Allocating funds to pay nonprofit payroll taxes is complex and challenging. Questions often arise on how to allocate payments between different funding sources.
Editor’s Note: The following questions and answers represent real world challenges nonprofits encounter managing nonprofit accounting everyday tasks. Our advisor column is intended to provide basic advice on questions related to the topic. Answers to these questions are simply the view and opinion of our nonprofit accounting pros. Nonprofit Accounting Pro shall not be liable, answerable or accountable for any loss or damage resulting from the advice given by our advisor.
Allocating Nonprofit Payroll Taxes Among Funding Sources
Question: I work for a 501(c)(3) and we were recently awarded a new funding source grant. We share staff among our two programs. We also have our payroll processing outsourced and don’t have a payroll module in our QBO Advanced. So, we record the payroll entries as expenditures with multiple line items. Is there any way to easily allocate FICA taxes and State unemployment taxes by payroll between the two funding sources? Our one grant is large – $441,666 and the other is $30,000. Salaries out of the larger budget are $275,782.06. Salaries out of the smaller budget are $22,581. Sorry if this is a silly question, but is there software that can allocate the payroll taxes and unemployment automatically somehow? Even if we have to bring the software in-house. The payroll taxes and unemployment taxes incurred from the $22,581 need to be allocated to the benefits in that budget rather than pushed onto the other larger grant. I hope this makes sense, please let me know if you need any other information, and thanks in advance for any help!
Answer: Yes, go to araize.com and check out FastFund Payroll software. It lets you allocate employee’s salaries and payroll taxes to multiple program and grant codes based on hours worked, or by percentage. You can also set up your Budgets for each grant so you can properly track your budget to actual to make sure you are in compliance.
Recording Nonprofit Payroll Taxes
Question: I’m trying to allocate the Total Payroll to various Customers and Classes, multiple per employee, essentially I want all the associated payroll taxes to be allocated along with the wages. The book I’m using as guidance says: “Notices that only expenses are allocated, not withholding (bc that’s not your expense, it’s the employees money that’s withheld).” This confuses me, yes we withhold employee taxes and remit them, but this is still part of the wage. I feel like the total cost is the gross wage and employer taxes. I am thinking about this correctly?
Answer: There are two types of payroll tax withholdings – Employee (not your expense) and Employer (your expense). Payroll Tax expenses incurred by the employer includes Social Security, Medicare and Unemployment. Some states have supplemental employer taxes. The employee’s withholdings for income taxes, Social Security and Medicare are not expenses for the company. When recording payroll, you are recording the Gross Salaries paid to each employee, plus the employer payroll tax expenses. If you are looking for an easy way to handle these allocations, go to araize.com and check out FastFund Payroll.
1099 for Executive Director?
Question: I am the ED of a new 501c3 organization that does Fitness programming for individuals with intellectual and developmental disabilities. I do not currently get a salary. Our families currently pay a fee for classes and then our instructors are 1099. As the ED, am I able to get paid as a 1099 with the same rate for teaching classes like all other instructors, or am I unable to due to my position? Thank you all for your advice.
Answer: Unless you provide the same services to other nonprofits, you are considered an employee. For more detailed explanation of how you should classify your pay, go to: Independent Contractor.
Allocating Fundraising Wages
Question: How do you decide the hourly equivalent for salary exempt employees exceeding 40 hours worked in a work week, when they have also spent time on fundraising efforts in that work week? Do you take their weekly salary and average it out by their total hours for the week by the number of hours they worked that week to determine the hourly equivalent to assign to fundraising OR do you just assign their straight hourly equivalent of how many hours they spent on fundraising (regardless if they worked less than or more than 40 hours total in that week)?
Answer: Since salaried employees get a fixed salary regardless of the number of hours worked in a week, you should allocate to fundraising based on the number of hours they worked for the pay period.
Separate Payroll Bank Account?
Question: What is the reason to set up a separate payroll bank account besides tracking the cash? I remember hearing once that it is a different type of account?
Answer: There is no valid reason to set up a separate bank account for payroll only. This only creates more work since you have to manage and reconcile two bank accounts.
In the normal course of performing nonprofit payroll, you may have encountered some of these issues. It is good practice to consult a nonprofit accounting pro to determine the best course of action to prevent costly errors.
We hope our answers provide clarification. We welcome your questions and feedback. Feel free to comment below.
Joseph Scarano is the CEO of Araize, Inc., developers of cloud-based FastFund Online Nonprofit accounting, fundraising and payroll software solutions to help your nonprofit become more transparent, accountable and sustainable.