501(c)(3) Non-profit Organizations

Background

Non-profit organizations (NPOs) are organizations that meet specific requirements outlined by the IRS to qualify for exemptions. Non-profit organizations have the same responsibilities of paying employees and filing tax returns similar to most other organizations. But there are a few key differences in processing payroll for a non-profit organization.

The most commonly recognized type of NPO is a 501(c)(3) organization, which includes organizations that operate exclusively for charitable, educational, scientific, religious, and other similar purposes.

501(c)(3) organizations are supported on OnTheClock, but require special configuration to ensure the correct taxability. This document will walk through the process and considerations needed for setting one of these companies up on OnTheClock.

Setting up a 501(c)(3) organization

In order to properly set up a 501(c)(3) organization on OnTheClock, you need to provide the following information about the company:

501(c)(3) recognition — Whether the company has been recognized by the IRS as a 501(c)(3) organization
SUI reimbursable election — Whether the company has elected to become a reimbursable employer for state unemployment
Company tax exemptions — Whether any special case exemptions apply for the company (e.g., for churches or other special category 501(c)(3) organizations)
Employee tax exemptions — Whether any special case exemptions apply for individual employees (e.g., for clergy members)

The steps below will walk through how to indicate each of these things in Ontheclock.

Company tax exemptions

Indicating that a company has 501(c)(3) Recognition will automatically exempt the company from Federal Unemployment Tax (FUTA), as per the IRS 501(c) guidelines. Similarly, electing into SUI Reimbursable will automatically exempt the company from withholding State Unemployment Taxes (SUTAs) and many related surcharge taxes.

However, depending on the type of 501(c)(3) that the company falls under, there may be additional company tax exemptions that need to be created to achieve the correct taxability. In particular, some sub-categories of religious 501(c)(3)s are exempt from a number of taxes by state (e.g., churches), as follows:

Tax Type	Exempt	Conditionally Exempt*	Not Exempt
State Unemployment Insurance (and related surcharges)	All other states	Colorado Illinois Indiana Louisiana Michigan Minnesota Nevada Ohio South Dakota Tennessee Vermont Wisconsin Wyoming	Hawaii Iowa Montana New York Oklahoma Oregon West Virginia
Paid Family Medical Leave	D.C. Massachusetts New Jersey	-	Colorado Connecticut New York Oregon Washington
State Disability Insurance	California New Jersey Rhode Island	Hawaii	New York

If these special case exemptions apply to the company, you will need to reach out to OnTheClock Support with the company ID to set the exemptions.

Note: This information is up to date as of December 2024, and may not be comprehensive of all scenarios. Please independently verify what exemptions are applicable for the company, or confirm with a tax professional.

Employee tax exemptions

In addition, certain employees for 501(c)(3) organizations may have special tax exemptions that need to be set.

For example, employees of religious NPOs who are members of clergy are exempt from many taxes, as outlined below. Some states allow these employee exemptions to apply to other employee groups as well, such as church caretakers.

Tax Types	Exempt	Not Exempt
State Income Tax	All other states	Arizona Delaware
State Unemployment Insurance (and related surcharges)	All other states	Oregon
Paid Family Medical Leave	D.C. Massachusetts New Jersey New York	Colorado Connecticut Oregon Washington

You should confirm with the employer if any employees fall under this category, and if they do, similarly reach out to OnTheClock Support with the exact employee IDs and taxes that should be exempted.

Religious 501(c)(3) NPO earning types

Finally, clergy members may also have a unique need to record allowance or housing (i.e., parsonage) earnings, which may or may not be taxable, but may need to be reported on the employee’s W-2.

OnTheClock supports the following special earning types for these situations:

Earning Type	Label	Description
`allowance`	Allowance	Allowance added to the regular paycheck. Used to add taxable car/auto or housing allowances.
`reported_allowance`	Reported Allowance	Allowance only added to the W2.
`clergy_housing`	Clergy Housing	Clergy housing added to the regular paycheck. This is sometimes referred to as parsonage and is considered to be non-taxable income.
`reported_clergy_housing`	Reported Clergy Housing	Allowance only added to the W2.

Note: These earnings types can only be used if the employer is categorized as a 501(c)(3).