Running payroll may seem like a simple task, but the reality is that it’s often a much more complex undertaking than many arts and culture organizations realize. Failing to adequately manage payroll can have serious implications – both for employees that rely on their checks and for the tax obligations of organizations themselves.
For arts and culture institutions including museums, operas, theaters, and symphonies, running payroll can be complicated further by the nature of the organization’s activities. Taking performances on the road or working with international performers can create additional compliance requirements that many organizations fail to recognize.
This is only compounded further by the fact that many nonprofit organizations lack the resources to staff a payroll specialist, leading to communication challenges and a lack of expertise understanding the nuances that come with managing the payroll process.
Amid these challenges, it’s vital for organizations to understand the responsibilities inherent in managing payroll. In this guide, we explore several of these considerations and share best practices for nonprofit leaders to keep in mind when administering payroll.
One of the most important distinctions any organization must make is whether their employees are considered employees or independent contractors.
Employees are individuals on an organization’s payroll that receive wages and benefits such as health insurance and vacation. They receive a Form W-2, Wage and Tax Statement from their employer every year and the employer must withhold income tax plus 50% of social security and Medicare taxes on their behalf.
An independent contractor is an individual who works for the organization but does not receive any benefits beyond payment for their work. Employers do not have to withhold taxes, issuing a Form 1099-NEC, Nonemployee Compensation to independent contractors each year. Organizations customarily have far less control over the scope, timeline, and delivery of the work that a contractor performs. Organizational resources are typically not used in the commission of this work.
Determining whether an individual is an employee or an independent contractor is an important step for organizations. Classifying individuals as independent contractors tends to be more affordable, with a reduced financial burden and lower compliance requirements. However, if an organization is found to have incorrectly classified W-2 employees as independent contractors during an IRS payroll audit, the organization may be liable for years of employer taxes, plus penalties and interest.
One of the more unique payroll considerations in the arts community is the payroll intricacies related to traveling performers. When employees are working in a state or city for a certain period of time, they may trigger state and local income tax considerations for those jurisdictions.
A classic example of this is a touring Broadway show. Performers might be in a new city for anywhere from a week to a couple of months at a time. Depending on the state and local tax laws of that city and state, their employer may be required to withhold payroll taxes during this time. To accurately calculate withholding amounts, organizations must consider all compensation provided to the employee during the period they are in a new tax jurisdiction, including wages, travel, lodging, food, and more.
Organizations must consider these issues proactively before they begin a tour. Meet with your organization’s tax advisor a couple of months before any employees are due to travel. They’ll help your organization understand its compliance obligations and support you in making the appropriate tax registrations and filings. If these issues are not addressed prior to the employees traveling, they can be challenging to resolve at a later date when a local tax authority demands payment.
This can also be a challenging issue for performers themselves, who are faced with having to file state income tax returns in multiple states. To minimize these compliance costs, many traveling shows and exhibits supplement core talent with local contractors in new locations.
Working with international performers can also result in additional compliance requirements. Your organization is required to solicit a Form W-8BEN from non-US persons, which clarifies whether your organization is required to withhold any US income taxes.
Arts and culture institutions should endeavor to collect this information before an international contractor commences work. At that time, the organization has leverage over the contractor to require this information, but after work has started, this is significantly lessened and it can be more difficult to obtain the required information.
Given the complexities outlined above, the best approach to payroll for many arts and culture organizations is to outsource this process to a third-party vendor. There are many businesses that specialize in helping organizations stay fully compliant with all payroll requirements, from Professional Employer Organizations (PEOs) to payroll processing companies.
Working with these types of service providers frees arts and culture organizations from managing the intricacies of payroll processing and compliance, and often represents a more cost-effective option than taking an internal approach.
At Smith + Howard, our nonprofit accounting and tax team is well-versed in the best approach to payroll for arts and culture organizations. Our team maintains close relationships with a variety of payroll vendors and is happy to refer arts and culture organizations to a range of trusted payroll provider options to allow them to find the best-matched solution to their needs.
Additionally, our tax advisors are on hand to help clients manage their monthly, quarterly, and annual payroll compliance requirements, helping organizations understand state and local income tax compliance requirements in every state and register for state and local payroll tax accounts in new jurisdictions.
To learn more about our advisory services for arts and culture nonprofits, contact an advisor today.
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