Processing payroll is one of the most important — yet administratively burdensome — ongoing business tasks for non-profit organizations (NPOs). The constantly changing donor and funding landscape can prove particularly challenging, and ensuring your organization is always compliant is critically important. But compliance also applies to employment standards and regulations.
Managing payroll for non-profit organizations (NPOs) in Canada presents a unique set of challenges. These challenges stem from limited resources, complex regulatory requirements, and the need to balance mission-driven goals with administrative duties.
We look at some of the common payroll challenges that nonprofit organizations face, as well as tips that will help improve the nonprofit payroll process and ensure corporate time and resources are being used effectively.
Common Payroll Challenges for NPOs
1. Payroll Errors Due to Manual Processes
For many nonprofit organizations, payroll can be one of the most intimidating employer tasks and one of the biggest operating costs, especially when done manually. There are numerous rules and regulations to be aware of, forms to file, deductions for withholding, and missed deadlines or mistakes that can result in financial penalties and unhappy employees. Given that manual payroll processing can lead to more errors, it’s surprising how many organizations still rely on physical timesheets and Excel spreadsheets!
Common payroll processing errors include:
- Miscalculating Payroll: If your nonprofit organization uses physical timesheets to calculate payroll, you leave it open to human error. With all the payroll data to track time and attendance, vacation pay, overtime, and commissions, occasionally mistakes will inevitably be made.
- Missing Payroll Deadlines: In other organizations, nonprofit payroll must be processed several days in advance to ensure employees are paid on time and deductions are processed without remittance penalties and late fees. Leave it too late, and banks won’t have time to process the deposits, resulting in disgruntled employees who might be relying on timely paychecks to meet critical financial commitments such as mortgage payments.
Mitigation Strategy: Non-profits can mitigate payroll errors resulting from manual HR processes by adopting automated payroll software to streamline calculations and reduce data entry mistakes. Additionally, providing comprehensive staff training ensures accurate and consistent payroll management.
2. Navigating Complex Legislation
Executive Directors of nonprofit organizations must wear multiple hats, from leader, manager, fundraiser, and communicator to planner, strategist, marketer, and bookkeeper. The list is endless. To be effective as a NPO leader, the Executive Director must wear each hat equally well. Knowing when to take one off and hand it over to a professional is an important skill in itself.
Nonprofit payroll is one of the tasks that should be taken off the hands of the Executive Director as soon as possible because, if you’re not a Payroll Compliance Practitioner (PCP), it can be difficult to keep up with payroll legislation.
- Understanding Complex Tax Laws: NPOs must navigate federal and provincial tax regulations, including deductions for Canada Pension Plan (CPP), Employment Insurance (EI), and income tax. Staying compliant requires a thorough understanding of these laws.
- Staying Updated on Legislative Changes: Tax laws and employment standards frequently change. NPOs must stay informed about updates to minimum wage laws, statutory holidays, and other regulatory adjustments to avoid penalties.
- Navigating Various Provincial Laws: NPOs operating in multiple provinces must comply with each region's specific employment standards and tax laws.
Mitigation Strategy: Subscribe to updates from the Canada Revenue Agency (CRA) and provincial tax agencies. Consider consulting with a payroll professional or accountant who specializes in non-profit regulations. Consider centralizing payroll functions to ensure consistency.
Some of the common complexities that come with nonprofit payroll legislation that the PCP must know include:
- How much CPP and EI to deduct from the pay checks of full-time employees, as well as how much CPP and EI to contribute as the employer.
- How to calculate vacation pay and when to issue termination pay (which can differ from province to province).
- How and when to file the Record of Employment (ROE) of employees who leave.
- How and when to issue T4s (or T4As for contractors) and handle vacation rollover.
Executive Directors already have so much on their plates that adding payroll when they’re not a PCP can be overwhelming.
3. Allocating Employee Wages to Grants and Restricted Funds
Applying for and receiving grants to fund specific projects that support the nonprofit’s mission is part and parcel of operating a nonprofit organization. Grants received can be used to cover nonprofit payroll expenses for certain members of staff and their work on projects related to the grant; however, it’s important to properly allocate the wages back to specific grant funds.
