Nonprofit Accounting Basics


Size of Organization: 

There are many payroll services that will process the regular payroll, make direct deposits, prepare quarterly and annual tax filings and remit taxes due for a very reasonable fee. This is generally the most efficient and cost-effective manner for processing payroll and ensuring all tax requirements are met. Further, the payroll service is responsible for keeping current with changes to tax and benefit laws in all jurisdictions. And because an outside party is involved in the process, the controls surrounding payroll are enhanced and the risk of errors and/or misappropriation of funds are reduced immeasurably. With few exceptions, the use of a payroll service by a small organization is preferable to processing the transactions in-house.

It is important to obtain references when selecting a payroll service. Verify that the company is well established, has a reputation for accuracy in the reports it produces and remits taxes and returns in a timely fashion. Further, ask about the ease with which errors are corrected and the responsibility the payroll service assumes when payroll taxes are not calculated and reported properly. As the vendors include these services in their fees, the not-for-profit organization should not be held responsible for any penalties or interest resulting from the service’s mistakes.

Once a payroll service has been selected, it is prudent to check with the Internal Revenue Service periodically to verify all taxes owed by the organization are paid currently and in full. This step will serve as a check in the event the payroll service does not remit all taxes when due, no matter what the reason.

All withdrawals from employees’ paychecks should be approved in writing by the employees. The following are common withdrawals that require signed forms:

  • Federal income tax
  • State income tax
  • Pension withholdings
  • Parking/metro
  • Health insurance premiums

In addition, any raises received by the employee should be documented in writing and signed by the executive director or president of the board of directors.

The person who is in charge of payroll should notify the payroll service of any changes for the particular payroll.

The payroll summary issued by the payroll service prior to the payment of the payroll should be reviewed by both the payroll processor and a member of management or the board.

Sufficient cash should be available for automatic withdrawal by the payroll service for both the net salary and all taxes due.

Payroll is either recorded through the check register (QuickBooks) or by journal entry.

Support in the form of timesheets should be available to support the allocation of the salaries to the various functions (programs, grants, departments, general and administrative and fundraising). All time records should be saved.