While ‘Payroll’ and ‘Tax Compliance’ may not be the most discussed topics among NGOs and nonprofits in Nigeria, they are equally crucial to the long-term success of these organizations. They play a significant role in building and maintaining public trust, a cornerstone for any charitable institution.
In Nigeria, NGOs must adhere to various legal requirements concerning payroll and tax compliance. As such, managing payroll for nonprofits requires a well-thought-out approach that ensures compliance with labour laws, financial transparency, and efficiency in handling staff remuneration.
This guide will help you understand payroll for nonprofits in Nigeria, covering legal requirements, tax obligations, payroll processing steps, and best practices. It is valuable to ensure smooth operations and compliance in your nonprofit organization.
Understanding Payroll for Nonprofits
Payroll refers to the total compensation paid to staff, including salaries, wages, benefits, and statutory deductions. While nonprofit organizations operate differently from profit-driven companies, they still have obligations to their staff, regulators, and stakeholders. Proper payroll management for nonprofits ensures financial accountability, enhances employee satisfaction, and maintains compliance with Nigerian labour laws.
Key Challenges in Payroll Management for Nonprofits
Nonprofit organizations in Nigeria face unique payroll challenges, including:
- Irregular Funding Streams: Many nonprofits rely on grants and donations, which may not always be consistent, making salary payments challenging.
- Complex Compliance Requirements: As an NGO in Nigeria, you must adhere to tax regulations, pension contributions, and labour laws while ensuring transparency in your financial reporting.
- Multiple Funding Sources: Some nonprofits receive funding from international donors, local agencies, or corporate social responsibility (CSR) programs, which may have specific payroll conditions.
- Volunteer and Contract-Based Employment: Unlike traditional businesses, nonprofits often have a mix of full-time employees, part-time staff, contractors, and volunteers, requiring flexible payroll structures.
Legal and Regulatory Considerations for Nonprofit Payroll in Nigeria
Nonprofit organizations in Nigeria must comply with several payroll-related laws and regulations to avoid penalties and maintain legitimacy. These include:
- Pension Contributions
Under the Pension Reform Act 2014, any employer with three or more employees must register under the Contributory Pension Scheme (CPS). Both employer and employee are required to contribute a minimum of 10% and 8% of the employee’s salary, respectively, to a Pension Fund Administrator (PFA).
- Pay-As-You-Earn (PAYE) Tax
There is a common misconception that NGOs do not pay taxes in Nigeria. However, the law states that NGOs and nonprofits are not required to pay income taxes if their income is obtained from their primary activities, including donations, membership fees, as well as local and international grants.
Furthermore, employers must deduct Personal Income Tax (PIT) from employees’ salaries under the Pay-As-You-Earn (PAYE) scheme and remit it to the relevant state’s Inland Revenue Service. Tax rates in Nigeria are progressive, ranging from 7% to 24%, depending on the employee’s income bracket.
- National Health Insurance Scheme (NHIS)
The NHIS provides affordable healthcare coverage for employees. Employers may contribute towards the scheme to provide health benefits for their staff, particularly when offering competitive compensation packages.
- National Social Insurance Trust Fund (NSITF)
This scheme provides social security benefits, including compensation for workplace injuries. Employers are required to register and contribute 1% of payroll to NSITF.
- Nonprofit Tax Exemptions and Incentives
As earlier mentioned, while registered nonprofit organizations in Nigeria are generally exempt from corporate tax, they must still comply with payroll-related taxes and contributions. However, nonprofits may qualify for tax-exempt employee benefits, reducing financial burdens.
7 Steps for Effective Payroll Processing in Nonprofits
To efficiently manage payroll for nonprofits, organizations should follow these key steps:
- Establish a Payroll Policy
A clearly defined payroll policy outlines payment schedules, salary structures, deductions, and benefits. It should align with regulatory requirements while considering the organization’s funding patterns.
- Classify Employees Correctly
Nonprofits employ different types of workers, including:
- Full-time Employees – Permanent staff with regular salaries and benefits.
- Part-time Workers – Employees who work fewer hours with prorated salaries.
- Contractors and Consultants – Independent professionals hired for specific projects.
- Volunteers – Individuals working without financial compensation.
Each category has different payroll implications, and misclassification can lead to compliance risks.
- Automate Payroll Processing
Using payroll software for nonprofits helps streamline salary calculations, tax deductions, and reporting. Automated systems ensure accuracy, reduce manual errors, and improve efficiency. Some recommended payroll software solutions for Nigerian nonprofits include:
- SeamlessHR Payroll
- Sage Payroll
- Zoho Payroll
- PayDayNG
- Ensure Timely Salary Payments
Nonprofits should have a structured salary payment schedule to maintain employee trust and satisfaction. If funding delays occur, organizations must develop contingency plans to ensure timely disbursement of salaries.
- Maintain Compliance with Statutory Deductions
Nonprofits must ensure that all deductions (e.g., PAYE tax, pensions, NHIS) are correctly calculated and remitted before the deadline to avoid fines and penalties.
- Keep Accurate Payroll Records
Record-keeping is essential for audits, donor reporting, and regulatory compliance. Payroll records should include salary slips, tax filings, pension contributions, and employment contracts.
- Regular Payroll Audits
Conducting regular payroll audits helps nonprofits identify errors, detect fraud, and ensure adherence to financial policies. Audits also improve transparency, which is critical for donor confidence and accountability.
Benefits of Proper Payroll for Nonprofits
- Improved Employee Satisfaction: Timely salary payments and benefits boost employee morale and retention.
- Regulatory Compliance: Ensures adherence to labour laws and tax obligations.
- Transparency in Financial Reporting: Strengthens donor trust and funding credibility.
- Operational Efficiency: Automates payroll processes, saving time and reducing errors.
- Cost Savings: Minimizes penalties associated with non-compliance and financial mismanagement.
We have identified the top 10 benefits of proper payroll management in Nigeria in this article.
Common Payroll Mistakes Nonprofits Should Avoid
- Misclassifying Employees: Treating full-time employees as contractors to avoid payroll taxes can lead to legal issues.
- Failing to Remit Deductions on Time: Late remittances can attract fines from regulatory agencies.
- Inconsistent Salary Payments: Payment delays can lead to staff dissatisfaction and decreased productivity.
- Poor Record-Keeping: Missing payroll documentation can cause audit issues and donor distrust.
Conclusion
Like most organizations, nonprofits in Nigeria need to file payroll correctly. Not doing so may result in legal trouble and damaged reputation. As a start-up or small-scale nonprofit organization handling your payroll processes in-house, you need all the help you can get.
Managing payroll for nonprofits in Nigeria requires careful planning, compliance with labour laws, and efficient payroll systems. By automating payroll processing, maintaining proper records, and ensuring timely payments, you can enhance transparency, retain talent, and remain compliant with regulatory requirements.
How we can help…
Partnering with a reputable payroll outsourcing provider like Workforce can further simplify nonprofit payroll management, allowing focus on your mission while ensuring financial efficiency. By prioritizing payroll best practices, your nonprofit organization can build a sustainable workforce and drive greater social impact.
With over 20 years of partnering with organizations across Nigeria and Africa to ensure seamless payroll processing, we are your go-to. Reach out to our payroll management consultants to know how we can support your mission by sending an email to hello@workforcegroup.com
