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

 

 

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

 

Yikes— Nonprofit fraud again….

It’s too common to hear that a trusted person has taken money from a nonprofit illegally. Even a little bit makes my blood boil. Stealing from any business is bad, but from a nonprofit that provides goods and services to a community is just despicable. The problem is that the organization staff and managers may not aware that something is amiss or odd. People are busy with their own jobs and day-to-day activities to focus on situations that may point to internal fraud. Ghost employees and unauthorized overtime pay come to mind…

Ghost Employee

A ghost employee situation happens when someone is hired and paid, but he or she doesn’t really exist and, not surprisingly, never shows up for work. But nobody notices it. I have this happening with a nonprofit program for youth where a manager hired this new person, Mary, who filled out timesheets and was very, very quiet.  This manager was an old-timer with the organization and could control many aspects of the program, which was located in a different building. When asked, she would give glowing reviews of Mary, a great find.

This situation went on for a few months. Mary was too busy to show up at the HR office to sign papers and the manager would take all to her, as to not inconvenience the HR dept. that was busy with other activities. Paychecks and other stuff were always picked up by the manager as well. Things were going well for Mary, until someone in HR had to talk to her about benefits. And she was nowhere to be found. Actually, Mary never existed.

The manager used a relative’s name and social security to “hire” Mary.  In fact, the manager was cashing all payroll checks after Mary would endorse them to a “business checking account” the manager had.

This ruse may not have worked with a smaller nonprofit, where everybody knows everybody, but it can happen with large ones that operate in various locations and have many employees in various programs. What can be done to avoid this situation?

1- HR should meet every employee and match the face with a drivers’ license or other identification. If one cannot meet personally, then at least a video talk can be utilized.

2- Run background checks on all employees. In the case of Mary, for example, the last job the real one had was in the seventies, so a background check would have helped to identify strange jobs or situations that may raise suspicion.

3- If a nonprofit is large enough to have an internal audit department, auditors should always check on new hires to make sure they are working where they are supposed to be.  They also could personally meet all employees.

4- Payroll should distribute checks or check stubs to employees personally at least once every quarter or year. The point is to meet new employees.

5- Watch out for employees who claim very little or nothing to be withheld in taxes. They could be just fake employees used for someone else to cash in.

Unauthorized Overtime Pay

This type of theft happens when someone gives him or herself a bump in pay by showing overtime that wasn’t authorized and never happened. While many organizations have policies regarding payment of overtime, this fraud keeps going on in government, for-profit and nonprofit sectors. Take Amtrak, for instance, that paid $200 million in overtime in 2014. Unfortunately, a lot has been deemed as fraudulent according to the Amtrak’s Office of Inspector General  (Dailysignal.com).

The fake overtime bid can be perpetrated by staff, managers and payroll personnel  Actually, I have seen this happening when finance managers and others were not paying attention, didn’t supervise the guy running payroll, and didn’t know much about controls. He paid himself overtime running into the 5 figures, which was material for the nonprofit. Since overtime pay can be time and a half or even more, the nonprofit lost quite a lot of money with this fraud.

Sometimes employees fake a supervisor approval signature or may change a time sheet after it’s approved. This problem is minimized with online or electronic time sheets, but odd things can still happen, as the authorization may be automatic and not reviewed carefully by a supervisor.

Like the ghost employee fraud, this one is harder to identify with larger organizations, where details may get lost and certain people may work in more than one department, making payroll a bit complex and allowing the fraud to happen.

What can nonprofits do to minimize the problem of unauthorized overtime pay?

1- Any overtime claimed by managers should be scrutinized since managers are usually exempt from overtime.

2- Be sure managers, especially the ones supervising payroll, have the time and focus to reviewing payroll reports. Oftentimes, managers, especially in the administrative area, wear too many hats, are spread too thinly to don’t a good job in paying attention to payroll issues, including overtime and exceptions reports.

3- Department leaders should sign off on payroll reports at least once every quarter to document that they looked at the information.  The act of manually sign off usually make people pay a bit more attention to such reports.

4-Know the total payroll amount for each department and if totals on payroll reports are very different, inquire about it.  Usually, this is done using budget numbers related to wages and benefits.

It’s a shame that people are willing to take advantage of nonprofits to enrich themselves. But it does happen and organizations should do whatever they can to minimize this problem or they may lose funds and credibility, which could spell disaster for any business.  Don’t wait until something happens to take action to prevent these types of fraud.
Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

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

Why Financial Rules Are Good for You

Oh no….Marcie from accounting is again asking for receipts, signatures and other stuff. Can’t she see that we’re busy?  What’s wrong with these people?  Where do they come up with these ideas? Well….there is a reason for this apparent madness and annoyance.

Many managers indeed get aggravated with demands from the accounting/financial department.  However, nonprofits have a lot to gain by following proper accounting requirements, such as requesting proper receipts or approvals. The requirements may seem a bit burdensome, but they serve important purposes within a nonprofit organization’s operations.  These requests are not to drive you nuts.

Oftentimes requirements for certain tasks are to assure that processes flow properly with enough check and balances to avoid errors or fraud. Below are a few important reasons for nonprofits to follow accounting requirements:

1- Financial requirements may be mandatory for recipients of federal and other government funding, such as demands for certain internal controls to avoid errors and misappropriations and the use of a budget. There is really no choice — either the nonprofit follows the prescribed requirements or funding stops.

