When the tax exempt organization has employees, then the organization is responsible for Federal Income Tax withholding and Medicare and Social Security taxes. These organizations are also responsible for Federal Unemployment Tax. Before hiring an employee, the organization needs a federal Employer Identification Number (EIN).
When the organization has employees working for them, then the organization is accountable for state, federal and local taxes. The organization acting as an employer for the employees must withhold certain taxes from its employee’s pay checks. The employment taxes for exempt organizations are given below:
- Federal income tax withholding (FITW)
- Federal Insurance Contribution (tax) Act(FICA)
- Federal unemployment taxes (FUTA)
Generally, an organization must withhold federal income tax from its employees’ pays. The organization must use the employee’s W4 form to calculate how much amount to withhold from each wage payment. For reference, the methods are explained in Employer’s Supplemental Tax Guide, Publication 15 A and Employer’s Tax Guide, Publication 15.
Medicare and Social Security taxes pay for the worker’s and their family benefits are received under FICA. Medicate tax pays for the hospital insurance part of FICA. Social Security taxes pays under the benefits of survivors, old-age and disability insurance.
Usually, clothing, meals, services, lodging, and other payments comes under Medicare and Social Security taxes, when the wages are paid in cash. But the meals will not be a taxable wage when it is furnished for the convenience of the employer and on the premises of the employer. Lodging cannot be taxable if it is furnished for the convenience of the employer, as a condition of employment and on the premises of the employer.
The Federal Unemployment Tax is a part of state and federal program under the Federal Unemployment Tax Act (FUTA), which pays unemployment compensation to the workers who lost their work. This program was passed in order to encourage the states to give some pay to the workers who lost their jobs. FUTA tax must be paid and reported separately from FICA and FITW. This Federal Unemployment tax must be paid from the own fund of the organization. Employees are not required to pay this tax or it cannot be withheld from their regular pay.
An organization which is exempted from the income tax under the section 501 (c)(3) of IRC is also exempt from FUTA. This tax exemption will not be waived.