For example, if your nonprofit organization obtained a grant for a specific project, and you hired an employee to help complete that project in addition to undertaking some of the organization’s administrative tasks, the employee must track their time and activities performed on the grant project back to the specific grant from which their wages will be paid. Time spent on activities unrelated to the grant project would be paid from an alternative fund.
Time and activity tracking and allocation can get complicated if you have multiple employees working on different projects covered by different grants.
Mitigation strategy: Non-profits can mitigate payroll errors by implementing precise time-tracking systems that allocate employee hours directly to specific grants or fund programs and by regularly auditing payroll data to ensure compliance with grant requirements and accurate fund allocation.
4. Worker Classification Issues
- Employee vs. Independent Contractor: Misclassifying workers can lead to significant penalties. Determining whether someone is an employee or an independent contractor affects tax withholdings and benefits eligibility.
- Misclassifying Employees: There’s a lot to remember regarding nonprofit payroll processing, even more so when it’s done manually. For example, the classification that each of your employees falls under impacts payroll processing. Contractors are usually responsible for their own payroll deductions and require T4As instead of T4s.
Mitigation Strategy: Use the CRA’s guidelines to correctly classify workers. When in doubt, seek legal advice to ensure compliance.
5. Managing Volunteers and Honorariums
- Tax Implications for Honorariums: Providing honorariums to volunteers may have tax consequences. Misreporting these payments can result in compliance issues.
Mitigation Strategy: Keep detailed records of all payments and consult the CRA’s policies on honorariums to ensure proper reporting and withholding.
6. Budget Constraints
- Limited Financial Resources: Tight budgets can make it challenging to afford payroll software or hire experienced payroll staff, increasing the risk of errors.
- Cash Flow Management: Irregular funding streams can complicate the timing of payroll, leading to delays or inconsistencies.
- Lack of In-House Specialists: Smaller NPOs may not have dedicated payroll professionals because of budget constraints, increasing reliance on staff who may lack expertise.
Mitigation Strategy: Implement budget forecasting and reserve funds specifically for payroll. Explore affordable or non-profit-specific payroll solutions that fit your budget. Outsource payroll functions to professionals or services that specialize in non-profit payroll. This can reduce errors and ensure compliance.
7. Record-Keeping and Documentation
- Maintaining Accurate Records: Incomplete or inaccurate payroll records can lead to compliance issues and difficulties during audits.
Mitigation Strategy: Adopt a standardized system for record-keeping, whether through software or meticulous manual processes. Regularly audit your records for accuracy.
8. Technology Limitations
- Outdated Payroll Systems: Relying on manual processes or outdated software increases the likelihood of errors and inefficiencies.
- Data Security Risks: Without proper technology, sensitive employee data may be vulnerable to breaches.
Mitigation Strategy: Invest in reliable, secure payroll software that is scalable and suited to NPO needs. Ensure it complies with Canadian data protection laws.
9. Staff Turnover and Training
- High Turnover Rates: Frequent changes in staff can disrupt payroll processes and lead to mistakes.
- Lack of Training: Limited resources may prevent proper training for staff handling payroll.
Mitigation Strategy: Develop comprehensive training programs and documentation to ensure continuity. Cross-train employees to cover essential payroll functions.
10. Multiple Funding Sources
- Complex Reporting Requirements: Different funding sources may have unique reporting needs, complicating payroll management.
- Restricted Funds: Some funds may be earmarked for specific projects, limiting their use for general payroll expenses.
Mitigation Strategy: Use accounting software that can track funds from different sources and allocate expenses appropriately. Maintain open communication with funders about reporting requirements.
11. Year-End Reporting Challenges
- Preparing T4 Slips and Summaries: Accurate and timely year-end reporting is crucial to avoid penalties.
Mitigation Strategy: Keep up-to-date records throughout the year to simplify year-end processes. Set reminders for deadlines and consider using software that automates reporting.
