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Why It Pays to Outsource Your Payroll
Using an outsourced payroll solution is typically more efficient for an organization than processing payroll internally. Leaving payroll to experts frees up hours that you can devote to other important ministries of your church. Whether it is your time, staff time, or a combination, chances are the hours could be better spent researching funding opportunities, improving community outreach, fine-tuning business operations or launching a public service. Among the areas where outsourcing will save time are:
- Processing payroll
- Cutting and distributing paychecks
- Calculating and paying withholding and employment taxes
- Preparing and distributing W-2s and 1099s at year-end
- Handling employee payroll inquiries
Many nonprofit managers underestimate the cost of processing payroll internally by failing to account for all hours spent and resources allocated to pay employees and maintain payroll paperwork. A thorough cost assessment usually proves that a nonprofit saves money by outsourcing the processing, tracking and filing of payroll documents. To assess your own internal payroll costs, consider:
- How much the time spent is actually worth: consider the cost of your time and the time of anyone who processes or “touches” payroll? Often, many people in a small church are involved in the various parts of payroll processing.
- What savings would outsourcing provide: since an outside provider can handle all the responsibilities involved in managing payroll and answering employee questions, a church can often eliminate or reallocate an internal payroll resource?
Calculating federal, state, and local employment taxes and filing payroll-related tax paperwork can be more than just a hassle. If it’s done incorrectly, your organization may face penalties and even interest on money owed since the mistake was made. In fact, it is estimated that one in three nonprofits receive a tax penalty costing over $800 each year. Outsourcing payroll does away with the risk of many of these costs and hassles because:
- An outsourced payroll provider calculates payroll taxes, based on its expertise and close tracking of regulation changes
- Monthly or quarterly employment tax reports are managed by the payroll service, ensuring they are submitted correctly and on time
- Payroll providers may assume penalties that come as a result of incorrect tax calculations
- End-of-year paperwork — such as W-2s and 1099s — are handled directly by the payroll provider, so they are sent out on time.
Frequently Asked Questions
If your nonprofit incorrectly classifies an individual as an independent contractor, it can be held liable for employment taxes for that worker, plus a penalty. Even worse, you can be liable for some of his taxes! An employee is to be paid using the system of a W-2, which includes withholdings for Social Security and Medicare taxes.
As with its employees the nonprofit should maintain an accurate and current record of its volunteers. First and foremost please understand that an employee cannot volunteer their time to their employer, and once a volunteer becomes an employee, for income tax purposes, they cannot go back to being an uncompensated volunteer without first officially resigning their employment position. The nonprofit is allowed to appreciate their volunteers, as long as the total value of the gift(s) does not exceed $100.00 during the tax year. If the nonprofit gives a volunteer more than $100.00 during the year, then that volunteer becomes an employee and Medicare and Social Security taxes (FICA) must be withheld and a Form W-2 must be issued at the end of the year.
Form W-9 is used by an organization to request the name, address, and Social Security number for an independent contractor who will be providing services to the organization. Another term for an independent contractor would be consultant or freelancer. There’s a distinction made between independent contractors and employees. They are treated differently in how their income is taxed and reported to the IRS. All non-employee recipients of nonprofit funds (i.e. independent contractors) who receive $600.00 or more during the year must receive a Form 1099. The funds cannot be classified as a non-taxable “gift”.
A general rule is that anyone who performs services for your organization is your employee if you can control what will be done and how it will be done. The nonprofit should maintain an accurate and current record of employees. If the organization pays an individual more than $100.00 during the year, then that person is an employee and Medicare and Social Security taxes (FICA) must be withheld and a Form W-2 must be issued at the end of the year. Employers must withhold the employee’s share and pay their matching share of FICA for employees. Employers cannot classify employees as self-employed to avoid paying FICA.