The Difference Between Traditional Payroll and a PEO for Nonprofits

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As a nonprofit leader, you’re constantly looking for ways to streamline operations and maximize resources. When it comes to managing your organization’s workforce, you have two primary options: traditional payroll services or a Professional Employer Organization (PEO). 

No matter which direction you end up going, it’s crucial to understand the importance of payroll compliance. As a nonprofit organization, there are many pitfalls around payroll and you need to be aware of the rules. 

To learn more about the do’s and don’ts around payroll, check out this resource. 

Traditional Payroll Services: The Basics

Traditional payroll services focus primarily on processing your organization’s payroll. This includes calculating wages, withholding taxes, and ensuring timely payments to employees. Many nonprofits handle payroll in-house or outsource to a payroll provider. Here’s what you can expect from traditional payroll services:

  1. Payroll Processing: Calculation of wages, overtime, and deductions.
  2. Tax Withholding and Reporting: Managing federal, state, and local tax withholdings and filings.
  3. Direct Deposits or Check Printing: Ensuring employees receive their pay on time.
  4. Basic Reporting: Providing payroll reports for your accounting and record-keeping needs.

While traditional payroll services can be cost-effective for smaller nonprofits, they often lack the comprehensive HR support that growing organizations need.

Professional Employer Organizations (PEOs): A Comprehensive Approach

A PEO takes a more holistic approach to workforce management. By entering into a co-employment relationship with your nonprofit, a PEO becomes the employer of record for your staff. This arrangement allows the PEO to offer a wide range of services beyond basic payroll processing. Here’s what a PEO typically provides:

  1. Full-Service Payroll: All the features of traditional payroll services, plus more advanced reporting and analytics.
  2. Human Resources Management: Assistance with hiring, onboarding, performance management, and compliance.
  3. Benefits Administration: Access to better, more affordable benefits packages typically reserved for larger organizations.
  4. Risk Management and Compliance: Help with workers’ compensation, safety programs, and staying compliant with labor laws.
  5. Training and Development: Resources for employee training and professional development.

Key Differences for Nonprofits

When deciding between a traditional payroll and a PEO, nonprofits should consider several factors:

1. Cost Structure

  • Traditional Payroll: Usually charges a per-employee or per-check fee, which can be more predictable for budgeting purposes.
  • PEO: Often charges a percentage of total payroll, which can be more expensive but includes a broader range of services.

2. Employee Benefits

  • Traditional Payroll: Your nonprofit is responsible for sourcing and managing benefits packages.
  • PEO: Offers access to better benefits at potentially lower costs due to economies of scale.

3. Compliance and Risk Management

  • Traditional Payroll: Provides basic tax compliance, but your organization remains responsible for most HR compliance issues.
  • PEO: Takes on much of the compliance burden, helping to mitigate risks associated with employment laws and regulations. This includes things like registering in new states when you hire employees.

4. HR Support

  • Traditional Payroll: Minimal to no HR support; your nonprofit needs to handle HR functions internally or hire separate consultants.
  • PEO: Comprehensive HR support, including policy development, employee handbooks, and conflict resolution.

5. Scalability

  • Traditional Payroll: Can work well for small to medium-sized nonprofits with stable workforce needs.
  • PEO: Often better suited for growing nonprofits or those with complex HR needs and remote teams across the country with complex compliance.

Considerations for Nonprofit Organizations

When evaluating your options, consider these nonprofit-specific factors:

  1. Mission Focus: A PEO can free up more time for your team to focus on your nonprofit’s mission by handling HR and administrative tasks.
  2. Grant Compliance: Ensure that either option can provide the detailed reporting often required for grant compliance.
  3. Volunteer Management: While not typically part of payroll services, some PEOs offer solutions for managing volunteers alongside paid staff.
  4. Seasonal Fluctuations: If your nonprofit experiences seasonal changes in staffing, a PEO might offer more flexibility in scaling services up or down.
  5. Board Oversight: Consider how each option facilitates financial transparency and reporting to your board of directors.

Making the Right Choice for Your Nonprofit

Ultimately, the decision between traditional payroll and a PEO depends on your nonprofit’s unique needs, size, and growth trajectory. Here are some guidelines:

  • Choose Traditional Payroll If:
    • Your nonprofit is small with simple HR needs
    • You have a stable, long-term workforce
    • You prefer to keep HR functions in-house
    • Cost is your primary concern
  • Choose a PEO If:
    • Your nonprofit is growing rapidly
    • You want to offer better benefits to attract and retain talent
    • You need comprehensive HR support and compliance assistance
    • You’re looking to reduce administrative burden on your leadership team
    • You are bogged down with the compliance of employees across multiple states

Remember, the goal is to find a solution that allows your nonprofit to operate efficiently while remaining compliant with all relevant laws and regulations. Whether you choose traditional payroll or a PEO, ensure that the provider understands the unique needs of nonprofit organizations.

