If you are like most nonprofits, paying people for services is your largest expense. It’s not unusual for payroll and contractor payments to make up 80% or more of total expenses. It’s also an area with many tax compliance issues and bookkeeping challenges. Consider what combination of accounting software and payroll software and/or services would help you best manage paying employees and independent contractors.

If you need to brush up on employees vs. independent contractors, here is a link to a good article and here is a link to an IRS resource.

Top Considerations for Coordinating Payroll with Accounting

1. Consider tracking payroll against restricted grants.

If you need to track payroll against multiple grants or contracts, you need a solution that makes this process as seamless as possible. QuickBooks Premier Nonprofit desktop software combined with QuickBooks Assisted Payroll, a full service payroll solution, will allow you do job costing, which is how you can assign payroll and related taxes to restricted grants or contracts. You cannot do job costing for payroll in QuickBooks Online.   If you outsource payroll to another payroll service, you will need to manually assign payroll to grants. This process can be very time consuming and prone to errors if you have numerous grants.

2. Consider using a full service payroll solution.

Payroll is a ball you cannot drop. Paychecks need to be cut, payroll taxes need to be submitted and payroll tax returns need to be prepared and filed, all on a regular schedule.  If a mistake is made with payroll, you may spend countless hours fixing it – filing amended tax returns, paying penalties – you just don’t want to go there.  We strongly recommend using a CPA or a payroll service company for payroll instead of doing it yourself.

If you use a third party payroll service, consider how you will enter payroll transactions into your accounting software.  If you have a lot of restricted grants that cover payroll, see #1 above. Otherwise, consider if the payroll service integrates with your accounting software or if the payroll transactions can be imported into your software. The last resort is manual entry of payroll which is time consuming and more prone to bookkeeping errors.

3. Consider using direct deposit instead of physical paychecks.

Physical checks get lost and create a problem if employees do not promptly cash them.  Use direct deposit instead. If you have employees without bank accounts, use a payroll service that can provide reloadable pay cards, which are debit cards given to employees and funded each pay period with the net paycheck amounts. Direct deposit ensures all of your payroll will clear the bank in a timely manner which greatly expedites reconciling your bank account and eliminates follow up on outstanding paychecks.

4. Consider your need for time tracking.

TSheets is one example of a third party time tracking software that can integrate with QuickBooks and other accounting software. Capturing, approving and submitting time for payroll can be a lot of work. Plan ahead for how your accounting software and/or payroll service software can help you manage this task.

5. Consider starting with a less expensive full service payroll solution and move up if your needs change.

If you only have one or a few employees, consider using an inexpensive full service payroll company such as Patriot Software or Wagepoint. They charge per payroll and per employee, so it’s cheaper if you run payroll less often. QuickBooks Online Payroll and QuickBooks Assisted Payroll are based on a flat monthly rate which may be a better deal if you run payroll weekly. If you need to change payroll service, it’s best to do this as of January 1 to avoid mix ups on filing payroll tax returns and the need to enter year-to-date payroll in the new service.

Save Time and Headaches

Too often we see nonprofits select a payroll service without considering how it will fulfill their needs or tie into their accounting system. Seek out the combination of payroll service and accounting software that works best for you. Don’t focus on fees at first. The time savings and reduction in headaches that comes from having the right payroll service/accounting software combo is well worth the cost. Not only will you avoid IRS problems and other fires, you will enjoy a smoother, more efficient payroll and accounting process as part of your daily operations.