Payroll costs, including salaries, benefits, and taxes are often the largest expense incurred by nonprofits. Yet many nonprofits do not see payroll as high risk for fraud, non-compliance, or errors. Here are a few areas you need to think about as you evaluate your payroll processes and review your payroll.
- Personnel files must include signed, approved pay rates, as well as required federal and state forms (Form W-4, Form I-9, New Hire Forms, etc.). Make sure any pay-rate changes are made promptly, accurately, and are reviewed by someone outside of the payroll function. Keep your personnel records in a safe and secure location.
- Payroll taxes must still be withheld from nonprofit employees’ paychecks. Social Security taxes and Medicare taxes are required to be withheld from each paycheck, with Federal and State withholding taxes optional depending on earnings and allowances selected by the employee. In addition, the nonprofit must match Social Security and Medicare, as well as pay into the state unemployment system. (Note: nonprofits are not subject to federal unemployment taxes.) Payroll taxes MUST be paid to federal and state governments on time, with due dates dependent upon the amount and timing of payroll. Quarterly reports and annual W-2s must be prepared. Make sure you know your due dates!
- If your nonprofit is fortunate to provide benefits, you must pay the premiums on time to the insurance carrier. If you offer retirement, any amount withheld from your employees paychecks MUST be paid to the retirement plan on time. Best practice is to pay this the same time you pay your payroll taxes.
- Document the steps for your payroll process and review these periodically. Make sure you have an individual with the financial skills in the payroll area to ensure accuracy and compliance. Also, make sure you have at least 2 individuals with knowledge of the process, in case one person is not able to handle payroll for a pay period or more. Segregation of payroll duties, including: the recording, authorizing, and disbursing of payroll is important to alleviate the risk of misappropriation of assets. Could someone change their own payrate and it go undetected?
- Outside payroll providers can provide the peace of mind you need to ensure your payroll taxes are paid timely. BUT always remember, it is your nonprofit’s responsibility to make sure your payroll provider is making those deposits accurately and on time. Make sure you review every payroll report you receive and check against your records.
- Be careful with the distinction between independent contractor and employee as the payroll tax consequences are significant.
The basic considerations from the Internal Revenue Service include:
Behavioral: Does the nonprofit control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits?
Will the relationship continue and is the work performed a key aspect of the business? Detailed questions can be found on the IRS website.
Contact Gilliam Coble & Moser, LLP at 336-227-6283 for more information regarding this topic and other nonprofit issues.