At The Charity CFO, we understand the complexities of nonprofit finances and operations. While we specialize in nonprofit accounting and bookkeeping, we recognize the importance of efficient payroll and HR management in the overall financial health of your organization. If you’re struggling with payroll issues or considering a switch to a PEO, our team can help you analyze your options and make the best decision for your nonprofit’s future.

Don’t let payroll and HR challenges distract you from your mission. Focus on making a difference in your community, and let the experts handle the rest. Schedule a consultation with The Charity CFO today to discuss your nonprofit’s financial management needs and explore how we can support your organization’s growth and success.

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Clocking in and Out: Nonprofit Payroll Issues

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Clocking in and out each day is a fact of life for tens of millions of workers around the country. But it’s often not the case at many charities and nonprofits, which can gauge an employee’s value by their impact, not just their hours spent in the office. 

Still, there are some situations where more precisely recording when (or where) you’re working can be beneficial to the organization. 

Let’s take a closer look at how and when it’s best used.

Common Nonprofit Payroll Issues

Nonprofit Payroll issues can present a wide variety of problems, several of which can potentially be helped by implementing a clocking-in and out procedure. 

These include both under- and overstaffing. For the former, tracking time on the job can be helpful to ensure enough people are contributing and preventing overworked employees. For the latter, a time clock can provide firm data that will help reduce unnecessary labor costs. Both of these are vital to operating in the most efficient way possible, allowing the most funding and effort to go toward the nonprofit’s mission.

In other cases, it may not be up to your organization. Grant-funded programs often require employees to track their time to ensure money is being used appropriately. The minor inconvenience of clocking in and time tracking can be far outweighed by the financial benefits these programs offer, making it a no-brainer decision.

Unfortunately, time-related payroll issues aren’t the only ones confronting many organizations. One of the most significant is simple employee turnover. High turnover usually leads to higher administrative costs for onboarding and other training needs. It’s among the reasons why it’s so critical to find the right-sized staff and keep good employees for the long term.

Situations When Payroll Issues Make Clocking In and Out Necessary

There are a variety of circumstances where clocking in and out could become necessary for the sustainable growth of the organization.

1. Compliance with Labor Laws and Overtime Management

Like any other employer, nonprofit organizations are subject to labor laws and regulations. With accurate time-tracking, it’s easier to stay compliant with these laws. 

This especially applies when managing overtime. There is a lot of work to be done at nonprofits and many times hourly workers are required to work overtime. When clocking in and out is required, it helps manage these hours and ensure the employees are being compensated correctly. 

When determining which employees should be paid for overtime, a nonprofit should consider exempt vs. non-exempt employees and adhere to the classification of employee issues from their respective states and the Department of Labor. 

You can find more guidance on whether employees are eligible for overtime pay by visiting the Department of Labor’s website and consulting with your employment law attorney. 

Please note penalties for misclassification of employees and failing to pay them overtime are significant and nonprofits are not exempt from fines simply because they didn’t know.

2. Data Analysis, Budgeting, and Resource Allocation

Budgeting and resource allocation are essential for nonprofit organizations. To get these things right, data analysis has to be done correctly. Time-tracking data can be used for:

  • Evaluating workforce productivity
  • Making informed decisions about staffing and scheduling
  • Gauging labor costs

3. Grant Funding and Compliance 

As mentioned previously, many grant-funded programs often require employees to track their time to ensure money is being used appropriately. If labor costs are part of the grant agreement, time-tracking will most likely be required. 

If this is the case and time isn’t properly tracked, it could lead to revocation of the funds. 

4. Accountability

Time tracking holds employees accountable for their work hours. While you don’t want them to feel like they are under a microscope, you can provide the valuable reasons listed above to reiterate the importance. 

This also will give them a good idea of how and where they spend the most time, which can improve their overall productivity. 

Quick Tip: Use Time-Tracking Software to Optimize Efficiency

A time-tracking software will enhance efficiency, transparency, and compliance for your organization. Here are a few pointers for successfully adopting a time-tracking software: 

  1. Define your objectives for the software and make them clear to the team and stakeholders. 
  2. Provide training, set processes, and create clear policies for time-tracking using the software. 
  3. Follow through, evaluate, and adjust the software when necessary. 
  4. If possible, integrate the time-tracking software with your payroll system to streamline the process and reduce the risk of errors. 
  5. Require all employees to log their time, regardless of whether or not they are hourly or salaried employees. By doing so, you can collect better data on your entire staff.

Search for Guidance on Managing Payroll Issues

What many new nonprofit leaders might expect to be a mundane administrative task can often become a serious headache for organizations. Nonprofit payroll issues can have dramatic and negative impacts on the organization as a whole, robbing leaders of attention and time in addition to contributing to waste. 

Time-tracking, in some cases, can be the best solution for mitigating these issues and improving efficiency throughout the organization. 

