Keeping Up With Nonprofit Compliance: Is Your Payroll Prepared?

Nonprofits are responsible for some of the most inspiring acts of goodwill that occur in our world, from offering aid during disasters to paying for children’s healthcare to feeding people in underprivileged communities. Keeping these organizations running smoothly is critical to society’s well-being and keeping up with nonprofit compliance is the key to success.

Due to rigid guidelines, payroll can be a particularly challenging business element to manage among nonprofits’ strict — and sometimes tricky — compliance landscape. Federal changes such as those brought on by the recent Tax Cuts and Jobs Act (TCJA), further complicate the process. This article will discuss these changes nonprofits are facing and the strategies payroll administrators can use to ensure they adhere to new compliance regulations.

What Nonprofits Need to Know

The TCJA has recently changed tax brackets, the federal 2018 Form W-4, and employee withholding allowances. In response, some states have passed their own legislation with other regulations, tax cuts, and adjustments. As nonprofits implement federal changes and begin to understand how additional state regulations will affect them, some organizations will likely rethink the way they process payroll.

For example, a nonprofit employer paying more than $1,000 in taxes for transportation fringe benefits will have one of two options: include the benefit as taxable income to the employee or file a Form 990-T and pay the 21 percent rate on its unrelated business taxable income. Should a nonprofit in California opt to pay the Unrelated Business Taxable Income (UBTI) tax itself, it could potentially end up paying an additional 8.84 percent in state taxes. If the organization decided to allocate the UBTI tax to its employees, payroll must be adjusted to compensate for the additional cost of the tax.

Without careful attention to these new requirements, errors could make your organization noncompliant, which could lead to penalties, fines, IRS audits or even loss of nonprofit status. Taking the following steps can help nonprofit administrators tackle payroll challenges and ensure they remain compliant across the board.

1. Focus on Maintaining Your 501(c)(3) Status

Maintaining your tax-exempt status hinges on having a clear understanding of your income sources. Check your donation records and past tax filings to determine whether your organization has primarily received income from the general public, government funds or other means. You need to analyze your employment data as well to ensure you are complying with state and federal 501(c)(3) regulations. A payroll system that allows you to quickly visualize your data through a dashboard or analytics platform will help you complete that task. Check your findings against the requirements, which can be found on your state government’s website and the IRS site.

In the face of the TCJA changes, it’s important to keep your 501(c)(3) status top of mind. In addition to federal adjustments, each state’s legislature has the option to either follow the national example or institute its own policies. If you or your team come across areas in your record-keeping that need improvement, make a plan to rectify that moving forward. You need to compile thorough files documenting all of your new and recurring income in addition to tracking the allocation of funds to remain compliant through tax law updates.

2. Pay Attention to Local Legislation

Even if you have a tax compliance service in place, it’s important to stay up-to-date with state and local changes yourself. It’s critical for someone on your team—or several people, depending on your organization’s needs—to focus specifically on complying with tax developments related to payroll along with any tax exemptions for which your nonprofit may qualify. As states respond to federal updates, they might add extra steps to the payroll compliance process. Things can change quickly, and missing an important update could jeopardize your organization’s compliance.

Several sources exist to help you keep an eye on your state’s legislation. Organizations like the National Association of Nonprofits and state-specific councils like the Louisiana Association of Nonprofit Organizations should top your list of go-to resources. Next, consider using the federal government’s tax reform page as well as your state government’s website to discover new details. Finally, look to news outlets and local newspapers or business magazines that report on nonprofits and tax changes alike.

3. Work Closely With Your Payroll Provider

In addition to your internal team, your payroll vendor can be another layer of support as you juggle the changes that stem from the TCJA. Loop in your vendor as soon as you’re aware of needed updates. Even better, choose a payroll provider with a tax compliance team that will monitor related tax changes for you and is familiar with nonprofits’ compliance requirements. That way, you’ll be quickly notified of necessary updates and asked to simply send along any paperwork or new information required. Your payroll software’s online document management system will be critical to storing and organizing that paperwork to access at tax time or in the event of an audit.

Open, clear communication with your provider will help you implement changes as seamlessly as possible. Be sure to take any software training your vendor provides to ensure you are using the platform efficiently. Don’t hesitate to ask your provider how long it will take to update your account to reflect the adjustments you’ve made. Reaching out regularly will help you quickly address any questions or concerns that come up from either party.

Why It Matters

The TCJA and many states have already outlined changes that will have a big impact on the way nonprofits conduct payroll. However, there’s always potential for new requirements to crop up. It’s important to stay on top of this issue and have a coordinated plan in place to adapt as regulations shift.

If payroll administrators work with their payroll vendors and members of their internal teams to keep track of tax regulation changes, nonprofits will have no trouble conquering their compliance checklists. With that taken care of, these organizations can focus on the life-changing humanitarian work they do every day to benefit all aspects of our world.