12. Benefits Administration
- Managing Employee Benefits: Offering benefits can be complex due to tax implications and administrative requirements.
Mitigation Strategy: Work with benefits providers who understand non-profit needs. Ensure clear communication with employees about their benefits.
Tips To Improve Your Nonprofit Payroll Processing
1. Use Cloud-Based Payroll Software
Ditch the pen and paper, the calculator, and even the spreadsheet! Instead, consider using cloud-based payroll software like QuickBooks Online or Payworks to manage your nonprofit payroll. There are many benefits to cloud-based payroll software, one of the major ones being that there’s one central location for all your employee payroll data.
In addition, cloud-based payroll software usually has direct deposit capabilities and can automatically generate employee T4s and ROEs. Some even have the ability to generate and remit payroll taxes directly to the CRA.
Benefits
- Automation: Reduces manual data entry errors and saves time.
- Compliance Features: Many software solutions are updated regularly to reflect changes in tax laws and regulations.
- Reporting Tools: Generate detailed reports for audits, board meetings, and funders.
Action Steps
- Research Nonprofit-Specific Solutions: Look for payroll software tailored to Canadian NPOs, which may offer discounted rates.
- Cloud-Based Options: Consider cloud-based software for accessibility and automatic updates.
- Integration Capabilities: Choose software that integrates with your accounting and HR systems.
2. Use Time Tracking Software
Time tracking software like TSheets or Harvest means you can also ditch the physical spreadsheets. Instead, employees and contractors can track their time and submit it electronically, allowing for easier and more accurate tracking of time worked back to a specific project.
Benefits
- Accuracy: Automated time tracking reduces errors in wage calculations.
- Efficiency: Simplifies the process of collecting and approving timesheets.
- Data Insights: Provides analytics on labor costs and staffing needs.
Action Steps
- Implement Time-Tracking Software: Choose a solution that can integrate with your payroll system.
- Mobile Accessibility: Ensure staff can log hours remotely if necessary.
- Policy Enforcement: Set clear guidelines for time reporting and approvals.
3. Hire a Payroll Compliance Practitioner (PCP) to Manage Your Payroll
Some companies might feel that manual payroll is the only option they can afford and that paying for payroll services (whether an accountant, outsourced contractor or payroll software) is something they can't afford right now.
However, as mentioned, nonprofit payroll can be complex, and there are penalties for missed deadlines. It’s one of the critical functions that should be handled by an expert rather than being added to an Executive Director’s already full plate. Hiring a Payroll Compliance Practitioner (PCP) is a smart move. They will be responsible for some or all of the following:
- Recording employee timesheets
- Performing payroll tax calculations on wages, vacation pay, termination pay, and banked time
- Calculating employer health tax and work-safe (WCB)/WSIB filings
- Withholding employee deductions and making government remittances
- Processing direct deposits or paychecks for hours worked
- Submitting T4s for employee income tax filing
- Issuing ROEs (record of employment) for exiting employees
- Preparing bookkeeping entries
4. Outsource Your Payroll
In some cases, hiring a full-time PCP may not make financial sense for your organization. That’s when outsourcing your nonprofit payroll to a service provider like Enkel might make more sense. Not only will you get access to PCPs and experienced payroll professionals who are well-versed in compliance and upcoming legislative changes, but it won’t add to your team headcount, eliminating the need to deal with payroll personnel turnover, training, or vacation coverage.
In addition, outsourced services can scale with you and easily meet your growing organization's needs. Outsourcing payroll to a professional organization like Enkel also reduces the risk of payroll fraud, offering great peace of mind to busy Executive Directors!
Benefits
- Expertise: Access to professionals who specialize in payroll and compliance.
- Time Savings: Frees up staff to focus on mission-critical activities.
- Risk Mitigation: Reduces the likelihood of errors and penalties.
Action Steps
- Evaluate Providers: Research reputable payroll service providers experienced with Canadian NPOs.
- Cost-Benefit Analysis: Compare the costs of outsourcing versus in-house processing.
- Service Level Agreements: Ensure the provider offers services that meet your organization's specific needs.