However, if you run into a nonprofit payroll issue that time-tracking can’t fix, getting help from experienced professionals like those here at The Charity CFO is a far easier, faster, and less stressful way to reach a better result. 

We can help spot potential issues, present solutions, and advise your organization on the best ways to implement them. Contact us today to get advise on how to make your accounting and payroll solutions easier. We work with numerous payroll platforms and are happy to look at yours to see if there is a simpler way to get better results.

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What to expect from nonprofit payroll services

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Managing payroll for nonprofit organizations comes with unique requirements and considerations. Ensuring that your nonprofit payroll services are up to the task of withholding payroll taxes, complying with grant regulations, and ensuring compliance and transparency can be a huge lift. 

Finding the right person or organization to handle the monumental task of payroll services will enable you to rest easy knowing that this task is in good hands and that your employees and donors are confident and happy with the results. 

In this article, we will explore the distinct payroll requirements for nonprofits. Understanding these nuances will help your organization effectively manage its payroll processes and avoid potential pitfalls.

Unique Payroll Requirements for Nonprofits

Withholding Payroll Taxes

While nonprofit organizations are generally exempt from federal income tax, they still have payroll tax obligations as it relates to their employees. Nonprofits must withhold and remit payroll taxes on behalf of their employees, including federal income tax, Social Security, and Medicare taxes in order to remain compliant with tax regulations. 

Using Grants to Pay Employees

Organizations often rely on grant funding to support them in carrying out their mission. Sometimes portions of these grants are awarded specifically for personnel costs, or can be allocated to those if employees are directly working on the grant-related projects. In these scenarios, it is cruel to effectively track, document, and allocate timesheets and grant-funded payroll separately to ensure transparency, accuracy and responsible use of grant funds.

Reviewing Executive Salaries

Nonprofit organizations must carefully manage executive compensation to maintain public trust and meet the legal requirement of the IRS to pay executives a “reasonable” salary. Organizations should establish a formal process for reviewing and determining the executive salary based on industry benchmarks.

Minister Pay

In religious or faith-based organizations, paying ministers and clergy involves specific considerations as well. They may often be classified as self-employed for tax purposes. However, the organization may still be required to report compensation and file appropriate forms depending on circumstances. 

Form 990

Filing your annual information return can be a huge undertaking and also requires the completion of important payroll details from throughout the year including payroll expenses, employee benefits and executive compensation. Accurate and thorough completion of Form 990 is crucial for nonprofits to maintain their tax-exempt status and showcase their commitment to transparency and accountability.

Common Mistakes and Problems

Processing Errors

Misclassifying Employees

Understanding employee classifications (as an ‘employee’ or ‘contactor’ and further either ‘exempt’ or ‘nonexempt’), at both the federal and state levels, can be a confusing issue that can have serious legal and financial implications. According to the council of nonprofits, misclassifying a worker can result in the nonprofit owing significant penalties, back taxes, and backpay. 

Miscalculating Payroll

Mistakes in calculating payroll can result in underpayment or overpayment of employees, leading to dissatisfaction and potential legal issues. Implementing a reliable payroll software and ensuring your payroll service provider is an expert in nonprofit payroll can help to mitigate such errors and avoid costly mistakes. 

Missing Payroll Deadlines

This can have significant consequences, such as delayed payments to employees or non-compliance with tax regulations. Nonprofits must adhere to strict timelines for processing, remitting and providing the necessary payroll documentation to employees. 

Should my organization outsource payroll?

Outsourcing payroll can be an incredible relief to an organization as the burden of understanding all the nuances of this process is large. However, the additional layers of compliance, reporting, and allocations that nonprofits must adhere to makes the task even that much more complicated. When considering the prospect of outsourcing, ensure that you are working with a service that understands the intricacies of a nonprofit organization and will be on top of your compliance, reporting and payroll needs. Keep in mind what services you will need and what will be the most helpful support for your organization. Many services can complete a number of tasks including:

  • Recording employee timesheets
  • Performing payroll tax calculations on wages, vacation pay, termination pay, and banked time
  • Calculating organizational filings
  • Withholding employee deductions and making remittances to the government
  • Processing direct deposits of checks
  • Submitting employee tax forms
  • Preparing payroll journal entries

Overall, be aware that payroll management for nonprofit organizations requires careful attention to detail and thorough understanding of the specific requirements applicable to the sector. Charity CFO has experts that can help navigate the intricacies of nonprofit payroll and ensure that your organization is properly withholding payroll taxes, effectively utilizing grants for employee compensation, conducting comprehensive reviews of executive salaries, adhering to regulations concerning minister pay, and accurately completing your Form 990. 

This process helps ensure compliance, maintain transparency and demonstrate responsible stewardship of resources. By implementing best practices and seeking professional guidance when needed, non-profit organizations can streamline their payroll processes and focus on advancing their missions while remaining compliant with relevant legislative and regulatory obligations.

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