Tax issues for nonprofit staff in Africa?
February 8, 2010 10:53 AM Subscribe
US TaxFilter: Help me figure out what the legal way is to file tax returns (if necessary) for my nonprofit staff members who live and work in Africa, and are doing work for next to no pay out of the goodness of their hearts...
I am the director of a very small nonprofit that runs programs in Africa but has a U.S. based board of directors and raises all our funds in the U.S. In Feb of 2009 we were approved for 501(c)(3) status and for the first time started paying the people doing our fieldwork money beyond just covering their room and board for them. We have 2 staff members who are US citizens and then several African staff members. The staff members from the US made $9000 and about $1500 respectively in 2009. So both of these people lived in Africa for the majority of 2009 and earned all the income from us while living in Africa. The money was paid to them by transferring it from our US bank account to their US bank accounts, though, if that matters.
I've asked a few people whether our staff need to file tax returns, and gotten conflicting answers. A CPA told me that because they make below the amount of the personal exemption plus the standard deduction (about $9500 total), they will not owe taxes. However, a few other tax folks told me that because they never signed I-9 forms and we never withheld any SS or income tax, they have to file 1099-MISC. I tried this out in Turbotax and it appeared that, for example, my staffer who made $9000 would owe about $900 in taxes. It seems to be too late to have them sign I-9s now and provide them with W-2s, but I'm not even sure how that would change the situation. The staff members are asking for W-2s so they can file and I think without having signed the I-9s initially, I cannot provide the W-2, which is silly because they really are our direct employees but it appears they will have to file as "non-employees".
I am concerned because I don't want to do anything illegal, but as this is our first year as 501(c)(3) with paid employees, I just received the tax guide from the IRS on this last week and am afraid we screwed up. I feel bad just telling the staff to deal with it, because they are doing this work out of the goodness of their hearts and dedication to serving the underserved, but then again we also run on a shoestring and an extra $1000 for income tax is a huge deal in our budget.
Is this even correct? I don't think that the tax folks we asked are too familiar with the implications of having employees who live and work in Africa, but are paid from the United States. It just doesn't seem like people who don't live or work in the United States (i.e. are not in a position to use or benefit from anything that taxes pay for) should have to pay taxes, and it also seems unfair that people who are making way less than below the poverty line should have to pay so much.
Sorry this is such a complicated question. Thanks in advance for helping a small humanitarian group!
I am the director of a very small nonprofit that runs programs in Africa but has a U.S. based board of directors and raises all our funds in the U.S. In Feb of 2009 we were approved for 501(c)(3) status and for the first time started paying the people doing our fieldwork money beyond just covering their room and board for them. We have 2 staff members who are US citizens and then several African staff members. The staff members from the US made $9000 and about $1500 respectively in 2009. So both of these people lived in Africa for the majority of 2009 and earned all the income from us while living in Africa. The money was paid to them by transferring it from our US bank account to their US bank accounts, though, if that matters.
I've asked a few people whether our staff need to file tax returns, and gotten conflicting answers. A CPA told me that because they make below the amount of the personal exemption plus the standard deduction (about $9500 total), they will not owe taxes. However, a few other tax folks told me that because they never signed I-9 forms and we never withheld any SS or income tax, they have to file 1099-MISC. I tried this out in Turbotax and it appeared that, for example, my staffer who made $9000 would owe about $900 in taxes. It seems to be too late to have them sign I-9s now and provide them with W-2s, but I'm not even sure how that would change the situation. The staff members are asking for W-2s so they can file and I think without having signed the I-9s initially, I cannot provide the W-2, which is silly because they really are our direct employees but it appears they will have to file as "non-employees".
I am concerned because I don't want to do anything illegal, but as this is our first year as 501(c)(3) with paid employees, I just received the tax guide from the IRS on this last week and am afraid we screwed up. I feel bad just telling the staff to deal with it, because they are doing this work out of the goodness of their hearts and dedication to serving the underserved, but then again we also run on a shoestring and an extra $1000 for income tax is a huge deal in our budget.
