Posts Tagged ‘Nonprofit Payroll’

Well, we are pretty much down to it.  There are only a few, short weeks left in 2009…and during much of that time, most of us will be preoccupied with all things Christmas.  But in all the hustle and bustle, there are a few things regarding your nonprofit that require your attention.

A few weeks ago, we talked about some key, end-of-year planning topics (read the post).  Extremely important, but somewhat conceptual.  The following is a checklist of year-end forget-me-nots that absolutely require your attention.  Ready?  Here we go:

Financial records. What is the current state of your financial recordkeeping?  Good, bad…or ugly?  Hopefully it’s more good than bad.  If it’s ugly…well, you’ve really got some work to do.  The fact is, you have a legal requirement to maintain proper financial records.  If your bookkeeping status lies anywhere south of good, get it fixed.  If necessary, hire someone who knows how to do this.  The truth is, the legalities are not even the most important reason to get this right.  You cannot effectively manage your organization without consistently good financial recordkeeping.

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Free t-shirts for all audit targets! (no, not really)

There is one phrase in the English language that generates more fear and trepidation than any other out there:  IRS AUDIT.  Just hearing the words is enough to cause many a fearless person to break out in a cold sweat and to shrink in terror.  It is bad enough when an individual has to deal with IRS questions.  But when it happens to a nonprofit organization, there is plenty of pain to go around.  Directors, employees, members, donors…all can be affected.  Plus, just the potential bad publicity is enough to cause nonprofit leaders to reach for the Rolaids.

So how does a nonprofit avoid an IRS examination?  It helps to understand some of the situations and events that can trigger an audit.  In this article, we are going to look at 5 sources of audits and give you advice on how stay out of Uncle Sam’s cross-hairs.

1.  Complaints. One of the most common causes of IRS examinations is a complaint filed by a third  party.  Such “whistle-blower” situations may or may not have a shred of credibility to them.  Typically, if the IRS decides to look into the allegations, it will start out as a compliance exam.  It is possible for one of these exams to progress to the status of a full-blown audit, but most do not…at least for those organizations that are operating completely above board.

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Last week we looked at some key points regarding nonprofit executive compensation.  This week, we want to take a closer look at best practices for paying everyone else your organization employs.

Payroll for nonprofits is a complex issue already.  Certain rules and exceptions apply that are different than what applies to for-profit payrolls.  As if that complication isn’t bad enough, many nonprofits seem bound and determined to create their own rules and exceptions that are categorically incorrect…and destined to get them in hot water with the IRS and/or their state.  Fortunately,  the principles we discussed last week apply to ordinary employees, as well as executives:  compensation must be reasonable, due diligence must be performed, and all decisions should be made at arms-length.  If you haven’t read last week’s post, I suggest you do so before you proceed…it will help.

In addition to those things, other considerations should be made.  This article is going to focus on two big issues:  1) payroll classification and, 2) types of payments.

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Nonprofit executive compensation tops the current list of IRS hot button issues.  A few weeks ago we talked about the fact that the IRS is ramping up its oversight and enforcement of nonprofit executive compensation.  With all the rancor surrounding executive perks and bonuses on Wall Street, expect that populist sentiment to spill over into the nonprofit sector as well.  It all adds up to the equivalent of a message written in the sky:  get your house in order!

So, how do you do that?  Let’s take a look at a few key points that will go a long way toward ensuring that the compensation package for your nonprofit’s leader(s) is appropriate.

Reasonable compensation. It all starts here.  The IRS requires compensation packages for nonprofit executives (and other nonprofit employees, for that matter) to be reasonable.  Unfortunately, the IRS doesn’t really define reasonable…at least not in a way that you could look up in Websters.  Reasonable compensation is best understood in light of factors the IRS examines when determining whether or not a charity is exceeding reasonableness with its compensation arrangements.  These factors look something like this:

• Actual job description
• Required level of education or experience
• Compensation averages in your area
• Number of hours worked
• The overall budget of the charity

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Your board of directors is one of the most important assets your nonprofit has.  Assuming they understand their role and are there for the right reasons, your board members provide invaluable insight, direction and oversight.  They volunteer their time and expertise, usually for little more than a pat on the back.  They also assume a certain level of liability in exchange for their efforts.  The old phrase, “No good deed goes unpunished”, is not something you want to see come true.  Let’s explore how to protect those who give of their time to your organization.

Understanding the issues. The first step to properly protecting your board members is to educate them as to what they are responsible for.  It is discouraging to see the level of ignorance that many boards operate under.  We frequently encounter boards where some members are merely placeholders who are doing a favor for the founder.  They rarely participate in substantive discussions or planning, nor are they consulted with by the program director.  They have no idea that there is any liability to them, but there is.  This liability usually falls into three categories:  1) corporate (state), 2) federal (IRS) and, 3) general liability.  Let’s take a closer look at each:

1. Corporate liability:  Board members are the legal, governing body of a nonprofit corporation.  They collectively represent the organization and its interests.  Each nonprofit corporation is incorporated in a particular state, according to that state’s corporate law.  Board members are responsible to make sure the corporation follows state law and that it follows its bylaws.  It is not terribly uncommon to hear of court cases involving other board members, or members of the public, accusing the organization of not abiding by its bylaws.  And, if the corporation is an employer, the board members have a fiduciary responsibility to ensure that employment taxes and related things are properly handled. Read the rest of this entry »

The headline for this article is not really “new” news.  The Internal Revenue Service has been stepping up enforcement of its regulations governing nonprofits for several years now.  Those who have been keeping up with the changes to the Form 990 annual reporting requirement know this to be true.  What is new this time is that the IRS is focusing hard on two, key areas:  1) nonprofit pay practices and, 2) abusive activities by charities.  Let’s take a look at each of these.

1) Nonprofit pay practices. The topic of nonprofit pay practices has long been an area of concern for the IRS.  Federal regulations require that compensation paid to employees of tax-exempt organizations must be “reasonable”.  Unfortunately, “reasonable” is a subjective evaluation of the situation as a whole, not necessarily an objective check list.  Moreover, the IRS is the ultimate arbitor of what is considered reasonable.  So what is new?  The overall economic downturn, along with the focus on executive pay, has ramped up IRS scrutiny of the compensation nonprofits pay their executives.

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At the end of most newsletters, we put out the call for “topic requests”.  We wanted to get to some reader questions before the year ended. We will try to answer questions like these, that don’t require a whole article, from time to time. If you have article topics that you would like us to cover, email them to us at mail@foundationgroup.com or simply reply to the email newsletter when you receive it.  We cannot guarantee your question will be chosen, but we’ll try.  On to the questions…

Q) Do all donations need to be spent by year’s end?

A) The quick answer is, no. “Nonprofit” does not mean that at the end of the year there should be no money left in the account.  A 501(c)(3) organization can have money left at the end of the year. It would probably be a good idea if it can.  Money left over can go toward adding programs, improving existing programs, make up for less funding next year, etc.  Never forget that you’re still running a business (of sorts)…you gotta make more than you spend!

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