How to Manage Payroll as a Nonprofit

by | Nov 4, 2020

According to the United States Bureau of Labor Statistics, 12.3 million people are employed by nonprofits. That’s a lot of employees to manage!

Payroll is a critically important part of running any business and nonprofits are no different. This guide will explore everything you need to know about how to manage payroll for your nonprofit with accuracy.

Finding Payroll Services

Firstly, your organization needs a payroll manager and software to manage all the employee data. What is a payroll manager? This is someone specifically trained to manage the ins and outs of all your payroll needs including taxes and employee benefits.

Your organization likely needs to invest in a quality portal for payroll services. If your organization is really small and brand new, you might be able to get away with just a spreadsheet, but it’s not the best practice for accuracy and data transparency.

Payroll management isn’t easy and if you’re asking yourself how to manage my payroll, you’re definitely in need of professional assistance. Besides knowing the intricate details of payroll tax management and other tricky laws, these services can cut checks, facilitate direct deposits, and even track paid time off.

The best payment systems are two-sided so that employees can also log in and download their own data when they need it. Most of them even have smartphone apps!

This is a great resource for finding the payroll system that fits your organization. Paying a monthly cost for these services is well worth it in the long run for you and your employees to have a good work experience.

Getting Started With Payroll

As you get ready to start paying your employees, you should ask yourself a few key questions. This will help make tax season easier and ensure there aren’t any issues with your employees!

What Are Your Benefits?

Keeping track of all the information for each employee’s benefits can seem like a ton of work, but it’s crucial that the correct amount of money is removed from your employees’ pay checks each month.

Employee benefits might include, but aren’t limited to:

  • Health Insurance
  • Health Savings Account/Flexible Spending Account
  • Dental Insurance
  • Vision Insurance
  • Retirement Plan
  • Life Insurance
  • Transportation Fund
  • Paid Time Off
  • Sick Time

All of these benefits are up to the employer to offer, but every organization should verify their exact requirements to provide health insurance to their employees under the Affordable Care Act. This also may stipulate what portion, if any, of employee health insurance your nonprofit is required to cover.

Who Are Your Employees?

Do you hire contractors or part-time staff? These workers may not have employee benefits and their payroll will need some tweaking. Contractor taxes also differ from that of full-time employees, so be sure to have all of this information prior to starting.

In addition to collecting W-4 forms from employees, be sure to provide all necessary paperwork for enrolling in health insurance and other employee benefits. Keep meticulous records on each employee both digitally and in hard copies.

How Are You Handling Payroll Taxes?

Tax season might be everyone’s least favorite time of year, but it’s crucial for your nonprofit organization to withhold the correct amounts for each employee for both state and federal taxes, as your state allows.

After you collect each employee’s W-4 tax form, input the data into your payroll software and be sure to verify this information with your employee.

Here is a list of some taxes your organization might need to withhold from paychecks and potentially match per dollar:

  • Local Income Tax: This pertains to cities, like New York City or Washington D.C.
  • State Income Tax: Some states don’t have this, like Tennessee and Florida. It depends where your nonprofit is located.
  • Federal Income Tax: The W-4 will let you know how much to withhold for each paycheck.
  • Worker’s Compensation: This is to protect your nonprofit from any injuries that could occur on the job.
  • State Unemployment Tax: This is a pool of funds that go to unemployment benefits.
  • Social Security: This supports those on social security benefits.

What Are My Legal Requirements?

In addition to your requirements to provide healthcare, your full-time employees have rights that you must adhere to according to the law.

For example, depending on your state, you may be required to offer a certain amount of sick days or vacation days.

You also may be required to provide paid or unpaid leave for new parents. Check with your nonprofit legal counsel to learn your particular state’s legal requirements before setting up your payroll system and employee handbook.

Tips to Manage Payroll

Part-time employees, full-time employees, and contract workers all rely on your ability to pay them on time and in full. While nonprofits might be exempt from certain taxes, they still function as a business and owe their employees a progressive payment system that accommodates all their needs.

If you don’t want to hire a payroll service, here are a few more options.

Accounting Department: If your organization is growing rapidly, consider forming a department to handle all of the financial information in-house with the help of software.

Hire a Bookkeeper: Bookkeepers have an extensive knowledge of payroll and financial systems. They can either be someone you hire to be in-house, but if your organization is small it is worth investing in a company and being one of their clients. Then, your bookkeeper is only used when needed. This is a great way to cut costs while taking the burden of payroll off your own plate while ensuring accuracy for employees.

Online Payroll/Software: If you’re brave, scrappy, and financially inclined, try managing all of this on your own.

Finalizing Employee Payroll

Now that you have all the insider tips on how to manage payroll for your nonprofit, contact us for more information on how we can help your nonprofit have efficient and transparency pay processes.

After all, you should focus on your mission and we’ll handle the rest!


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