Is this even correct? I don't think that the tax folks we asked are too familiar with the implications of having employees who live and work in Africa, but are paid from the United States. It just doesn't seem like people who don't live or work in the United States (i.e. are not in a position to use or benefit from anything that taxes pay for) should have to pay taxes, and it also seems unfair that people who are making way less than below the poverty line should have to pay so much.
Sorry this is such a complicated question. Thanks in advance for helping a small humanitarian group!
Treally is a situation where you need to hire an honest-to-goodness tax professional. Non-profit compensation? Overseas non-profit compensation?
Don't waste your time here. Get thee to a CPA.
posted by valkyryn at 11:07 AM on February 8, 2010 [1 favorite]
Don't waste your time here. Get thee to a CPA.
posted by valkyryn at 11:07 AM on February 8, 2010 [1 favorite]
US citizens are required to report on and pay taxes on income earned worldwide.
This is true. But under certain circumstances, they can exclude the first $91,400 of their income from taxation.
If they are really your direct employees, you should check whether it is legal for you to pay them as contractors. The fact that you should have withheld taxes from them before and didn't does not necessarily mean that you can deal with the situation by just declaring them as contractors after the fact. You really need to pay an accountant for advice here.
posted by grouse at 11:11 AM on February 8, 2010
This is true. But under certain circumstances, they can exclude the first $91,400 of their income from taxation.
If they are really your direct employees, you should check whether it is legal for you to pay them as contractors. The fact that you should have withheld taxes from them before and didn't does not necessarily mean that you can deal with the situation by just declaring them as contractors after the fact. You really need to pay an accountant for advice here.
posted by grouse at 11:11 AM on February 8, 2010
Response by poster: To explain a bit further about how grassroots my organization is, our board is made up mostly of undergraduate and graduate students, and we generally spend next to nothing in the United States, nearly all our funding goes to Africa to pay for our programs. We have no person who does our taxes, no accountant, and we have no lawyer!
I am basically the only board member with a real job so I pay for all the organization's US expenses. So that means unless I can find a CPA to curbside through idealist.org or something (or AskMeFi??) I'm paying for this... does this cost much? I always do my own taxes and have never paid someone for it.
Thank you all for your quick and helpful answers. I just want to do the right thing here.
p.s. does this really mean that if I for example move to New Zealand to do locum tenens work as a physician (I am a physician who would like to move to NZ), I'd have to pay US taxes on my much smaller NZ income??? And NZ taxes?? I am really curious. 2 questions for the price of one!
posted by treehorn+bunny at 11:23 AM on February 8, 2010
I am basically the only board member with a real job so I pay for all the organization's US expenses. So that means unless I can find a CPA to curbside through idealist.org or something (or AskMeFi??) I'm paying for this... does this cost much? I always do my own taxes and have never paid someone for it.
Thank you all for your quick and helpful answers. I just want to do the right thing here.
p.s. does this really mean that if I for example move to New Zealand to do locum tenens work as a physician (I am a physician who would like to move to NZ), I'd have to pay US taxes on my much smaller NZ income??? And NZ taxes?? I am really curious. 2 questions for the price of one!
posted by treehorn+bunny at 11:23 AM on February 8, 2010
I'd have to pay US taxes on my much smaller NZ income??? And NZ taxes??
Caveat: I'm not a tax professional in any way, shape or form.
As I understand it, you'd have to pay taxes on the amount over $91k and often you get to deduct any local taxes. So if you're making bank, then yes, you'll likely have to pay some taxes.
posted by small_ruminant at 11:30 AM on February 8, 2010
Caveat: I'm not a tax professional in any way, shape or form.
