Nonprofit must pay payroll taxes

Nonprofits may be exempt from paying income taxes, but they still need to pay payroll taxes. Taxes withheld must be remitted to the government and 1099 must be filed for contractors.

When payroll taxes are not paid up, people working for the nonprofit may be personally liable for the money.  Yikes!  Read more about this at:

https://www.nolo.com/legal-encyclopedia/what-happens-if-nonprofit-fails-pay-payroll-taxes.html

 

 

Kindle Version Available

Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:

http://amzn.to/2GF2E8W

 

#Nonprofit Jobs Tips

If you’re interested in working with a nonprofit, the best approach is to volunteer first to figure out the culture and style.  If that doesn’t pan out, then it’s time to search for jobs online.  Besides general job websites like monster.com, you could narrow your search to websites that specialize in the nonprofit sector. Below are some options:

https://www.workforgood.org/jobs/

https://www.idealist.org/

https://www.bridgespan.org/

https://www.philanthropy.com/

https://careers.councilofnonprofits.org/

http://nonprofit-jobs.org/

To get a job at a nonprofit, a passion for the organization programs is a must.  Read up on it online, including the latest news on it in the media to emphasize your interest.  Next are some issues I noted many people do when trying to get a job with a nonprofit.

Dress formally — Don’t assume that just because it’s a nonprofit, you can go in wearing sweatpants, for instance.  Proper dressing shows respect and professionalism. It’s better to overdress since most employers understand that people want to make a good impression.

Don’t talk badly about other organizations — This could be done saying that a place has a toxic environment or something more subtle.  Sometimes when giving examples of situations, people slip and show issues that should have been kept private.

Check tax returns at guidestar.com — Tax returns- 990- can show how the organization is doing financially, details about each program, and even salaries of board members and the five highest employees. Look at page 7- Part VII.

Happy job hunting!!

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

 

 

 

 

 

Nonprofit Payroll Risks and Controls

Some organizations run on volunteers only, but many need employees to perform certain tasks. Since having employees is costly, it’s no surprise that payroll is usually the biggest expense in the financial statements. Running payroll can be difficult, and while many organizations contract out outside payroll services, some prefer to process it in-house. Some key risks and controls with payroll are:

Risk: Time sheets could contain wrong information.

In many organizations receiving government funds, everyone files time sheets—even the president—to support charging grants “real” salaries rather than estimated/budgeted ones. Fortunately, many organizations use computerized timekeeping devices and time sheets that once implemented, reduce errors and confusion significantly.

A traditional internal control is for nonprofits to require supervisory approvals on time sheets (manual or electronic) to make sure hours and overtime are authorized. Auditors typically verify if the time charged to a grant was allocated and authorized properly. If the auditor finds errors or no time sheets, or time sheets with no approvals, the scope of the audit is likely to increase, becoming more expensive.

Risk: Employees may be fictitious.

Each employee should file the proper paperwork with human resources and should visit the HR department personally. I know of a case where a program supervisor “hired” a relative part-time who was a “ghost employee.” The nonprofit paid the “employee” for six months, while the supervisor cashed the paychecks.

It was only after a problem with the time sheet of this person (all fake) that the human resources manager got involved, and the fraud was discovered. So, it’s crucial for HR to see and meet with all employees, including part-timers to be sure they’re real and are actually working for the organization.

Risk: Unauthorized payroll changes or increases happen.

To make sure payroll records are correct, department managers should review and sign off payroll registers regarding their department at least once a quarter. Many department managers get the dollar amount of their department’s payroll expenses through regular internal financial reporting, but not the details.

So, having managers verify payroll numbers, overtime, sick days, vacations, etc. is very helpful in keeping it all correct. If they see someone claiming overtime that the manager didn’t approve, he or she can follow up on it.

Controllers or accounting managers should review payroll registers and change reports to make sure the persons running payroll aren’t paying themselves unauthorized overtime or salary increases—a fraud I witnessed that could have been prevented had the controller taken a look at payroll reports regularly.

Risk: Paying terminated employees by mistake.

One issue I often see with payroll relates to nonprofits paying terminated employees because payroll staff didn’t know about the terminations. Once paid, it’s tough to get the money back.  So, it’s important for human resources and managers to notify the payroll department when people quit or are let go. Staff may need to process final checks and update the payroll system.

