipends properly, and avoid unintended payroll liabilities.
6. Religious Nonprofits – Understanding Minister Pay and Housing Allowances
(Churches, synagogues, mosques, and related faith-based organizations)
Ministers working for religious nonprofits have unique payroll requirements:
- Ministers are considered self-employed for Social Security/Medicare, even if they’re paid on W-2s.
- Employers do not withhold FICA; ministers pay both portions through self-employment tax.
- Housing allowances are excluded from income tax but still subject to self-employment tax, unless an IRS exemption is granted.
- To opt out of SE tax, ministers must file Form 4361 within two years of earning $400+ in ministry-related income.
Inova simplifies minister payroll by supporting housing allowance setup, FICA exemptions, and tracking for Form 4361 eligibility.
What This Means for Religious Nonprofits
If your nonprofit employs ministers or receives restricted grants, your payroll setup needs to reflect those nuances. Inova supports role-specific tax rules and ties payroll data directly to funding streams so nothing gets misreported
