Key Takeaways:

• For the most part, nonprofits don’t have many exceptions relating to employment law. The key exception is for unemployment insurance for nonprofits under 4 employees.
• Common oversights include forgetting new employee registrations and employment posters in the workplace.
• Make sure you properly consider who is an employee, volunteer, and independent contractor. If they work under your direction and oversight, they may very well be an employee.
  
  

Nonprofits must follow nearly all the same employment laws as for-profit businesses. This includes federal laws like tax withholding and anti-discrimination statutes, and state laws like unemployment insurance and workers’ compensation mandates. However, some obligations evolve as the organization grows in employee count and scale. In this article, we’ll talk about what the law requires for just your first employee.

Starting Out: From All-Volunteer to First Employees

Many nonprofits begin with volunteers and no paid staff. In this phase, formal employment law obligations are minimal, since true volunteers are not “employees” under wage-and-hour laws, meaning you generally don’t have to pay volunteers a salary or overtime. The very first volunteers are often the founders of the organization, who serve as the first officers and directors. However, the moment you decide to hire even one paid employee, a host of legal requirements kick in.

Hiring Your First Employee: Initial Compliance Checklist

When your nonprofit hires its first employee, even if they will only be part-time, you become an “employer.” At this point, many requirements take shape immediately, including EIN requirements, federal payroll taxes, and state income taxes.

Obtain an EIN

Most nonprofits organizations with tax exemption already have an EIN, but if not, you’ll need an EIN from the IRS to report taxes for your employee. This EIN is used for all payroll tax filings.

Employment Taxes

Federal Payroll Taxes: You must start withholding federal income tax from your employee’s pay, as well as Social Security and Medicare contributions (aka, the FICA taxes). You’ll pay these to the IRS. Many third-party payroll processors can help you with this function.

State Income Tax Withholding: You typically must also withhold state (and sometimes local) income taxes from wages. Register your nonprofit as an employer with your state’s Department of Revenue (or similar agency) to get a withholding account.

• In Indiana, your agency is the Indiana Department of Revenue. Registration involves filing Indiana’s Business Tax Application (BT-1) via the INBiz portal to obtain a state Taxpayer Identification Number for withholding.
• For Ohioans, your agency is the Ohio Department of Taxation. Ohio provides online registration through the Ohio Business Gateway.
• In Georgia, the Georgia Department of Revenue requires any employer with employees in Georgia to register for a Georgia withholding payroll tax number. Registration is done via the Georgia Tax Center online portal.
  
  

Unemployment Insurance

Employers must usually participate in their state’s unemployment insurance program at some point, which provides temporary benefits to workers who lose jobs. This means registering with the state labor department or workforce agency and paying state unemployment taxes (aka, SUTA) each quarter. However, you won’t need to worry about this for your first employee for a couple of reasons.

• Federal Exemption for 501(c)(3): If your nonprofit is a 501(c)(3) charitable organization, you are exempt from the federal unemployment tax. However, state unemployment tax still applies.
• State unemployment insurance requirements don’t kick in until you have at least 4 employees in most states, including Indiana, Ohio, and Georgia. In these states, you need 4 or more employees in 20 weeks during a calendar year. However, you can still choose to register anyway, and your employees will be covered in the case of unemployment.
  • In Indiana, your agency for unemployment insurance is the Indiana Department of Workforce Development.
  • In Ohio, your agency is the Ohio Department of Job and Family Services.
  • For Georgians, the Georgia Department of Labor regulates unemployment insurance requirements.
    
    

Workers’ Compensation Insurance

Workers’ comp is state-mandated insurance that covers medical bills and some wage replacement if an employee is injured on the job. Nonprofits are not exempt from workers’ comp; they must comply just like other employers. But the requirement to carry coverage can depend on number of employees and type of organization:

• In both Indiana and Ohio, virtually all employers must carry workers’ compensation insurance if they have one or more employees. There are some exceptions, but they are not typically relevant for nonprofits. Indiana Workers Compensation Board and Ohio’s Bureau of Workers’ Compensation are the agencies responsible for regulating these requirements.
• In Georgia, the threshold is a bit higher and doesn’t get triggered until you “regularly employ three or more persons” in Georgia. This count includes part-time workers and corporate officers. The State Board of Workers’ Compensation is the regulating agency for Georgians.
  
  

New Hire Reporting

Federal and state laws require employers to report newly hired employees to a state database, for child support enforcement purposes. When you hire someone, you’ll need to submit a simple online form to the state’s New Hire Reporting Center within 20 days of the new hire (10 days if you’re in Georgia). This requirement applies no matter how small the employer.

Compliance Posters

Even with one employee, you should post certain federal and state labor law notices in the workplace to the extent the law is applicable (e.g., notices about the Fair Labor Standards Act, anti-discrimination laws, OSHA safety, state minimum wage, unemployment insurance rights, workers’ comp info, etc.). Your regulating agency typically will provide the required posters. If you opted into unemployment insurance, you would want to display the poster provided by your regulating agency. Federal posters are provided by the U.S. Department of Labor. Make sure to post these in a break room or other conspicuous place once you have staff.

Employee vs. Volunteer/Contractor Classification

In a nonprofit startup, you might have a mix of volunteers and maybe some paid stipend workers or independent contractors. Be very careful: if someone is doing regular work under your control for a stipend or low pay, they might legally be considered an employee, which would trigger all the above obligations. Misclassification is a common pitfall. For instance, calling a worker a “contractor” doesn’t make them one if you direct their work and they act like an employee. The IRS and state agencies use specific tests to determine status. If in doubt, consult an attorney—mistakenly classifying an employee as a volunteer or contractor can lead to unpaid tax bills and penalties.

Final Thoughts

As soon as your nonprofit transitions from an all-volunteer team to having paid staff, you must set up the basic infrastructure of a responsible employer: payroll tax withholding, unemployment and workers’ comp coverage, and compliance procedures. It’s wise to create an HR compliance checklist at first hire and follow it diligently. You may also bring on third-party service providers to help you manage some of these new requirements; payroll is often the first one that nonprofits partner with to streamline their operations. Whatever your strategic approach, familiarizing yourself with relevant employment laws early on will bring you peace of mind when you reach that major milestone of bringing on your first employee.