Did you just start a Florida non-profit and need to pay yourself? Below are the do's and do not's!
First things first, make sure you set up your Florida Non-Profit correctly!
The 3 core things to know about starting a Florida nonprofit are:
Registering with the IRS
Registering with the State
State Licensing
Making sure you have your entity created correctly in the first place will save you hundreds of hours of headaches later down the road. Examples of common mistakes we see made early on are:
Clients prior accountant not filing Form 1023 and therefore leaving their entity as a C-Corporation
Clients prior accountant not filing for proper licensing for solicitations, payroll tax, sales tax, etc.
Clients prior accountant not informing them of the ongoing compliance needs that are mandated in order to maintain non-profit status (i.e. you must maintain detailed bookkeeping records, file tax returns annually (3 missed years in a row jeopardizes a 501(c)3 revocation, etc.)
Clients prior accountant not informing them of the ways they're able to pay themselves (i.e. distributions are not allowed in a non-profit the way they are allowed in an LLC)
Making sure you're properly educated is key to maintaining compliance. There is much more that goes into upkeeping a non-profit as opposed to an LLC so you'll need to reverse some 'bad habits' if you have them (i.e. letting your bookkeeping fall behind, constantly using your business card for personal expenses, etc.).
Read here for the 101's of creating a Florida Non-Profit.
1 - How NOT to pay yourself in a Florida Non-Profit.
First and foremost, non-profits can NOT be organized or operated for the private benefit of an individual or organization. So if you created a non-profit with hopes of paying no income tax and taking tax-free distributions, this is both unlawful and unethical.
Unlike an LLC, owners of a non-profit cannot withdraw funds from the entity for personal use at leisure (i.e. distributions). For example:
You have an LLC that contracts with the government for consulting/contracting work. Your total income through the LLC is $100,000 and you withdraw $50,000 for personal use. You're still taxed on $100,000 as the $50,000 is a distribution and not an expense, however, there is no penalty for personal use distributions.
Alternatively, you have a non-profit that contracts with the government for similar work. Your total income through the non-profit is $100,000 and you withdraw $50,000 for personal use. This is a big NO. You're not permitted to use a non-profit as a personal piggy bank.
If your non-profit made a $100,000 profit, you are allowed to use those funds for ordinary and necessary business expenses such as paying your staff, paying for fundraising activities, paying for HQ rent, insurance, etc. However, you are not allowed to co-mingle personal expenses (like your home rent, utilities, groceries, etc.) with the business income. For this reason, strict bookkeeping is recommended for the non-profit to ensure compliance and adherence to the mission, vision, and values.
Again, it's important to note that non-profits are not taxed on their net earnings because of their mission to engage in activities for both public and private interest without pursuing the goal of commercial or monetary profit.
Have more questions on non-profit compliance and owner compensation? Click Here!
2 - How TO pay yourself in a Florida Non-Profit.
When it comes to paying yourself the right way, the term "Reasonable Compensation" comes into play. The general rule is that a reasonable salary is the amount that a similar company would pay for the same or similar service/output that you provide, to another person.
Example: if you are an attorney with a non-profit that does pro-bono cases and you make $300,000 from grants and spend $100,000 on operation expenses, it’d be reasonable to assume that any other legal firm would pay a similar person in your role +/- a $100,000 salary to perform the same or similar services. Use discretion and do research on both your industry and your tax situation holistically before finalizing a salary figure.
For non-profits, compensation is scaled differently than for-profits. Click here for Guidestar's comprehensive review of nonprofit compensation by position.
What a salary is:
Formal Payroll (i.e. biweekly)
After Tax (i.e. SS, Medicare, and Fed. Tax are withheld)
Subject to payroll tax filings (RT6 and 941 if you’re in FL)
Subject to State Unemployment Taxes
What a salary is not:
A distribution (likewise, a distribution is NOT a salary because distributions have no taxes withheld)
Exempt from taxes (you pay FICA taxes on a salary)
Contact our Accountants in Tampa today to help you figure out what a reasonable salary means to you and your non-profit! A Tampa Accountant can help look at your non-profit profits in conjunction with the rest of your tax portfolio to get a bird's eye view of the best salary for you to maximize earnings and personal taxes!
Have more questions on non-profit compliance and owner compensation? Click Here!
Our firm believes in transparency above all else. We never want to walk into tax season with any client with uncertainty. For those reasons, not every client may be a good fit for us. If you're looking for just tax preparation and not tax planning, it's unlikely we can provide much value to you outside of what a TurboTax/H&R Block advisor could do. However, if you're looking for more hands-on tax planning with a firm that prioritizes value-add to their clients, then we'd love to talk to you!
If you have any questions on non-profits, tax planning, or tax preparation contact a Tampa Accountant and we can walk you through it!
Have more questions on non-profit compliance and owner compensation? Click Here!
Why Work With Taxes Tampa?
For over a decade, Taxes Tampa has sought to be a communication-focused Tampa Accounting firm. We don’t operate on a volume-based business model which allows us to check in with our clients more than the average accountant in Tampa and offer our clients a more hands-on and advisory tax experience. We want to ensure you understand the ABCs of LLCs, Taxes, and everything in between. Contact us today for a free tax consultation with one of our Tax Accountants in Tampa!
Foot Notes:
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