Nonprofits may implement policies and procedures, including a checklist to follow when employees leave. Many details are involved, such as COBRA requirements that need to be handled correctly or the organization could be liable for fines.

Risk: Payroll information may leak.

Confidentiality is essential with payroll records. Nonprofits must keep all payroll-related documents, including time sheets, in safe, locked filing cabinets where only a few selected authorized personnel are allowed in. Similar security measures must be considered with access to the computerized payroll systems that should be very limited.

Nonprofits should hire people who are discreet and don’t discuss confidential matters with others in the organization. They should avoid using email when mentioning any sensitive payroll information because the system may not be secure enough.

Excerpt from book Nonprofit Finance – A Practical Guide Second Edition — https://goo.gl/M563u9

 

No Audit Freak Out

One of the most common audits of a nonprofit organization is the one performed by an independent CPA firm, usually, every year. This work may be a requirement for many grantors who want assurance that the funds have been used properly. Auditors may ask detailed questions or require certain information that may not be readily accessible. However,  there is no need to panic – be prepared and understand the process, which tends to be the same every year. Some tips below are to help you deal with the audit, which is one of those processes that many organizations go through, not just yours.

Tip #1– Sometimes staff with not much experience conduct the audit,  so, try to help them and show them the way, or they may get lost and the audit may take longer. The idea here is to have a helpful, not a defensive attitude. It can be frustrating to have to do this every year with different audit staff, but it’s part of the game. The good news is that it’s common for a former team member in an audit to return the following year as a Sr. or Supervisor so that you won’t have to train auditor again.

Tip #2- Be sure to have all the reports and items mentioned on the audit list, often given to the client a few weeks before the audit. If you don’t have all, call the CPA firm and let them know. Maybe you have other reports or items that can be alternatives to what’s on the list. Your audit may also be postponed until you have all the documents. Most accounting firms schedule nonprofit audits a few months during the year, so you may have some flexibility there.

Tip #3– Hire temp workers or volunteers on an as-needed basis to get all the documentation done, prepare worksheets, and help with filing, copying, and other tasks. Some organizations also use temps to assist with the day-to-day activities while the accounting folks are busy with the auditors. Your accounting staff may not be able to do their regular jobs and at the same time give auditors the attention and information they need. So, help at the right time can lessen the stress. Usually, having temps do a specific task, such as entering invoices for payment, works the best because the work is repetitive and training time is minimum. If you’re lucky to have an accountant on your board or as a volunteer, you can give him or her more involved financial tasks.

Tip #4– Communicate often with the manager responsible for the audit to identify issues or bottlenecks. Sometimes auditors use too technical language that the nonprofit staff may not understand and panic. Or maybe there’s a problem in finding information or explanations for certain transactions that you may be familiar with. The goal is to have a quick, clean audit with no major issues or conflicts. The quicker you know of problems, the smoother the process will be.  Make a point to contact the manager at least once every few days.

Tip #5- Notify everyone in the organization of the upcoming audit, since auditors may need to talk to people in other areas of the nonprofit, such as programs and HR. Warn managers and staff that they may need to present certain things to the auditors, including showing them confidential HR and payroll files and reports. Since auditors usually request the same items and calculations, such as vacation accruals every year, the requests shouldn’t be that surprising. But it’s always good to let people know beforehand.

Other Considerations -Freaking out with questions asked by auditors makes no sense— usually, they follow a pre-set program that may not fit your organization 100%, so you can explain to them the situation in a respectful way and offer alternatives.  Ask the auditors what goals they’re trying to get at.  Maybe they are looking at mitigating a risk that doesn’t really apply to your nonprofit, so let them know about it. CCH – Wolters Kluwer Audit guides, for instance, are very popular with many CPA firms that use their audit programs to guide them through this process.  If you’re interested, you could buy the guides, even if it’s expensive.

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

Nonprofit Finance and Management Explained

The second edition of my book, “Nonprofit Finance: A Practical Guide,” is out.  It includes detailed coverage of FASB update regarding reporting, details about liquidity and other details effective in 2018.   For example, the official financial reporting will show only two net assets, but internally, a nonprofit should maintain the three net assets separately and combine the temporarily and permanently restricted for reporting only.

Internal controls are covered in detail for cash, payables and computerized systems, giving ideas about how to minimize certain risks specific to the nonprofit sector.

