How "Small" Payroll Mistakes Cause Multi-Year S#!t Storms for Nonprofits

The 4 Most Common Payroll and Tax Compliance Mistakes and How to Avoid Them

There’s something stinky in the air lately.
It smells like past payroll mistakes.
And it takes a while to clean up.
 
Here’s the reality: you want a badass bookkeeper, not a BAD bookkeeper! 

Nonprofit bookkeepers must understand nonprofit payroll and tax compliance. If they don’t, preparers beware.
 
Our accounting team has been cleaning up many stinky payroll messes lately. The kind of messes that only come to light during W-2/1099 time. And many of which started with a tiny mistake years ago that snowballed into a significant issue.
 
So, we thought we would share a few examples to help other nonprofits keep their books and payroll tax situation clean and avoid the cost and totally unnecessary stress of rework. 

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(1) ​Incorrectly recording a virtual employee’s work location in the payroll system.

HE MISTAKE: This is a common mistake with the rise of a virtual workforce. If an employee’s work location (the state they physically work in) is not recorded correctly within the payroll system, the payroll provider will not withhold state income taxes properly. Payroll taxes must be paid and withheld based on the state that an employee works in, NOT the state where their employer is located. This mistake is typically caught when employees receive their W-2s.

THE FIX: The employer will need to create a new W-2 and amend all previous quarterly state (and local, where applicable) tax returns to correct the issue. This is a HUGE headache and may result in many penalties and fees.
 
HOW TO PREVENT IT: In the payroll system, ensure all remote employees have a work location that reflects their physical location.  ​

(2) Data is not fully transferred when switching payroll providers.

THE MISTAKE: Companies that switch from one payroll processor to another in the middle of the year, beware. Often, some historic or employee data isn't properly transferred to the new provider. This causes (1) incorrect filing of payroll forms (federal and state) for the period this occurred, (2) errors related to benefits and deductions like retirement balances, unemployment compensation, and workers comp. This mistake is not typically noticed until year-end when W-2 forms are prepared or when the IRS/state sends the notice. IRS penalties can occur.
 
THE FIX:  Audit the data transfer between payroll providers to determine what went wrong. Then ensure the new provider has completed and corrected information before issuing W-2s.
 
HOW TO PREVENT IT: Follow this Switching Payroll Providers Checklist and carefully compare prior employee records/paychecks to current ones after a payroll transition to ensure data accuracy.

(3) No one files quarterly tax forms (yes, it happens).

THE MISTAKE: Payroll tax returns never get filed in the hustle and bustle of running a nonprofit organization. Typically, the IRS will send notice, and penalties apply. If there was turnover in the payroll administrator position, it would likely take some digging to figure out what was filed and what was not.
 
THE FIX: Pay penalties and backfile tax returns. This is a nightmare from an administrative standpoint.
 
HOW TO PREVENT IT: Hire a professional accounting firm (like us) to manage payroll, follow payroll tax and compliance deadlines, and properly prepare your payroll tax returns.

(4) Payroll taxes are paid in the wrong amount.

THE MISTAKE: Someone with a lack of training in payroll taxes is responsible for the task. There is no reconciliation process, so payroll taxes are paid in the wrong amount.  It can take up to a year to notice this mistake when the IRS sends notice and penalties.
 
THE FIX: Pay penalties, recalculate payroll taxes, and pay the correct amount.
 
HOW TO PREVENT IT: Hire a professional accounting firm (like us) to manage payroll, follow payroll tax and compliance deadlines, and properly prepare your payroll tax returns.

Need Help With Payroll Tax & Compliance? - - - Let's Chat!

Are you surprised by some of these examples?
 
Some of the preventative tips seem obvious, right?! File your taxes on time, pay the correct payroll tax, etc.
 
It's easy to imagine how seemingly "small" things like this can get missed. Nonprofit leaders are stretched thinner and thinner these days with, you know, ALL THE THINGS like:

• A global pandemic
• Virtual workplaces challenges
• National workforce shortages
• Lack of financial expertise on staff
• Constant tax law changes
• New technology options
• Demand for virtual services
• And the list goes on…

 
Nonprofit leaders need to know that they are not alone in feeling overwhelmed by financial management. Deep financial knowledge and expertise are not typically found in-house in the nonprofit sector, especially in organizations with budgets between $1-5 million.
 
This is why Blue Fox exists. To lighten the nonprofit manager's load. To educate and serve nonprofits and social enterprises on all things financial management. We tell our clients that we’ll handle the stuff that keeps them up at night.
 
If your organization struggles with payroll and tax compliance issues, give our friendly team a shout.
 
We’ll get you sorted!