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3 Key Payroll Mistakes Non-Profits Should Avoid

April 2nd, 2024 | 4 min. read

By Kelli Lewis

For non-profits, every dollar counts towards your mission, but a simple payroll error can unexpectedly chip away at those precious funds, creating challenges you're not always equipped to handle.

The lines between different types of workers in non-profits — like volunteers, full-time employees, and contractors — can be blurry. This confusion can make payroll errors more likely, which might end up costing your organization.

At Whirks, we've worked with many non-profits to fix these payroll problems. We know the common mistakes and how to avoid them, making payroll less of a headache and more of a smooth process.

In this article, we'll share the top three payroll mistakes non-profits make and show you how to avoid them. We'll cover everything from making sure you classify your workers correctly, to following wage laws, to managing employee benefits properly. 

Mistake 1: Misclassifying Employees and Contractors Under the FLSA

Non-profits often work with a blend of volunteers and paid staff, which can blur the lines when it comes to classifying employees correctly. Misclassifying someone who should be a W-2 employee as a 1099 contractor is a common slip-up. Understanding the rules pertaining to contractors and determining who is or isn't considered a contractor is a crucial test you should evaluate whenever you are paying someone. While usually unintentional, this error can sometimes be used to sidestep financial obligations like overtime and taxes, leading to severe legal and financial consequences.

Identifying the Criteria for Classification

To classify workers correctly, it's essential to understand the IRS's criteria, which fall into three main categories: behavioral control, financial control, and the relationship between the organization and the worker.  This is generally called the ABC Test.

This is by no means a comprehensive list, but here are a few factors to consider in each of these categories: 

Behavioral control (Part A) — Measure the extent to which the employer controls when, where, and how the work is completed, the tools and equipment used to complete the job, and where supplies and services are purchased. 

Financial control (Part B)— Consider whether the employer is in control of the financial aspects of the work. Does the worker have a significant investment in the work? Do they have unreimbursed expenses? Do they have an opportunity for profit and loss? 

Relationship of the parties (Part C)— Determine what kind of relationship is perceived between the business and the worker. Does the worker receive any benefits, such as insurance, pension, or paid leave? Is there a written contract? 

Risks and Consequences of Misclassification

Getting the classification wrong can have major repercussions. If a non-profit mistakenly labels an employee as a contractor, it could face audits, penalties, and hefty back taxes. Plus, it can damage the trust and morale among your team, which is crucial for any organization but especially for those driven by a mission.

Best Practices for Correct Classification

To avoid these pitfalls, it's vital to conduct a thorough review of each worker's role against the IRS's guidelines. If you determine a worker is a 1099 contractor, always collect a completed W-9 form before any payment. This ensures you have the correct information for tax purposes and helps avoid penalties for incorrect filing. By adhering to these best practices, non-profits can safeguard themselves against the significant risks of misclassification.

Mistake 2: Non-Compliance with Wage and Hour Laws

Non-profits often require their staff to assume multiple roles. This flexibility is key to their operations but can complicate things when it comes to following wage and hour laws. Just like any business, non-profits have to stick to the rules about minimum wage and overtime pay. 

One of the big issues we see is when an employee is paid a salary but isn't eligible for salary status without receiving overtime compensation unless they meet specific qualifications. To qualify as 'exempt from overtime', an employee must earn a salary above the minimum threshold set by the Department of Labor, which is $684 per week or $35,568 per year, and meet certain job duty requirements. 

These requirements typically pertain to executive, administrative, professional, computer-related, outside sales, or highly compensated positions. This classification is based on the premise that exempt employees often have more control over their work and hours, and receive a salary that compensates them for all the hours they work, not just a standard 40-hour workweek.

Understanding Federal and State Wage Regulations

Non-profits must be well-versed in the federal and state regulations governing wages and hours. These rules mandate that employees receive at least minimum wage and are compensated for overtime. These standards apply to all workers, whether in non-profit or for-profit sectors. Additional stipulations may apply to non-profits receiving government funds.

The Impact of Non-Compliance

Failing to comply with these laws can have severe consequences for non-profits, including legal penalties and damage to their reputation. When a non-profit doesn't comply, it can lose the trust of its employees and the community, which could get in the way of achieving its goals.

Strategies for Ensuring Compliance

To maintain compliance, non-profits should regularly review and update their payroll practices, ensuring they align with current wage and hour laws. This includes keeping precise records of employee hours and wages, covering regular and overtime hours. Adopting these practices helps non-profits prevent non-compliance and uphold their commitment to fair labor standards.

Mistake 3: Poor Management of Employee Benefits

Employee benefits are an essential aspect of compensation for those working in non-profits, offering crucial support through health insurance, retirement plans, and paid time off. Yet, non-profits might not have the extensive resources that for-profit entities possess for managing these benefits, potentially leading to errors and non-compliance issues.

Common Challenges in Benefits Administration

Managing employee benefits in non-profits comes with its set of challenges, mainly due to limited resources. These challenges can range from selecting the right benefits packages to ensuring that the benefits offered align with the organization's financial capabilities and compliance requirements. Mistakes in benefits administration can lead to serious issues, affecting employee satisfaction and the organization's legal standing.

The Importance of a Strategic Benefits Partner

To mitigate these challenges, it's advisable for non-profits to collaborate with a reputable benefits provider. A strategic partner can offer expertise and support in managing benefits packages, helping non-profits make informed decisions and avoid common pitfalls. This partnership can ensure that employees receive valuable benefits while the organization stays compliant with regulations.

Regular Audits and Plan Evaluations

Regularly reviewing and evaluating benefit plans is crucial for non-profits to ensure they remain compliant and continue to meet the needs of their employees. This involves conducting audits to identify any discrepancies or areas for improvement and making necessary adjustments to the benefits offerings. Staying proactive in benefits administration helps non-profits avoid potential compliance issues and maintain a supportive work environment for their employees.

Empower Your Non-Profit Through Strategic Payroll Management

Your nonprofit's payroll isn't just about numbers and compliance; it's a vital part of keeping your team motivated and focused on your shared goals. When payroll runs smoothly, it eliminates distractions and builds trust, letting everyone concentrate on the impactful work you're doing together. By ensuring you classify employees correctly, comply with wage laws, and manage benefits properly, you're not just avoiding problems—you're actively uplifting your team and strengthening your mission.

And speaking of empowering your team, why not take it a step further by helping them understand their paychecks better? Our article, Helping Your Employees Understand the Withholdings on Their Paychecks, connects the dots between the effort they put in and the compensation they receive. Clarify any confusion and reinforce the value of transparency and knowledge in your organization.