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In this Issue...
It was a busy week in Washington. Leaders in Congress negotiated details of a plan to fund the federal government through September 30 and discussed a tax plan that could include some good news for many nonprofits and the people they serve. Learn about new federal regulations that could affect the way your nonprofit classifies its workers and how nonprofits administer donor advised funds. See reminders about upcoming filing deadlines for lobbying reports and wage statements (W-2s and 1099s) that most organizations now need to file electronically.
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New DOL Rule Means More Workers Properly Classified as Employees
On Monday, the U.S. Department of Labor (DOL) announced a new final rule for determining whether workers are employees or independent contractors under the Fair Labor Standards Act (FLSA). Under FLSA, nonprofits and other employers are required to pay a minimum wage and offer overtime pay for certain workers who are classified as employees. Independent contractors aren’t entitled to these or other benefits of employees.
The new rule, which takes effect on March 11, replaces a rule from early 2021 that made it easier for employers to classify workers as independent contractors. The 2021 rule focuses on two criteria – opportunity for profit or loss and control over work – in determining whether workers are employees or independent contractors. The new rule returns to a more traditional six-factor “economic realities” test that would consider:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the employer;
- Degree of permanence of the work relationship;
- Nature and degree of control by the employer;
- Extent to which the work performed is an integral part of the employer’s business; and
- The worker’s skill and initiative.
The new rule means that more nonprofit workers will soon need to be classified as employees rather than independent contractors and receive employee benefits. Separately, DOL is still in the process of developing a final rule on the salary threshold for overtime pay under FLSA. The Center submitted comments on that proposed rule in November noting that it will likely have a disproportionate impact on North Carolina nonprofits. We also prepared an analysis of the proposed regulations and their potential impact on nonprofit organizations, concluding with 15 compliance options and eight next steps for nonprofits to consider while we wait for a final rule from DOL later this year.
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Congress Agrees on Federal Spending Levels for Current Fiscal Year
Over the weekend, leaders in the U.S. Senate and U.S. House of Representatives agreed on spending levels for the federal government for the remainder of the fiscal year (through September 30, 2024). Under the agreement, total spending levels would be $886.3 billion in defense spending and $772.7 billion in domestic discretionary spending. Among other things, the spending agreement would speed up $20 billion in funding cuts to the Internal Revenue Service and rescind about $6 billion in COVID relief funds that have not yet been spent.
The agreement on spending levels is an important step in Congress’ effort to pass the 12 appropriations bills necessary to fund the federal government for the remainder of the fiscal year.
The federal government is currently funded through a two-part continuing resolution that provides temporary funding for the federal departments of Veterans Affairs, Agriculture, Transportation, Housing and Urban Development, as well as energy and water programs through January 19 and for all other federal agencies through February 2. To prevent a partial shutdown of the federal government, Congress either needs to pass 12 appropriations bills, pass an omnibus spending plan, or approve another short-term continuing resolution.
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Congressional Leaders Negotiate Tax Legislation
Leaders in the U.S. Senate and U.S. House of Representatives also have been negotiating a bipartisan tax package that would: (a) restore three expired business tax deductions related to research and development spending, purchases of assets that lose value over time, and interest expenses; and (b) reinstate the expanded child tax credit that expired in 2022. Congress could include tax changes as part of appropriations legislation or pass them as a separate bill.
The expansion of the child tax credit could particularly benefit people served by nonprofits. In 2021, the American Rescue Plan Act (ARPA) expanded and improved the child tax credit in three important ways:
- It increased the amount of the tax credit from $2,000 per child to $3,600 for children under the age of six and $3,000 for children ages 6-17.
- It made the credit fully refundable, providing financial assistance to many low-income families who don’t normally pay income taxes.
- It provided advance payments of the credit for the final six months of 2021, providing immediate cash assistance to millions of families in the form of monthly checks.
The expanded and prepaid child tax credit helped lift many North Carolina families with children out of poverty in 2021, but child poverty levels rose sharply in 2022 and 2023 after the expanded child tax credit ended.
The tax plan also could end new applications for the Employee Retention Tax Credit (ERTC), both in response to the growing number of ERTC scams and fraudulent claims and as a way to raise revenue to offset some of the costs of business tax deduction and child tax credit changes. The Center and other nonprofits continue to advocate for Congress to include a universal charitable deduction in the tax package to help offset recent reductions in individual philanthropy by encouraging people to give more generously to nonprofits.
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IRS Extends Deadline for Public Comments on Donor Advised Fund Proposed Regulations
In November, the U.S. Treasury Department and Internal Revenue Service issued proposed regulations to provide clarity on donor advised funds (DAFs). The proposed regulations would establish definitions of donor advised funds, donors, and donor-advisors. The proposals would create better clarity about the legal structure of DAFs and could impact the way that nonprofits administer their DAFs. Nonprofit Law Blog has a helpful summary of the proposed regulations and their potential impact on nonprofits with DAFs.
The IRS recently extended the deadline for public comments on the proposed rule through February 15. Please let us know if your nonprofit has feedback on the proposed rules. The Center is not planning to submit public comments, but we would consider submitting them if there is significant interest (positive or negative) in the proposed rule from North Carolina nonprofits.