As I understand it, you'd have to pay taxes on the amount over $91k and often you get to deduct any local taxes. So if you're making bank, then yes, you'll likely have to pay some taxes.
posted by small_ruminant at 11:30 AM on February 8, 2010
does this really mean that if I for example move to New Zealand to do locum tenens work as a physician
You really, really, really need to consult with a qualified CPA to answer these questions. That your ideals call for you to try to do good in the world is laudable; the tax laws care not a whit about your ideals, however.
posted by dfriedman at 11:30 AM on February 8, 2010
You really, really, really need to consult with a qualified CPA to answer these questions. That your ideals call for you to try to do good in the world is laudable; the tax laws care not a whit about your ideals, however.
posted by dfriedman at 11:30 AM on February 8, 2010
I just want to do the right thing here.
This is too complicated for a non-expert to be able to give a qualified answer on what the right thing is. Nonprofit, overseas, and employee/contractor issues? Sticky. Sorry.
does this really mean that if I for example move to New Zealand to do locum tenens work as a physician (I am a physician who would like to move to NZ), I'd have to pay US taxes on my much smaller NZ income??? And NZ taxes??
This depends. If you moved there permanently and you were earning less than USD 91,400/year, then no. Even if you made more than that or you weren't living there permanently the answer could still be no (there is a tax treaty with New Zealand that handles such things) but it gets more complicated. But yes, you would have to report the income and file taxes in the U.S. even if you didn't have to pay anything.
posted by grouse at 11:32 AM on February 8, 2010
This is too complicated for a non-expert to be able to give a qualified answer on what the right thing is. Nonprofit, overseas, and employee/contractor issues? Sticky. Sorry.
does this really mean that if I for example move to New Zealand to do locum tenens work as a physician (I am a physician who would like to move to NZ), I'd have to pay US taxes on my much smaller NZ income??? And NZ taxes??
This depends. If you moved there permanently and you were earning less than USD 91,400/year, then no. Even if you made more than that or you weren't living there permanently the answer could still be no (there is a tax treaty with New Zealand that handles such things) but it gets more complicated. But yes, you would have to report the income and file taxes in the U.S. even if you didn't have to pay anything.
posted by grouse at 11:32 AM on February 8, 2010
Best answer: I am not a tax professional, but I know a bit about international tax issues.
I'd recommend reading IRS Publication 54, which covers international tax issues pretty thoroughly. Your employees may be eligible for the foreign earned income exclusion, which lets them deduct up to about $90,000 of their earnings. If not (for instance, they weren't in the foreign country long enough to qualify, and the the country has no tax treaty with the IRS) then they may be able to take a tax credit for whatever African taxes they paid. Do you know if they owe African taxes? They may well, since they were resident there while doing the work. There's also the matter of Social security and Medicare taxes, which you may be required to withhold as an American employer, even for overseas work.
Reading the IRS docs should give you an overview of what you might be liable for on the US side, but I agree that this is way too complicated to do on your own. You need an accountant who specializes in tax issues for multinational organizations. You not only owe it to your employees, but your organization itself may be liable for not withholding proper taxes. This is a big deal.
Likewise, you need to consider what the tax withholding and reporting requirements are for your host country. You do have a local consultant to deal with government regulations and registration requirements, right?
posted by serathen at 11:37 AM on February 8, 2010
I'd recommend reading IRS Publication 54, which covers international tax issues pretty thoroughly. Your employees may be eligible for the foreign earned income exclusion, which lets them deduct up to about $90,000 of their earnings. If not (for instance, they weren't in the foreign country long enough to qualify, and the the country has no tax treaty with the IRS) then they may be able to take a tax credit for whatever African taxes they paid. Do you know if they owe African taxes? They may well, since they were resident there while doing the work. There's also the matter of Social security and Medicare taxes, which you may be required to withhold as an American employer, even for overseas work.
Reading the IRS docs should give you an overview of what you might be liable for on the US side, but I agree that this is way too complicated to do on your own. You need an accountant who specializes in tax issues for multinational organizations. You not only owe it to your employees, but your organization itself may be liable for not withholding proper taxes. This is a big deal.
