How to Set Up a Nonprofit Payroll System

When a nonprofit organization begins employing workers, it first must establish a payroll system. The organization needs to decide how often to distribute paychecks, for example. You can disburse paychecks on any schedule you choose — weekly, biweekly, semimonthly, or monthly. Semimonthly is the most common schedule for payment, but the decision is up to the organization.

Although in-house staff can handle payroll, contracting with a payroll service is a better option. Most banks either provide payroll services or can recommend a service. Payroll services are inexpensive — they’re almost always cheaper than assigning a staff person the job of handling payroll.

They make the proper withholding deductions based on income level, number of dependents, and state laws; make tax deposits; and maintain a record of vacation and sick leave. Usually when you contract with such a service, it requires that you keep enough funds on deposit with the company to cover two or three months of salaries and benefits.

If you decide to handle your own payroll, be sure to make tax deposits on time. Failure to pay federal and state payroll taxes can get your organization in serious trouble. Check the Internal Revenue Service (IRS) website for the latest information.

Typical deductions include the following, although state tax laws vary:

  • Federal income tax withholding

  • Social Security and Medicare (must be matched by the organization)

  • State income tax withholding

  • State unemployment and disability insurance

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