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2023 Lobbying Forms Due January 21 and 2024 Lobbying Registration (with Much Higher Fees) Now Open
Nonprofits that were registered as lobbyist principals in 2023 (and their staff or contractors who were registered as lobbyists) must file their final quarterly reports with the Secretary of State Lobbying Compliance Division by January 21. Lobbyist principals need to use the special fourth quarter expense reports (available online) that include the cumulative total payments to registered lobbyists for lobbying services for the year. To help you understand the basics of state lobbying laws affecting nonprofits, check out the Center's summary of NC lobbying laws for nonprofits.
Also, the NC Secretary of State has opened lobbying registration for 2024. Lobbyist principals (i.e. nonprofits that lobby) and lobbyists (i.e. nonprofit employees and contractors who lobby on behalf of nonprofits) must register annually with the Secretary of State. Lobbyists and lobbyist principals must register within a day after they begin lobbying. Thanks (or perhaps no thanks!) to a provision in the state budget, the registration fees for lobbyists and lobbyist principals are each $500 (plus a mandatory $3 electronic filing fee) for 2024, meaning that a nonprofit with a lobbyist must now pay $1,006 in registration fees (plus an additional $503 for each additional registered lobbyist). The Center recognizes that these fees, which are twice as high as last year’s fees and among the highest in the country, may be a financial burden for some nonprofits. The Center is advocating for legislation to allow for fee waivers or reductions for some or all 501(c)(3) nonprofits, but legislators cannot make any changes to the fees until the 2024 short session begins this spring.
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More Nonprofits Need to File IRS Information Returns Electronically This Month
A new federal regulation requires employers, including nonprofits, that file 10 or more “information returns” in a calendar year to file these forms electronically. The “information returns” included in this new electronic filing requirement include the Form 1099 series (typically used for nonprofit contractors), Form W-2, and Affordable Care Act information returns including the Form 1094 series and Form 1095-C. Practically, this means that many nonprofits, including any organization with a total of 10 or more employees and independent contractors, must file these forms electronically this year. The Internal Revenue Service can impose significant financial penalties for employers that don’t comply with electronic filing rules.
Nonprofits already must file their Forms 990 electronically. However, in the past, nonprofits were only required to file most other information returns electronically if they filed 250 or more of any specific form per year. Nonprofits that have not filed information returns electronically in the past will need to register with the IRS to e-file in 2024. Nonprofits that use third-party providers to process their payrolls may want to check with these providers to confirm that they are filing Forms W-2 electronically (they probably are).
Also, the IRS reminded employers this week that they must file their wage statements (including Forms W-2 and W-3) and independent contractor forms (including the Form 1099 series) by January 31 to avoid late filing penalties.
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DHHS Offers Resources to Help Nonprofits Provide Outreach on Medicaid Expansion
Medicaid expansion began in North Carolina last month. According to the new Medicaid expansion dashboard from the NC Department of Health and Human Services (DHHS), more than 272,000 North Carolinians enrolled in health care through Medicaid expansion last month. DHHS estimates that more than 300,000 additional North Carolinians may be eligible for coverage under Medicaid expansion. Almost all of the potential Medicaid expansion enrollees receive services from nonprofits, so it is important for nonprofit organizations to spread the word about Medicaid expansion eligibility and the application process.
DHHS has launched a website to help with community outreach on Medicaid expansion, including basic information on eligibility, details of costs and coverage, and free materials to help nonprofits and others provide clear and accurate information about Medicaid and Medicaid expansion to their clients and communities. Please share this information widely, especially with clients who may now be eligible to apply.
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Coming This Spring: Nonprofit Policy Conversations
This spring, the Center will host a series of Nonprofit Policy Conversations around the state to bring together nonprofit leaders and local elected officials (mostly state legislators) to discuss public policy issues that are important to charitable nonprofits and the people and communities they serve. At each Conversation, the Center will provide a briefing on trends in the nonprofit sector and potential public policy solutions and challenges for nonprofits in 2024 and beyond. The Conversations also will include discussions about state and federal public policy issues of particular interest to local nonprofits and ways nonprofits can engage in the 2024 election while remaining nonpartisan. We will share dates, locations, and registration information soon.
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2024 Short Session Begins in April
The NC General Assembly will return to Raleigh for its 2024 short session on Wednesday, April 24, 2024. Legislators’ main priority for the short session will be to make adjustments to the state budget for FY2024-25. However, during the short session, legislators also can take action on a variety of other bills that passed either the House or Senate in 2023 or that affect state taxes or spending. Among the bills eligible for consideration during the short session are legislation to exempt nonprofits from paying sales tax on their purchases and to modernize the NC Nonprofit Corporation Act.
Between now and mid-April, a variety of legislative study and oversight committees will be meeting to review the impact of new laws and the state budget and to make recommendations for legislation to be considered during the 2024 short session. A few of these committees held their first meetings this week. We will keep you posted on any developments affecting nonprofits in these committee meetings.
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