If your payroll system has been one of those problems you’d like to leave behind, the new year is a prime time to start anew. While your fiscal year for accounting purposes may or may not be on the calendar year, your payroll system always starts out fresh on January 1.
Nonprofit Payroll Complexities
Payroll can be a complicated, never mind expensive, problem. Unfortunately you can’t simply eliminate payroll. The IRS is not keen on you paying people as independent contractors when they should be classified as employees. As long as you need and have employees, you need to deal with payroll.
Payroll for 501(c)(3) nonprofits is further complicated by two things:
1. The need to allocate payroll expenses by functional area (program, management & general or fundraising).
2. The need to assign certain payroll expenses to grants and contracts.
You need to keep in mind all of your organization’s unique needs when selecting a payroll service, including how it interfaces with your accounting software.
Problems with a Mid-year Change
Of course you could always change your payroll service at any point during the year, but this scenario presents several potential problems.
- If you have run any payrolls you will need to enter information into the new system pertaining to year-to-date paychecks issued and the related payroll taxes incurred and paid. This process can be laborious and prone to errors.
- If you switch mid quarter, you run the risk of both your old and new payroll services filing payroll tax returns for that quarter, both of which may be incomplete. Needless to say this causes problems with the IRS.
- If you switch mid-year, you will typically have a stressful window of time to enter all the year-to-date information before the new service can be activated.
Take it from people who have been there and done that. If you have the option and need to make a payroll service change, start your new service on January 1.
Advantages of Full Service Payroll
The longer we’ve been in this business, the more we have gravitated toward external full-service payroll providers for our clients rather than “do-it-yourself and save money” in-house solutions. Payroll is something you do not want to mess up. The costs to fix a payroll problem with the IRS in terms of potential penalties and professional time can be tremendous. You want a professional service you can rely on to file your quarterly payroll tax returns and W-2s. Problems aside, you may find it’s actually cheaper to use an outside service. That being said, we have a few suggestions for you.
Payroll Options with Intuit
If you are a user of QuickBooks Online, consider Intuit Full Service Payroll (IFSP). IFSP is a stand-alone online service that can import payroll into either QuickBooks Desktop or QuickBooks Online. The import process records individual paychecks as opposed to summary information. Wages and taxes are posted by account and class. (Classes are what you use in QuickBooks to track functional allocations.)
If you use QuickBooks Desktop, payroll can also be assigned to jobs, which is the mechanism for tracking restricted grants or contracts. If you have a lot of restricted grants and contracts that include payroll, we recommend sticking with QuickBooks Desktop. QuickBooks Online cannot integrate payroll with sub customers, which is the equivalent to jobs in the Desktop version.
Another plus for IFSP is that you can pay independent contractors (1099 vendors) by direct deposit. Intuit will also issue the 1099-MISC forms for you in January.
Another Intuit option is QuickBooks Online Payroll. While Intuit Full Service Payroll (IFSP) is stand-alone software, QuickBooks Online Payroll is fully integrated into your QuickBooks Online company file. You have the choice of full service or enhanced service (where you e-file the payroll tax returns). While IFSP will allow you to pay 1099 vendors by direct deposit, QuickBooks Online Payroll will not process payments to contractors. You pay a contractor like any other vendor and mark the contractor’s vendor record as eligible to receive Form 1099. That way you can run a report of 1099 vendor payments at year end and, optionally, e-file Form 1099-MISC through Intuit. If you pay a lot of contractors, you may want to consider a service that can process contractor payments by e-check and issue 1099-MISC forms for you.
A downside to both Intuit Full Service Payroll and QuickBooks Online Payroll is that neither will import to Location codes in QuickBooks Online. If your nonprofit is using Location codes to track different service locations (or for other purposes), and especially if you wish to keep a balance sheet by location, you may not want to use a solution that is only partially integrated. You will have to fix each payroll with a journal entry to assign expenses to the proper location(s), so you might want to consider using a less expensive service and entering the entire payroll via journal entry. Some payroll services will import to QuickBooks Online so you could use a combination of importing the payroll and fine tuning the coding of the payroll to class, location and sub customer using a journal entry.
Payroll with Patriot Software and Others
While we have found Intuit’s payroll services to be high quality and the staff to be friendly and helpful, they can be a little pricey, especially if you only have one or two staff. We tried a couple of new services this year, one of which disappointed and will remain nameless, and one which surprised us with their responsiveness, user interface and features. That service is Patriot Software. They offer full service payroll which, for two employees, currently costs $29.35 per month. You cannot hire someone to process the quarterly returns, never mind be assured that everything will be done consistently and correctly, for that price. A downside is that you must submit your payroll four days in advance for direct deposit as opposed to the two days required by Intuit. Also Patriot Software does not allow you to send direct deposits to 1099 vendors nor will it e-file forms 1099-MISC for you.
You can always e-file your own Forms 1099-MISC using an online service such as efile4biz. We recommend e-filing 1099s as opposed to printing and mailing physical forms.
Another online full service payroll option that we’ve had some good experience with is Gusto. On the more expensive side of the price spectrum are services like Payroll Office of America (POA) which cater to larger employers and also offer many other services such as employee benefits consulting, payroll paid to pay cards (avoiding physical checks for non-banked employees), and extremely flexible and detailed reporting.
501(c)(3) Orgs Are Exempt from Federal Unemployment Tax
If you decide to switch payroll services, make sure your new payroll service knows to not charge you Federal Unemployment tax. We have also seen this problem on multiple occasions! 501(c)(3) nonprofits are exempt from Federal unemployment tax. It pays to understand how the state and federal payroll laws apply to your particular situation.
The New Year Awaits!
Resolve NOW to fix that creaky payroll system. You will need the time between now and year end to consider payroll service options and set up your employee and company information so you are ready to run your first payroll in January.
Excellent and affordable payroll solutions are out there. The price you pay for payroll mistakes and inefficiencies is bound to be more than paying for services that can truly address your needs. Payroll and contracted services are typically a nonprofit’s largest expense. Don’t let it be your biggest headache, too!