A federal regulator recently reported $875 million in payroll tax delinquencies by 501(c)(3) organizations. Even though tax-exempt organizations don’t generally pay income taxes, they are still subject to payroll taxes.
While the report downplayed the gravity of the problem by pointing out that only 3.8% of tax-exempt organizations (i.e., numbering 64,200) are delinquent, it feels like an epidemic to me. That’s because unpaid payroll taxes are not just an organizational liability. They are a personal liability for nonprofit managers and volunteer board members.
While we don’t know the details of this federal debt, it could lead to many potential observations.
There are plenty of staff and trustees who didn’t know they signed up for this. Personal liability for organizational debts is an unfortunate reality of both fiduciary duty and payroll taxes. Relevant board member training in nonprofits is often cursory and sometimes nonexistent.
Many staff and trustees lack sufficient general business training. For good reason, mission-driven individuals typically rise to the top leadership positions in nonprofits. But a drive for the organizational mission is not a substitute for understanding the compliance needs of what is — like it or not — a business.
There are many nonprofits serving similar community needs that have an obligation to find mutual synergies. These could range from cooperating in programs, shared services, and even merging. There are numerous reasons, territorial and otherwise, why these things don’t happen as often as they should; however, outside pressures continue to mount. Beyond the potential for pure economic efficiency, it’s typically impractical for smaller organizations to have the internal compliance expertise they need to operate safely and effectively.
Where there are federal tax liabilities… This payroll tax issue isn’t isolated. Nonprofits often struggle with a host of compliance issues — state and local tax liabilities, Wage and Hour, workers’ compensation, financial reporting, health care, liability insurance – and the list goes on.
I’ve previously noted the pitfalls of internally processing payroll. In most cases, this endeavor is simply too dangerous to assume the risks. But this is really about more than the risks of payroll compliance. It’s about meeting the challenges of society’s ills in light of an increasingly complex business environment. Nonprofit leaders and trustees need to proceed with their eyes wide open.
Counterpart CFO and Nonprofit BackOffice specialize in helping nonprofits achieve excellence while avoiding compliance pitfalls. Contact us for a free, no obligation consultation, and we’ll identify specific ways we can help you.