Likewise, you need to consider what the tax withholding and reporting requirements are for your host country. You do have a local consultant to deal with government regulations and registration requirements, right?
posted by serathen at 11:37 AM on February 8, 2010
Your field workers are students. Maybe someone at the university could help you with your question.
posted by mareli at 11:48 AM on February 8, 2010
posted by mareli at 11:48 AM on February 8, 2010
I'm a lawyer. I'm in insurance, not tax, but I deal with non-profit entities pretty much all day. The degree to which most non-profits are naive about their legal obligations would be endearing if it weren't 1) really dangerous to them, and 2) a huge pain in my ass.
Non-profit organizations are actually relatively delicate operations, from a legal perspective. You're managing a legal person--that's what a corporation is, after all--and the ways of screwing that up are too numerous to mention.
To make things worse, we're talking about two of the most arcane areas of law right now: tax and non-profit organizations. Law schools teach entire courses on both of these, and you can get advanced legal degrees in either.
The idea that you can run this thing by yourself is cute, but wrong. It's also a contributing factor to why so many non-profits fail on a regular basis: sheer logistical mismanagement. I'm not accusing you of doing anything wrong or of being incompetent. You're obviously trying to do the right thing. But you're in over your head. Hell, I am a lawyer, and this is way outside my area of expertise. It's kind of a shame that do-gooders can't just rush out there and Do Good Stuff(tm) without having to think about things like taxes, but that's just the world we live in.
If you want your organization to be viable over the long term, you're going to need a strategy for dealing with this that involves professional, expert input. Fortunately, many professionals are decent people who like to help their communities when they can. Getting someone to do this pro bono might be possible. But you really do need to get someone to do it, one way or the other.
posted by valkyryn at 11:49 AM on February 8, 2010 [2 favorites]
Non-profit organizations are actually relatively delicate operations, from a legal perspective. You're managing a legal person--that's what a corporation is, after all--and the ways of screwing that up are too numerous to mention.
To make things worse, we're talking about two of the most arcane areas of law right now: tax and non-profit organizations. Law schools teach entire courses on both of these, and you can get advanced legal degrees in either.
The idea that you can run this thing by yourself is cute, but wrong. It's also a contributing factor to why so many non-profits fail on a regular basis: sheer logistical mismanagement. I'm not accusing you of doing anything wrong or of being incompetent. You're obviously trying to do the right thing. But you're in over your head. Hell, I am a lawyer, and this is way outside my area of expertise. It's kind of a shame that do-gooders can't just rush out there and Do Good Stuff(tm) without having to think about things like taxes, but that's just the world we live in.
If you want your organization to be viable over the long term, you're going to need a strategy for dealing with this that involves professional, expert input. Fortunately, many professionals are decent people who like to help their communities when they can. Getting someone to do this pro bono might be possible. But you really do need to get someone to do it, one way or the other.
posted by valkyryn at 11:49 AM on February 8, 2010 [2 favorites]
We have no person who does our taxes, no accountant, and we have no lawyer!
Yeah, you really, really need professional tax advice from someone experienced with international organizations. Maybe talk to better established non-profits doing similar work, and see if they can refer you to someone? And definitely figure out what your legal and tax obligations are as an employer in the African country you're working in.
Your potential New Zealand situation is easier. Foreign taxes for US expats are a pain in the ass, but could be within the realm of what you can handle yourself, depending on how complicated New Zealand's taxes are and whether you'd be self-employed there. Worst case scenario if you're not self-employed is that if NZ's tax rate was lower, you'd pay the difference to the IRS.
posted by serathen at 11:55 AM on February 8, 2010
Yeah, you really, really need professional tax advice from someone experienced with international organizations. Maybe talk to better established non-profits doing similar work, and see if they can refer you to someone? And definitely figure out what your legal and tax obligations are as an employer in the African country you're working in.
