April 11, 2014
According to Nonprofit Quarterly, unpaid payroll taxes are not an uncommon problem in the nonprofit community. The article asserts budget constraints force financial managers to hold off on payroll taxes until grant monies come through. When the check arrives, more pressing obligations take precedence and taxes remain unpaid.
While maintaining cash flow can be difficult for a nonprofit, deferring tax payments is a risky way to address that issue. The IRS may appear more lenient than other creditors and these tax payments may seem less important than paying employees, however, taxes and the penalties associated with not paying them add up quickly, which can put an organization in a perilous financial hole.
"Virtually any alternative – including taking on additional debt, restructuring, downsizing, and filing for bankruptcy – is better than failing to remit withholding taxes to the government," the article stated.
Control what you can't change
Even as a tax-exempt organization, most nonprofits are not free of all financial obligations to either a local, state or the federal government. When operating on a tight budget, even small tax amounts of tax owed by a nonprofit can be a burden. While meeting payroll tax may simply require some tough decisions, other taxes come with more options.
Nonprofits are responsible for paying state unemployment insurance (SUI) tax each year. The tax is usually paid four times a year and the rate varies from year to year. This tax can be avoided by opting out of the SUI pool and becoming a reimbursing employer. Under this method, a nonprofit owes only the amount that is paid out in UI claims. The best example: if there are no UI claims, a nonprofit has no UI obligation for the year.
Opting out of SUI comes with a risk
However, if unemployment at an organization suddenly spikes, a nonprofit can find itself with a large unfunded liability. To mitigate this risk, nonprofits need to take advantage of alternative methods for meeting their obligation. An unemployment savings program or bonded service program are two ways that nonprofits can save on UI tax costs while providing a safety net if claims suddenly jump. Unlike SUI tax pools, nonprofits can make these payments quarterly and know what the amount is upfront.
The ability to properly budget for the cost of UI helps ensure that the costs are not pushed down the road while waiting for grant funding or other revenue. Maintaining more control over the cost of UI will free up funds and budget space to help prepare for other obligations such as payroll tax. To properly take advantage of alternative methods for meeting UI costs, nonprofits should turn to experts in the field. Those who understand the system can help nonprofits avoid overpaying claims and choose the method that is best for the organization.
For information on how your organization can cost-effectively meet its unemployment insurance needs, contact First Nonprofit Group at FNCUI@firstnonprofit.com or visit www.firstnonprofitcompanies.com.
Working with Marshal Whittey at First Nonprofit has been a great experience. He handles our request as a priority and goes above and beyond to resolve any issues we have in a timely manner. Marshall follows through to the end and ensures our needs are met. He has been a great resource for LSC and our “go to” for any tax questions we may have. With LSC transitioning several facilities into one federal tax identification number, First Nonprofit was able to assist and provide guidance with best practices resolving claims to each entity. Additionally First Nonprofit provided knowledge (information materials) and one on one training to HRS group with best practices to handle claims state adjudicated, fraudulent claims, and appeals. And processing information in the First Nonprofit [unemployment claims] system allows for timely information can be collected.
My experience with FNP has been wonderful. Unemployment in general is quite confusing and FNP has simplified the process for us. Everyone we have reached out to or worked with has been very helpful and follows up to be sure we understand the information. I am so happy we made the switch to FNP!
First Nonprofit smoothed the unemployment perils for our organization during Covid. Without the ability to cap our UI exposure, we would not have been able to weather the storm. The program worked perfectly and we have come out of the pandemic ready to forge on. Thanks FNP!
My experience with the FNP has been fantastic. The idea of setting funds aside for the unemployment tax liability is a bedrock for nonprofit organizations like mine, namely ASHBA; what is even more advantageous is having the FNP as a custodian of those funds. 100% recommended!
I would like to comment on my experience with FNP….to date our District has saved $1,000’s of dollars by being enrolled in the First Nonprofit program. My only regret is that we did not know about this method of paying unemployment tax years ago….as I had figured about five years
ago, had we enrolled 15-20 years ago, we could have saved our small school district upwards of $500,000 in payments to IDES. Also we would have had a pretty hefty sum of money in our Reserve Account. Thankfully I attended a workshop hosted by First Nonprofit back in 2015 which got the ball rolling!
I have worked with the First Non-Profit Team for many years, and I appreciate the quick response and care that Cecilia and the team provides anytime I have questions. While there are other providers that may provide like services, First Nonprofit will always be my first choice! I appreciate you!
First Nonprofit has been easy to work with and makes the administrative process easier and smoother. We enjoy working with you.
Luckily for us, our interactions regarding any issues with staffing has been very minimal! I can say that all other interactions with regards to billing, 941 reporting, etc. have been extremely pleasant, accommodating and easy to work with. Kim Ghanayem is always prompt, professional and friendly. Thank you so much!