5. Enhance Staff Training and Development
Benefits
- Competency: Well-trained staff are less likely to make errors.
- Compliance Awareness: Employees stay informed about the current regulations.
- Efficiency: Improved processes lead to time and cost savings.
Action Steps
- Regular Training Sessions: Schedule periodic training on payroll procedures and software use.
- Professional Development Opportunities: Encourage staff to attend workshops or obtain certifications in payroll administration.
- Create a Payroll Manual: Develop a comprehensive guide that outlines all payroll processes and policies.
6. Establish Standardized Payroll Procedures
Benefits
- Consistency: Standard procedures ensure uniformity across the organization.
- Accountability: Clear processes make it easier to identify and correct errors.
- Scalability: Standardization facilitates payroll system growth and onboarding of new staff.
Action Steps
- Process Mapping: Document each step of the payroll process.
- Checklists and Templates: Develop tools to assist with routine tasks.
- Approval Workflows: Implement a system of checks and balances for payroll approvals.
7. Improve Record-Keeping and Documentation
Benefits
- Audit Preparedness: Accurate records simplify audits and compliance checks.
- Transparency: Clear documentation enhances trust with stakeholders and funders.
- Historical Data Access: Easily retrieve past payroll information when needed.
Action Steps
- Digital Record Storage: Use secure, cloud-based storage solutions for easy access and backup.
- Regular Audits: Conduct internal reviews of payroll records to ensure accuracy.
- Retention Policies: Establish guidelines for how long to keep different types of records.
8. Stay Current with Compliance Requirements
Benefits
- Avoid Penalties: Up-to-date knowledge prevents costly fines.
- Reputation Management: Compliance enhances the organization's credibility.
- Operational Efficiency: Proactive updates reduce last-minute scrambles to meet new regulations.
Action Steps
- Subscribe to Official Updates: Receive notifications from the Canada Revenue Agency (CRA) and provincial authorities.
- Join Professional Networks: Participate in nonprofit and payroll associations for shared knowledge.
- Compliance Calendar: Maintain a calendar of key deadlines and regulatory changes.
9. Enhance Data Security Measures
Benefits
- Regulatory Compliance: Meets legal obligations under privacy laws like PIPEDA.
- Risk Reduction: Protects against data breaches and fraud.
- Trust Building: Assures employees that their personal information is secure.
Action Steps
- Access Controls: Limit payroll data access to authorized personnel only.
- Encryption: Use encryption methods for data storage and transmission.
- Regular Security Audits: Assess and update security protocols annually or semi-annually.
10. Coordinate Multi-Provincial Operations
Benefits
- Regulatory Adherence: Meets varying provincial laws and standards.
- Unified Processes: Streamlines payroll across different locations.
- Resource Optimization: Centralization can reduce duplication of efforts.
Action Steps
- Centralize Payroll Functions: Consider a unified system for all provinces.
- Local Compliance Checks: Assign responsibilities for staying updated on provincial laws.
- Customized Policies: Adapt procedures to meet local requirements where necessary.
11. Conduct Professional Payroll Audits
Benefits
- Error Detection: Identifies mistakes before they become costly.
- Process Improvement: Offers recommendations for efficiency gains.
- Compliance Assurance: Verifies adherence to all applicable laws and regulations.
Action Steps
- Schedule Regular Audits: Plan for periodic external reviews of payroll processes.
- Audit Trail Maintenance: Keep comprehensive records to facilitate the audit process.
- Implement Recommendations: Act on audit findings to improve operations.
Final Thoughts
Payroll is one of those functions in a nonprofit organization or any organization in fact that you can’t afford to get wrong. Payroll legislation can be complex, and to ensure compliance, a Payroll Compliance Practitioner should manage payroll rather than the nonprofit organization’s Executive Director.
If managing payroll is something you’re looking to outsource, Enkel’s experienced payroll team can work with you to streamline and automate this otherwise burdensome task. We combine the best in payroll technology with our experienced team to ensure timely, accurate payroll processing for our clients.
Learn more about our payroll services.