Like the first edition, nominated for a McAdam Book Award, this second one has many examples and suggestions based on real-life experience, not just theories.  It was written with both the accountant and the non-accountant in mind, so that people of different backgrounds can benefit from the material and put it to good use right away.

You can check the new edition at https://goo.gl/M563u9

Do You Know What a Pledge Really is?

Most nonprofit organizations are familiar with pledges, as people, businesses, and foundations make promises to give in the future. Many times these promises are the results of fundraising campaigns or appeals. Depending on the situation, the pledge could be for a general or specific purpose, such as for a new child-care program.

Pledges, both short and long-term, may be shown as “Pledges” or “Unconditional Promises to Give” on the Statement of Position.

Promises to give may or may not be real. For example, if a person notifies an organization that he is including the nonprofit in his will, this isn’t a pledge. The same situation exists if someone promises to pay a certain amount twenty years in the future—it’s not a pledge. In both cases, donors can easily change their minds; circumstances can change, making the promises hard to keep.

  • Promises to give must have no conditions to be recognized as real pledges.

Note that  conditions are different from restrictions:

  • Conditions determine if the amount will be given or not
  • Restrictions determine how to use the proceeds

Suppose there is a condition associated with a pledge — the money will be given only if a relative recovers from a serious disease. In this situation, the nonprofit records the pledge only after the condition is met, that is, the person recovers. This situation is tricky since a lot can change, and it makes good sense not to recognize this promise until it’s paid. Same if the condition is the occurrence of a major disaster in California— this pledge is conditional, and the nonprofit should not record it. Once a disaster hits California, then the pledge may be valid.  Managers should use common sense here.

Another example of a condition is a company matching donations made by employees. If an employee gives $10, the firm would also pay $10, matching the donor’s amount. As the employee donates, the condition on the firm’s pledge is lifted. Therefore, each time an employee pays, the organization recognizes a matching pledge.

The wording of a pledge is crucial to determine when a promise is conditional or just restricted. The key word in conditional pledges is “if.” Those are usually not recorded as real pledges by the nonprofit, although they may be filed for future follow up.

Once a pledge is determined to be valid, it can be unrestricted or restricted to a particular time or event, such as for a reading program happening in the future. The classification depends on donors’ intentions. A pledge made on a general appeal can be safely assumed to be unrestricted, while others specific to an individual program should be considered restricted.

Organizations must have pledge documents in writing whenever possible. If a donor doesn’t want to acknowledge the pledge, a thank you letter confirming the gift is a good idea. The letter can be simple and brief but should leave no doubt about the existence of the pledge and its intent.

Issues usually associated with pledges are collectability, pledges paid in installments and privacy of donors, all discussed next.

Collectability

As promises are to give in the future, pledges may not be all collectible, and most organizations aren’t going to sue to collect promised amounts because of PR issues. Therefore, by its nature, pledges are riskier than regular accounts receivable. As expected, a pledge due in a year is less risky than another one due in two or more years since a lot can happen in a year or longer.  Fundraising staff usually follow up on promises to pay, diplomatically, of course.

Due to the risk of default on pledges receivable, an Allowance for Uncollectible Pledges account is employed. It may be created and adjusted every year based on history. If an organization experiences 15 percent in uncollectible pledges, for instance, this percentage may be applied. It’s the same concept as the Allowance for Uncollectible Receivables in the for-profit world.

A strange situation with promises to give has popped up recently with a young, wealthy supporter promising to give a significant amount to an organization. As expected, people got excited, made a public PR deal with the pledge and started planning how to spend the money. Low-and-behold — it was all fake. The guy liked the attention, but was not wealthy and had no intention to fulfill the promise. The organization lost a lot of credibility with this deal. So, I recommend that nonprofits set up policies and procedures to evaluate significant pledges and to refrain from announcing it and making plans for it until all checks out.

Installments

Besides lump sum promises, nonprofits could also have pledges payable in installments; for example, a commitment of $25,000 payable at $5,000 a year for five years. In this case, organizations are to discount the payments to present value using a reasonable percentage. The discount is amortized as in the for-profit world. FASB ASC 820-10 (FASB 157) relates to this topic to be sure organizations evaluate pledges in a fair and acceptable manner.

  • Government and other grants aren’t considered to be pledges and are presented separately in financial statements.

So, if an organization receives a pledge of $30,000 payable in 5 years, apart is considered to be current pledge receivable, and the rest is non-current. In addition, revenue is recognized along with a discount and the allowance account. Don’t double count pledges – once as revenue when the promise is made and again when payments are made.

