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Run the Payroll Fee Auditor →Blog · Payroll Management · Nonprofit
Nonprofits & Religious Organizations: Payroll Mistakes to Avoid (2026)
The costliest payroll mistakes in nonprofits are misclassifying program staff and case managers, leaving grant-funded payroll allocation out of the overtime regular rate, and missing the nonprofit tax rule cited here, IRS, Exempt organizations. BEG: $45 per employee per month inside the payroll software you already use, live in 3 to 5 days.
Mistake 1: classification
A volunteer is generally not an FLSA employee if the person volunteers freely for public service, religious, or humanitarian objectives without contemplation or receipt of compensation. Volunteers typically serve part time and do not displace regular employed workers.
Mistake 2: hours and the regular rate
Paid employees of a nonprofit cannot volunteer to provide the same type of services they are employed to provide. Volunteers typically serve part time and do not displace regular employees or perform work that regular employees would otherwise do.
Nonprofit charitable organizations are not covered enterprises under the FLSA unless they run ordinary commercial activities, such as a gift shop or fee-based services, with at least $500,000 in annual sales or business done. Employees working in the charitable activities can still be covered individually if they engage in interstate commerce, such as interstate phone calls or shipping.
Mistake 3: the nonprofit tax item
An organization exempt from income tax under section 501(c)(3) is also exempt from FUTA, and the exemption cannot be waived. Nonprofits that are not section 501(c)(3) organizations are not exempt and report FUTA on Form 940.
What catches them
A pay code review at setup, an exemption file per employee, a regular-rate flag on every pay component, and a deposit calendar that does not depend on one person remembering. Failure-to-deposit penalties run 2 to 15 percent; back overtime runs at time and one half plus an equal amount in liquidated damages.
The rules behind this page, with sources
General information, not legal advice. Every rule below was read on the agency page linked next to it.
- A volunteer is generally not an FLSA employee if the person volunteers freely for public service, religious, or humanitarian objectives without contemplation or receipt of compensation. Volunteers typically serve part time and do not displace regular employed workers. [DOL Fact Sheet #14A]
- Paid employees of a nonprofit cannot volunteer to provide the same type of services they are employed to provide. Volunteers typically serve part time and do not displace regular employees or perform work that regular employees would otherwise do. [DOL Fact Sheet #14A]
- Nonprofit charitable organizations are not covered enterprises under the FLSA unless they run ordinary commercial activities, such as a gift shop or fee-based services, with at least $500,000 in annual sales or business done. Employees working in the charitable activities can still be covered individually if they engage in interstate commerce, such as interstate phone calls or shipping. [DOL Fact Sheet #14A]
- An organization exempt from income tax under section 501(c)(3) is also exempt from FUTA, and the exemption cannot be waived. Nonprofits that are not section 501(c)(3) organizations are not exempt and report FUTA on Form 940. [IRS, Exempt organizations: What are employment taxes?]
Read the full guide to how to correct a payroll error, and the rest of the nonprofit payroll library.
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Frequently Asked Questions
What is the most common classification mistake in nonprofits?
A volunteer is generally not an FLSA employee if the person volunteers freely for public service, religious, or humanitarian objectives without contemplation or receipt of compensation. Volunteers typically serve part time and do not displace regular employed workers.
What wage and hour mistakes does DOL see in nonprofits?
Paid employees of a nonprofit cannot volunteer to provide the same type of services they are employed to provide. Volunteers typically serve part time and do not displace regular employees or perform work that regular employees would otherwise do.
Which nonprofit tax rule is most often missed?
An organization exempt from income tax under section 501(c)(3) is also exempt from FUTA, and the exemption cannot be waived. Nonprofits that are not section 501(c)(3) organizations are not exempt and report FUTA on Form 940.
What does managed payroll cost for a nonprofit?
$45 per employee per month, all-inclusive, inside the payroll software you already use, with no monthly minimum. Grant-funded payroll allocation, clergy housing allowance and FUTA exemptions are configured at setup, not billed as add-ons.
Related Resources
Anthony leads payroll solutions at Business Executive Group, a national managed payroll firm serving businesses across industries including Nonprofits & Religious Organizations. BEG manages payroll at $45 PEPM, all-inclusive, with deep expertise in compliance, multi-state filing, and industry-specific payroll requirements. Get instant pricing at beghr.com.
Authoritative source: U.S. Bureau of Labor Statistics: Occupational Employment and Wage Statistics
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