2- The IRS specifically asks about financial tasks on the tax form 990, the information return filed by many nonprofits. For instance, the return explicitly inquires about the number of items reported on the form 1096, the Annual Summary and Transmittal of U.S. Information Returns. This is usually related to reporting payments to contractors over a certain amount. To comply with this inquiry properly, the nonprofit should have financial rules to capture this information.

3- The nonprofit must also follow all local, State and federal laws. For example, employees may need to file time sheets to be paid correctly. If they don’t follow this accounting rule, paychecks may be printed incorrectly, putting the nonprofit at risk for fines and penalties. So, accounting folks must require proper documentation and approvals so that this process run smoothly.

4- Following financial guidelines protect nonprofits from errors and fraud. An example would be the procedure of requiring approvals on all invoices to be paid. Usually, a supervisor approves such invoices to avoid payments for fake or wrong items or services. You don’t want employees charging the nonprofit for their own tech or other personal purchases.

5- Compliance with accounting requirements, including financial processes, are often evaluated by auditors to assess the risks of nonprofits. For instance, if an accounting requires monthly cash reconciliations, but the auditors note that they are actually done once every four months, most likely the audit risk will increase along with the costs of such audit. So, accounting requirements are to be followed ALL THE TIME to avoid problems. Even by the accounting department.

6-Financial  rules can help in building a nonprofit’s competence while minimizing confusion. For example, a rule to pay bills on only certain days every week may give employees the sense of a set order in finance. One cannot walk in and expect that a check would be ready within minutes. Financial rules can instill confidence and controls within a nonprofit.

Accounting, taxes change throughout the years, so don’t be surprised if the requirements change. For example, starting effectively in 2018, nonprofits must prove that they can pay their bills short term. This is a new requirement of FASB, the organization that dictates accounting rules for nonprofits. So, expect some new requirements from folks from the accounting department regarding this new guideline and others coming down the pipe.

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9  -First edition nominated for a McAdam Book Award.

 

 

Tax Forms Nonprofits Need

It may come as a shock that nonprofits may be tax-exempt, but they may need to file tax returns and even pay taxes on certain income, including those at local, state, and federal levels. If nonprofits fail to file the forms, they may lose their tax exemption,  be liable for penalties and interest, making tax compliance a priority to many organizations. This article focuses on federal and California tax forms and requirements.

Below are some tax issues and forms nonprofits should mind:

Sales Tax

States and local authorities may collect sales tax on fundraising efforts, including proceeds from auctioned items. Some states allow for exemptions if the nonprofit files an exemption form before the event.

In California, sales taxes are applied to certain auction items, and the nonprofit must remit the tax using the form BOE401a2. Depending on the case, you may need to file the taxes online and pay using a regular check, e-check or another method.

Payroll Taxes

Nonprofit organizations must follow the law when it comes to payroll taxes, including withholdings and paying their share of Social Security tax unless the nonprofit has its own approved retirement plan.

Nonprofits file the same payroll forms, as for-profit business do, such as the form941, Employer’s Quarterly Federal Tax Return, and form 940- Employer’s Annual Federal Unemployment Tax Return. Also, a nonprofit distributes tax forms W-2 to employees in the beginning of the following year with summaries of salaries and withholding.

Note that states have their own payroll taxes that nonprofit must comply with and pay. California has the form DE1NP Registration Form for Nonprofit Employers and DE-9 Quarterly Contribution Return and Report of Wages.

Annual Information Tax Returns

Except for religious organizations and a few others, nonprofits are required to file a form within the 990 tax series a few months after their year-end. Small organizations may file online the e-card 990-N, giving the IRS basic information, such as name and address of the nonprofit. Larger organizations file the forms 990 Return of Organization Exempt from Income Tax, or the 990-EZ, which are more detailed, requiring specific numbers for revenues and expenses along with information on programs and board of directors. If the nonprofit doesn’t file taxes for 3 years, its tax-exemption may be revoked, including smaller organizations.

In addition, states like California have their own reporting and paying system. In California, for instance, requires annual reporting – FTB 199N of smaller organizations, with larger ones filing longer, more detailed form 199.

Unrelated Business Income Tax

There are instances where nonprofit may compete unfairly with for-profit businesses, such as a nonprofit opening a restaurant with no connection to its mission. Many exceptions apply, but if the organization is deemed to have unrelated business income, it must file form 990-T with the IRS and pay the proper tax, also known as UBIT.

Note that California requires that nonprofits with taxable income to fill out the form 109 Exempt Organizations Business Income Tax Return.  Other states may have their own reporting and paying requirements.

>>Be sure to double check the requirements for these forms at least once a year, since things change often and you don’t want to be out of compliance. For instance, Obamacare has requirements for businesses, including nonprofits, to provide health insurance for employees if the organization has a certain number of employees.  It also may be possible for smaller nonprofits to get the Small Employer Tax Credit.  Since Obamacare may change in the future, keep an eye of this and other issues.

 

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition Nominated for the 2016 McAdam Book Award

What you need to organize a nonprofit well – Article-Blog