Payroll software is a program that helps small businesses and nonprofits to manage their pay. This software will easily calculate paycheck, overtime, benefits, and commissions with just a click of a button.
Payroll is not easy, especially if you are working for an organization that has over 20 employees. There are many complexities with payroll, but there is also much software you can use to simplify the process. This software can easily help you set up payroll for your nonprofit organization or for your small business. What is payroll software? Payroll software for a nonprofit organization is any type of payroll software that is meant for use by nonprofit organizations. As a nonprofit organization, you face many challenges and one of them is administering the payroll system.
PROCESS PAYROLL SIMPLY AND QUICKLY
Your payroll software will need to be able to handle all of the complex pay scenarios that do or can occur at your organization. This may include different pay rates, labor cost allocations, and shift differentials that all must be calculated before payroll can be processed. Software that can handle and automate these calculations can help ensure accuracy and compliance every time payroll is processed.
HANDLE DIFFERENT PAY RATES AUTOMATICALLY
If your nonprofit organization is like most, your workforce is made up of exempt and nonexempt employees. Some employees may split their time between different programs, departments, or shifts that are paid at differing rates. You may have certain special pay rates, secondary pay rates, or other shift differentials that all need to be accounted for.
DISTRIBUTE LABOR COSTS SEAMLESSLY
With a unified timekeeping and payroll system in place, your nonprofit will be able to maintain a bird’ eye view of all of these factors to ensure everyone is paid fairly. In fact, many of these differentials will be applied automatically, based on the individual employee’s timekeeping. If an employee consistently works in multiple areas, labor costs can be allocated based on predetermined percentages. Or, if their time is more variable, employees can allot their time to the appropriate cost center through their time and attendance dashboard.
Nonprofit Tax Exemptions
Due to the nature of nonprofits, there are different tax exemptions to be aware of. However, not all nonprofits have the same tax exemptions. A fully exempt nonprofit may be exempt from most federal income taxes and some state taxes. Not all nonprofits will be eligible for both of these exemptions. The most common tax organization for charitable nonprofits is 501(c)(3).
According to the IRS website, “to be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.” If your nonprofit follows this tax organization, the organization will receive an income tax exemption, and donors may take a tax deduction for their donations.
Additionally, besides being a way of section 501(c)(3), there are a variety of other forms your nonprofit may be responsible for filing for exemptions. The IRS provides a full list of forms and instructions for exempt organizations.
Employee Classification
Do you fully understand who your employees are? What we mean by this is, are you sure you’re classifying your employees correctly?
While you may have a mix of full-time, part-time and hourly employees working at your nonprofit, there are special ways besides those categories that you need to classify your employees, specifically exempt vs. non-exempt. Misclassifying your employees can lead to larger payroll headaches.
Bonuses and Commissions
One way that nonprofit payroll differs from for-profit businesses is in the form of bonuses and commissions. In a for-profit setting, it’s common for employees to receive quarterly and year-end bonuses. Additionally, in a sales setting, many employees get paid a commission. In the nonprofit sector, funds are collected for a specific cause. Therefore individuals internal to the organization are unable to benefit from the money it raises and won’t receive a bonus or commission.
Classifying Compensation: Employee or Contractor?
This is a biggie…and it gets asked about by clients on a weekly basis. That is, “Should I pay my staffers as employees or independent contractors?” 95% of the time, the answer is employee, regardless of any other extraneous information that gets tossed into the mix.
It is a widely-held belief that an employer has the choice under which status to pay its workers. The most common justification is the savings the nonprofit will experience if it doesn’t have to cover payroll taxes. The problem is, it’s not your choice. Even if your staffer agrees to be treated as a contractor, it may still be contrary to IRS and state regulations. The IRS, in determining whether or not a worker is a contractor or employee, looks at several factors. They are:
- Behavioral: Does the company 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, i.e., pension plan, insurance, vacation pay, etc.? Will the relationship continue and is the work performed a key aspect of the business?
The IRS also uses a multi-point test to evaluate such classification issues.
So what are the consequences of improperly paying employees as contractors? Plenty! If the IRS reclassifies your workers from contractors to employees, your nonprofit will be held liable for both the employer’s and employees’ share of payroll taxes (Social Security and Medicare), plus very expensive penalties and interest. Then the state comes along to take their share. This type of action, especially if it applies to multiple years, can put any business out of business.
Types of Payments: Fixed Compensation Vs. Variable Compensation
By type of payment, we mean things like straight salary or wages versus bonuses and commission. The IRS calls the latter non-linear compensation…and it isn’t too fond of it in a 501(c)(3) setting. For-profit companies can do this virtually without limitation. But for nonprofits, the IRS considers this a potentially open door to unreasonable compensation.
For example, Charity, Inc. hires two employees, John and Jane, who will be in charge of managing fundraisers. Each will be paid a small base salary, plus a percentage of the money raised at the event. Sounds reasonable, but the IRS says, “Not so fast!”
The reason makes sense when you consider the possible outcomes. Let’s presume that reasonable compensation if fixed, for John and Jane is $45,000 per year. Let’s further presume that instead, John has a base salary of $20,000, and receives 10% of all money raised. John goes on to raise $125,000 this year and is paid a total pay package of $32,500. It’s less than what his fixed compensation would likely be, so what’s the harm? Both he and the nonprofit are assuming the risk of John doing a poor or mediocre job.
The problem isn’t with John’s outcome. It’s Jane’s that is the problem. Jane also has a $20,000 base salary. But Jane has a stellar year and raised $800,000 for her employer. As a result of her success, Jane is awarded $80,000 in commission, for a total annual salary of $100,000. The problem is, Jane’s job doesn’t really square with a 6-figure salary. The IRS could determine this to be excessive, should they examine the organization’s books.
Employees should be paid according to the job description of the position. Not only is non-linear compensation often unreasonable by IRS standards, but it also opens the door to potential fraud, or at least improper conduct, as the employees have everything to gain by pushing the limits on fundraising.
Conclusion
The right payroll software can make a world of difference when running a business. This is especially true in the nonprofit sector. In fact, nearly every nonprofit accounting firm will advise their clientele to use a payroll system tailored to their needs rather than a generic option. With that being said, Payroll Software For Nonprofit Organizations can be used in any type of setting that requires employees to be paid on a recurring basis. It’s able to handle piecemeal payments, tips, and bonuses along with salary payments, federal and state disbursements, and deductions for workman’s comp insurance, health insurance, or retirement plans. A customized version