Privacy

Many times big donors want to keep their donations and personal information private. To this end, nonprofits should implement proper care so that the donor is acknowledged, donations are recorded, and the donor’s identity is kept secret. So, to assure privacy, donor databases need to be kept secure. Only a few people should possess access to the donors’ records.

As an example, a nonprofit organization I worked with had celebrities donating significant amounts of money, and they didn’t want their names, email addresses or other information available. Therefore, instead of inputting the real names and information in the database, the organization used the names “Anonymous 1,” “Anonymous 2,” etc. The nonprofit kept the real names and personal information under lock and key in a file cabinet accessible only by a couple of people. This low-tech setup worked well.

Note that a pledge is assumed to be a donation, not an exchange, so FASB ASU 2014-09 Revenue from Contracts with Customers doesn’t apply.

 

 

( Excerpt from “Nonprofit Finance A Practical Guide– Second Edition)

Overhead Essentials

If the program is the heart of a nonprofit, overhead is its backbone. Overhead is known as general and administration costs and, in some circles, it includes fundraising as well. Since the definition of overhead may vary, you should be clear on what it means. For example, in government agencies, fundraising is usually not part of overhead, while other entities consider anything besides program costs, overhead.

Overhead rate on grants –Many grantors use “overhead rates” to reimburse nonprofits for administrative costs. This rate, a percentage, is usually calculated based on prior financial numbers and negotiated with grantors. The calculations can be complicated and detailed.

To decrease this complexity, the Federal government pays nonprofits a standard 10% overhead rate on their grants. This means that after reimbursing direct costs, it adds a 10% for overhead. If direct costs are $100, the reimbursement will be $110. This setup may be fine for smaller organizations, but not for larger ones that may negotiate a higher rate. The idea is for the overhead rate to cover costs that cannot be allocated easily to a program, like an electric bill for a building that houses many programs.

This rate should be reviewed every year to make sure that indeed the overhead rate is at least equal to actual overhead costs. If the rate of 10% reflects $100,000, but the actual overhead costs are $120,000, then the organization may need to negotiate a higher rate with the grantor for the next fiscal year.

Overhead requirement on grants and gifts–Another reason overhead is important is that it must be part of every grant proposal or gift. Some nonprofits have funds restricted for certain programs only with nothing much left over for overhead, forcing many to fundraise for overhead mostly. It’s a strange situation where an organization may have money to fund research programs, but cannot pay its phone bill and other basic needs. Quite real and disconcerting situation.

To avoid this issue, nonprofits have started to require a percentage for overhead to be included in the gift or grant or they cannot accept it. I have seen a large nonprofit say no to a large gift because of this issue.

Overhead should NOT be zero –Overhead exists for a reason and if it shows as zero on financial statements or tax forms, you have a problem.  It could be an accounting error in classification or not understanding what overhead is. Whether fundraising is included or not, there should be something allocated to overhead in items like insurance policies, salaries or supplies. Even if all employees are unpaid,  expenses exist that cannot be specifically assigned to a certain program and are part of overhead. While it’s understandable the wish to keep overhead costs low, it’s not realistic to keep it at zero.

The first thing to think about when someone mentions overhead is to understand what it means. That is very important to make sure everyone is talking about the same thing. The overhead definition and calculation may vary among grantors and even government agencies. So, ask questions about it, don’t assume anything and don’t forget about it in proposals.

 

Check out the book”Nonprofit Finance: A Practical Guide- Second Edition First edition nominated for a McAdam Book Award.

2018 Changes to Nonprofit Reporting

Financial statements of nonprofits will look at bit different in 2018. The changes may not be that noticeable to the untrained eye, but they will happen due to FASB (Financial Accounting Standards Board) attempt to make financial reporting easier to understand. Even though current reporting rules have been in place for over 20 years, many people have complained that the financial statements of nonprofits are confusing not providing enough information to assess liquidity and ability to pay bills. This update, known as ASU 2016-14, focuses on these concerns.