Your potential New Zealand situation is easier. Foreign taxes for US expats are a pain in the ass, but could be within the realm of what you can handle yourself, depending on how complicated New Zealand's taxes are and whether you'd be self-employed there. Worst case scenario if you're not self-employed is that if NZ's tax rate was lower, you'd pay the difference to the IRS.
posted by serathen at 11:55 AM on February 8, 2010
Er, rather: Foreign taxes US federal taxes for US expats are a pain in the ass
posted by serathen at 12:01 PM on February 8, 2010
posted by serathen at 12:01 PM on February 8, 2010
Since you're presumably doing awesome save-the-world work in Africa, maybe you could find a CPA or even accounting student at your university who'd be willing to donate a couple of hours of their time?
posted by miyabo at 12:03 PM on February 8, 2010
posted by miyabo at 12:03 PM on February 8, 2010
I don't think an accounting student is really what is warranted here. You need someone with some real experience dealing with the IRS. An accounting student might even have less experience with these laws than the people responding to this question.
posted by grouse at 2:56 PM on February 8, 2010 [1 favorite]
posted by grouse at 2:56 PM on February 8, 2010 [1 favorite]
I don't think an accounting student is really what is warranted here.
Agreed. And though all accounting graduates are eligible to sit for the CPA exam, not all CPAs are qualified to advise on tax issues relating to non-profits' international operations. This really is a niche question best answered by a subject matter expert.
An accounting student is not a subject matter expert.
posted by dfriedman at 6:20 PM on February 8, 2010
Agreed. And though all accounting graduates are eligible to sit for the CPA exam, not all CPAs are qualified to advise on tax issues relating to non-profits' international operations. This really is a niche question best answered by a subject matter expert.
An accounting student is not a subject matter expert.
posted by dfriedman at 6:20 PM on February 8, 2010
Response by poster: Good points, good points. We are not exactly a rushing in and fooling around, going to shutter up by next week kind of operation here - this is our 7th year operating in Africa. It's just that this year, we are a 501c3 and have paid employees, which is the new and exciting part. I appreciate that it may seem naive etc. to some, but there's not exactly someone who holds your hand and walks you through starting a nonprofit.
THANK YOU, especially to the person who pointed to Publication 54 - that was extremely helpful!!
I'm off to idealist.org to look for a CPA!
posted by treehorn+bunny at 6:24 PM on February 8, 2010
THANK YOU, especially to the person who pointed to Publication 54 - that was extremely helpful!!
I'm off to idealist.org to look for a CPA!
posted by treehorn+bunny at 6:24 PM on February 8, 2010
You're on the right track with looking for a CPA, you want one that knows non-profit taxes. Another thing that you might want to do is have the accountant do a full audit, it will probably make your life easier with the IRS in the future (especially as a non-profit that has been running as a different type of corporation for years), give your major donors and grantors a feeling of security, and help show you what you'll need to do in the future.
posted by thebestsophist at 11:00 PM on February 8, 2010
posted by thebestsophist at 11:00 PM on February 8, 2010
The person that holds your hand and walks you through it is an attorney who has experience with non-profit organizations. They're out there, they do a good job, and they understand your financial situation.
If this thing is worth doing--and it does sound like it is--it's worth doing right. That means a lawyer.
Good luck.
posted by valkyryn at 8:08 AM on February 10, 2010
If this thing is worth doing--and it does sound like it is--it's worth doing right. That means a lawyer.
Good luck.
posted by valkyryn at 8:08 AM on February 10, 2010
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(2) US citizens are required to report on and pay taxes on income earned worldwide.
(2a) "A CPA told me that because they make below the amount of the personal exemption plus the standard deduction (about $9500 total), they will not owe taxes." This sounds correct.
Who does the accounting/taxes for your nonprofit? Presumably that person should be able to answer this question for you.
posted by dfriedman at 10:58 AM on February 8, 2010