“Not-for-profit organizations that will be affected include charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, and cultural institutions, among others” (FASB.org)

The main changes regarding this accounting update are:

Only two classes of net assets

As you may know, net assets are elements that hold information about nonprofits, accumulating increases and decreases in revenues and expenses throughout the years. A nonprofit account always belongs to a net asset, traditionally classified as unrestricted, temporarily and permanently restricted. No more. After this update, we will have only two classifications of net assets:

1-Net Assets Without Donor Restrictions, comparable to the “old” unrestricted net asset
2-Net Assets With Donor Restrictions, combining the “old” temporarily restricted and permanently restricted net assets.

So, instead of reporting on three net assets, as has been the case until now, with statements showing three columns or lines, there will be only two net assets.  It doesn’t mean that the accounting of temporarily and permanently restricted net assets need to change internally, but these are now combined in the “official” financial statements.  Most likely, the reporting on the accounting software will need to be modified to accommodate the update requirements.

Underwater value of endowments 

Organizations may receive endowment funds that are held for long-term or perpetuity. When the fair market value of such investments is lower than the original value of the gifts, they are said to be “underwater.” Unfortunately, that has been the case with the volatility of the stock market and other losses. Currently, such losses are reported under the unrestricted net assets area. However, after this update, accumulated losses are to be shown within the endowment fund — net assets with donor restrictions.

Detailed information about endowments is also required as disclosures on the official financial statements, such as the current fair market value of the endowment, any amount required to be maintained, and any deficiencies of the underwater endowment fund.

Liquidity

Liquidity is the ability of a nonprofit to pay its bills, a valid concern to many donors and grantors. As many donors restrict gifts, it can be hard to determine if an organization has the money necessary to pay its current bills. Financial flexibility is essential for any nonprofit to be viable long-term, so this update requires disclosures about how an organization will be able to meet its financial obligations for the next 12 months. Specific resources available should be disclosed, such as prior year’s reserves and any money restricted by the board.

For more information, check out the book “Nonprofit Finance: A Practical Guide –  Second Edition”

Challenges in Financial Planning of Nonprofits

Nonprofits need to plan for their future as any other firm. However, because of the nature of nonprofits, planning can be quite a challenge. While for-profits rely on the sale of goods and services, nonprofits must count on grants and donations for operations. Expenses are mostly related to programs and are very dependent on the income stream. Since the point of a nonprofit is not to generate profits, many don’t have that much left over after they spend all revenues. So detailed planning is a must. Some of the challenges of planning for nonprofits are:

Income uncertainty

Bills are a sure thing, but income may be received after a campaign, a gala event or gifts and grants. Nonprofits may not be able to ascertain the amounts and timing of such income as donors that may have given certain funds in the past may not be able to keep on giving at the same level. Grants may be cut or delayed with no prior notice. Also, grant income may decrease if auditors find noncompliance items and those could be substantial and unexpected. The key here is for the organization to learn of any changes in income stream the earliest possible time to be able to adjust for those.

Because of this instability, it’s always good for a nonprofit to keep a “cushion,” also known as a reserve to be used when the unexpected hits. Add a bit to budgeted expenses, just in case, and contact major donors and grantors to verify any changes in revenue.

Lack of financial knowledge

Many nonprofits are headed by kind people with the best intentions and good contacts. But too often the organization lacks financial education and experience. Basic financial concepts may be missing. Sometimes people are not aware that they need help in this area until something happens that doesn’t make sense to them. This vacuum can pose additional challenges on planning since many concepts may be new to management.

Boards of directors must have people with financial expertise to help in this process and provide guidance in these matters. Also, management should make efforts to learn about accounting and finance so that they can make right decisions. Usually, having a bookkeeper with some experience with nonprofits is not enough to see “the big picture.”

Lack of Time

Typically, nonprofit managers wear many hats, are hands-on, and there is no time to focus on planning and financial matters. It’s hard to think about financial planning and strategy when so many things need to be done today. The result is that usually information is pulled in a hurry and not analyzed, resulting in poor planning and errors.

It’s a good idea to have appointments and set schedules for managers to talk about planning and strategy, A bookkeeper or accountant can only do so much in financial planning. He or she needs input from various areas such as from managers regarding new programs and fundraising folks about new grants or changes in donations.

Planning for nonprofits pose particular challenges but can be done. Management can learn from past mistakes and try to get a better planning model moving forward.  The concept here is that nonprofits must take planning seriously and keep on improving it. Donors and grantors like to see a nonprofit planning ahead and not just putting off fires.

 

You can check out my books at:

Nonprofit Finance: A Practical Guide -Second Edition — First edition was nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited