It’s generally assumed that nonprofit businesses with a 501(c)(3) status, (particularly churches,) don’t have to pay taxes on – well, anything. While that is mostly true, there are definitely exceptions to the rule. Not fully understanding those exceptions could cost your nonprofit organization money and, in extreme cases, your organization’s 501(c)(3) status.
If you do the bookkeeping for or manage a nonprofit, it’s important to remember that your charitable status does not give you a license to never be taxed on any of the money you bring in. As a nonprofit entity, it is crucial for you to understand the nuances of taxable vs. nontaxable income.
Let’s talk about what it looks like to maintain a charitable status and what situations your nonprofit might face where funds received need to be classified and reported as profit.
Maintaining Charitable Status
First, to be deemed a nonprofit an organization must file for and receive 501(c)(3) status from the IRS. A non-profit also needs to obtain a state business license. Rules can vary from state to state, but generally, your state business license will need a renewal occasionally. The 501(c)(3) status does not need to be renewed but can be revoked by the IRS if they determine it is being exploited for profit.
Every nonprofit organization must file a Form 990 each year. While this form isn’t reporting taxable income, it does report your organization’s income and expenditures to the IRS each year. This transparency with the IRS is as much for your organization’s protection as it is for the IRS’s. As we’ll see ahead, there are many “gray” areas nonprofits can find themselves in where the line between donations and for-profit transactions can get blurry. The 990 form helps a non-profit prove that it is following the rules and not abusing its charitable status.
What qualifies as non-profit taxable income?
The most basic way to determine whether or not your nonprofit’s income is taxable or not is to consider if it’s actually a freewill donation or if it is a transaction of goods for money. Anything not purely a donation needs to be taxed as profit.
Let’s look at some situations an organization might find itself in where these questions might arise:
It is not uncommon for large churches to have a coffee shop, bookstore, or thrift shop under their organization’s umbrella. Even if the profits from these stores go directly to fund the church’s charitable work, they still need to be taxed the same as any independent coffee shop or bookstore would be.
In a coffee shop, gift shop, or thrift store, customers exchange money for a product sold for a specific price. Ultimately, this is a for-profit business functioning within a non-profit.
The same policy applies to the exchange of services for money. Let’s say a church runs a daycare center out of its facility. If parents and guardians are paying the church for the service of caring for their children, this is an exchange of services for profit. Even if a church is renting space out to another non-profit organization or renting out its resources, (like a parking lot), that rent income still needs to be reported as profit.
Reporting Taxable Income as a Nonprofit
If your nonprofit organization engages in transactions like the ones mentioned above and is receiving any income that doesn’t qualify as purely donation, it will need to take extra steps to ensure that income is accounted for properly.
The 990T (990 Taxable) form is specifically for nonprofits to report any income that needs to be taxed as profit. This is a separate form than the 990, which every nonprofit needs to file, and does not account for taxable income.
Situations that Fall Under “Donations” and Do Not Need to be Taxed
What about more nuanced situations like fundraisers, you might ask? What organization doesn’t occasionally host a raffle, a “spaghetti dinner,” or a bake sale to raise money for a charitable cause or mission?
As long as the money raised goes directly to the advertised cause, an organization can have a “suggested donation amount” or “pay what you can” policy that keeps it under the “donation” bracket, thus avoiding taxes. In this instance, there isn’t a consistent revenue stream being built under a non-profit umbrella; it is a one-off event.
Similarly nuanced are situations where an organization is refunded for products/services. Perhaps a youth group wants to have t-shirts with their group’s logo, or a small group wants to host a catered dinner event. An organization can ask participants to pitch in a set amount of money to cover those costs, and because it is a one-time, low-volume transaction with direct ties to a net-zero profit, it does not need to go under the “profit” bracket.
Consequences of not following the rules:
Conceivably, if your organization has 501(c)(3) status and the IRS determines that you are not properly following their rules, they retain the right to revoke your charitable status.
Unfortunately it is totally feasible and possible for an organization to start a fraudulent non-profit simply to get around income and property taxes. The IRS is fully aware of that, which is why the 990 and 990T forms are necessary to keep transparency and accountability between a non-profit and the government.
In the same vein, it is also possible for a nonprofit with good intentions to appear to the IRS as if it has been acting fraudulently, simply by not understanding and distinguishing correctly between what income falls under “donations” and what income falls under “profit.”
If you are a bookkeeper for a nonprofit, it’s important to tread wisely as you make these distinctions. Your charitable status and your organization’s reputation hang on it!
At System Six, we want you to know that you don’t have to do this work alone. We have years of experience helping churches and nonprofits manage their bookkeeping, and we also can make referrals to vetted, experienced nonprofit-specialty CPAs as resources for 501(c)(3) companies.
Want to learn more? Contact us today!
Modern payroll is complex, covering everything from taxes to benefits to managing a variety of employees and contractors. As your remote finance team, we employ a robust tech-stack of cloud-accounting tools to streamline these exact payroll processes for you. These tools not only allow us to manage consistent, trustworthy compensation for your employees, but also provide best-in-class reporting capabilities and integrations with your accounting software.
But many may still be wondering, is outsourcing payroll really worth the investment?
If you’re a small business owner with only a few employees or have a history of managing payroll on your own, you’re probably hesitant to outsource this responsibility. Read on to see three ways that outsourced payroll provides value far beyond simply compensation management.
The Tax Arena
Paying employees properly is far more complicated than simply managing time, wages, and cash flow; you need to account for all of the complex tax details.
Outsourcing payroll includes offloading the coordination and liability of properly setting up and filing employees’ tax paperwork. System Six uses payroll specific tools like Gusto because, should a mistake or discrepancy arise in the tax filing process, Gusto takes on the responsibility of paying any fines and penalties associated with late or incorrectly filed returns.
With remote work growing in popularity and normalcy, registering employees for taxes isn’t simple. Small and big businesses alike employ remote workers across multiple states, cities, and municipalities. While this opens doors to valuable possibilities, it also creates new hassles in the onboarding process. In addition to differing tax codes, states have inconsistent implementations and descriptions of their rules and regulations. This can lead to confusion, mistakes, and possible penalties as you onboard employees.
When you outsource payroll, we ensure your employees are paid on time, but also partner with another firm, CorpNet, who assists with registering for tax accounts in states when you expand or hire in new areas of the country. CorpNet will communicate with each state on your behalf, ensuring that each state’s tax accounts are properly set up, submitting essential paperwork on your behalf.
The second value-add of outsourced payroll tools is assistance with benefits management. A high priority for today’s workforce is the availability of benefits, including paid time off, insurance, and 401ks, just to name a few.
Just like tax registration can vary from state to state, benefit requirements vary also. For instance, certain states now mandate that all employees be provided paid time off, regardless of whether they are part-time or full-time. With remote work on the rise, employers may find employees working from states with varying PTO requirements.
Some outsourced payroll platforms have the capability of accounting for each state’s PTO requirements and codes. They can then track and manage PTO hours for employees, which is a huge time saver for business owners.
This is where we love using a tool like Gusto with our clients. Gusto offers both benefits packages through its own network of brokers and more recently added the ability to “bring your own broker.” This new feature allows its clients to reap the rewards of running benefits directly through the Gusto software while always maintaining a relationship with the broker of their choice.
While we’re singing Gusto’s praises, we need to mention a unique feature they now offer, the “Gusto Wallet” app. For the company with employees who occasionally request or find they need an advance on their paycheck, Gusto Wallet can be a lifesaver for employers and employees alike. Personally taking responsibility for and tracking advancements on payroll is risky and never advisable for business owners. With the Gusto Wallet app, however, employees can set aside monthly money from their checks that allow them to access emergency cash in between paychecks if the unexpected happens. Providing practical ways of making financial health a reality for employees is a huge benefit.
HR Tools & Support
The final added benefit is more robust HR tools. From advertising and managing job postings to job offers and onboarding to assisting with performance reviews, payroll platforms offer a lot of tools to help the modern business owner with HR responsibilities. For example, Gusto’s job postings integrate with popular job boards and their onboarding allows new employees to electronically sign custom documents, such as handbooks.
Some of these tools are newer to Gusto’s suite, and they can be a huge asset for businesses that need help getting off the ground and don’t have the necessary staff to take on all the HR functions themselves.
As a part of holistic client accounting services, we recognize the immense overlap between managing payroll and other elements of a healthy human resources department. Streamlining employee compensation goes hand in hand with caring for and supporting your employees. In simpler times, payroll was just a check every other Friday, but now payroll is intertwined with many facets of being an employer. Outsourcing this component of financial management is an incredible benefit to business owners; it allows them to focus on the business and not get lost in the financial complexities of PTO, benefits, family medical leave, and more.
Outsourced Payroll is for Everyone
These days it really doesn’t matter whether you’re a brand new start-up with just one employee or an established, multi-million dollar business – outsourcing payroll to a trusted partner is a great option for everyone. Simply put, the time, unnecessary costs, and headaches outsourcing saves employers are worth the costs.
So let’s talk – we are here to help companies set up and manage payroll as a part of our outsourced bookkeeping and accounting services. Whether you need to streamline your payroll processes, onboard employees across a range of states, or just need to get started with payroll, now is the time to integrate a fully tech-enabled set of financial systems to manage your business with efficiency and accuracy. And that will ultimately free you up to focus your time and energy on other priorities, like running their business, investing in their passions, or spending valuable time with family!
A good fourth quarter just might be the most important win of your business year, because it demonstrates that you know how to implement the right strategies to succeed when and where it counts.
Reviewing this year’s financial records, as well as the goals you made at the start of the year, is a great place to begin gathering the information you need to build the right strategy for the end of the fourth quarter.
Do you hope to show profitability or growth? Do you have investors or stakeholders who are expecting you to hit certain metrics? Did you have a challenging first quarter and do you want to balance it with a big final quarter, or do you want to save those sales for a strong Q1 in 2022? What insights can you pull out of the past year to strategize setting new goals next year? Depending on your situation, here are our tips for making the most of your final weeks of the year.
No matter your situation, there are a few things you should double check and remember.
- If you have a single member LLC but have elected as an S corp, make sure to check with your CPA to make sure you have taken the appropriate salary for the year. If not, you can still change your salary over the next few weeks as needed.
- The holidays is a great time to be generous:
- If you are in the position to do, charitable donations can make a big difference in your community, and they will reduce your taxable income, helping reduce the tax bill you’ll have to pay come April
- Also, it can be a great time to be generous with your team. Whether $50 or $500, a holiday bonus can go a long way to keep your team happy, especially critical in this competitive labor market. But, remember, you must record these bonuses or gifts as income as part of your payroll system. Christmas gifts mean withholding taxes for both the employee and employer – so make sure you pay these through your payroll system, and not via cash!
Strategies for when you’re ending the year with strong profits.
So, you’ve had a great year, and your profits reflect it. What strategies can you implement to reduce potential liabilities and secure conservative metrics before the next tax season?
Take the time to go back through your books and make sure you’ve taken advantage of tax-deductible expenses throughout the year. This is where detailed bookkeeping and implementing accounting technology throughout the year will pay off. Make sure you haven’t missed any valuable write-offs!
If you’ve accounted for all your tax write-offs, this may be the perfect time to purchase new equipment or restock inventory. Significant expenses will reduce your overall taxable income for the year, giving you much-needed new equipment or increased inventory, and importantly, relief on your forthcoming tax bill. Don’t buy equipment just to reduce your taxable income, however – these purchases should be purchases you are going to take on, regardless of timing. But, if you are going to spend the money, spending it in December 2021 vs. January 2022 means you’ll help reduce taxes you must pay come April 2022.
On the flip side, if you are experiencing high demand from your customers in this final quarter, can you defer some of that demand into Q1 2022? Having those customers purchase in Q1 2022 will help reduce your 2021 tax liabilities by reducing your income in 2021. Of course, you’ll still pay income tax on those sales, but by having a customer purchase occur in January 2022, vs. December 2021, you don’t owe Federal Income tax until April 2023 for that sale vs. April 2022 if that sale had occurred just a few weeks earlier in December.
Of course, pulling forward expenses and pushing out demand also impacts what your 2021 P&L looks like. So make sure your actions aren’t going to cause you to miss important revenue or profit goals.
Strategies for when you’re ending the year behind in profits.
What if you’ve reached the fourth quarter and your profit/loss balances don’t match the goals you set for your business at the beginning of the year? What strategies can you implement in the remaining weeks of this year to bring your profits up?
Before panicking, start by critically evaluating your annual numbers. How does this year’s fourth-quarter profit and loss statement compare with last year’s? How much more do you need to earn to meet your goals before the new year? Were the goals you set maybe unrealistic?
Once you have concrete numbers to work with, you can strategize ways to bring up your fourth-quarter profits much more efficiently.
Obviously, how you bring up profits at the end of the year will differ widely depending on the type of business you have, but some helpful questions to consider may be:
- Are there unsold customers from earlier in the year you can follow back up with?
- Are there ways to improve or change up your marketing strategies this holiday season? Would a sale drive a big increase in volume?
- Do you have any stock surplus that you can strategically market and sell?
- Are their proposals in the pipeline that you can push through before the end of the year?
Don’t forget to use the information you gather during this time to help you set the appropriate goals for the coming year. Take a moment to recognize sales trends in your industry, particularly if you have historically strong months or quarters. This can help you balance your annual budget and build sales strategies accordingly.
We may only have a handful of weeks left this year, but there are a lot of things you can do in a relatively short amount of time to finish this year well. Do you have questions about getting a fourth-quarter strategy in place? We can help.
Businesses employ independent contractors all the time, in multiple capacities. Perhaps you hired a freelance designer to create marketing materials for your business this year, or maybe you brought in an independent consultant to develop strategies to improve your operations. If you used a contractor or vendor this year and paid them $600 or more, you need to be prepared to issue them a 1099 tax form by January 31.
1099’s can be complicated and confusing, dreaded by employers and contractors alike. Even if you have experience with issuing or filing 1099s, you may have missed recent changes in tax laws that might affect you this year. Unfortunately, the consequences of failing to use 1099s properly can include fines and penalties, so understanding these complexities is essential. Here are some steps and considerations to keep in mind as you, the employer, prepare for the end of the year.
The first step is to figure out which 1099 form your contractor will need. As of 2021, there are 20 varieties of 1099 forms, but the 1099-NEC (non-employment compensation) form and 1099-MISC form historically have been the ones most commonly used for contract employees who were paid $600 or more during the year.
Use the Proper 1099 Form
Why is this important to know? Until 2020, the 1099-MISC form was used to report payments to independent contractors and vendors for services rendered, but differing due dates created loopholes in the system that were being abused. As a result, beginning in 2021, the 1099-NEC was reinstated to report all payments to non-employed individuals. This covers nearly all contract/freelance work, with a few rare exceptions that may still require a 1099-MISC form.
Always consult a tax professional if you have any questions or uncertainties about which 1099 form you need to issue to your particular contractors and vendors.
Accurate Compensation Records
The next step is to ensure you have all the information needed before issuing 1099 forms to your contractors. Some important questions to consider are, do you have an accurate account of which contractors and/or vendors you used this year, and how much you paid each of them? Implementing a system at the beginning of the year to keep an accurate account of who you are contracting and how much you are paying them will keep you organized and on track when it comes time to issue 1099 forms.
Update Contact Information
Do you have up-to-date and accurate ways of contacting them? Sometimes contractors and vendors move locations or change their contact information. Fall is the perfect time to start making sure you have their up-to-date details, so your 1099 forms get to where they need to be on time (keep in mind that January 31 is the deadline for mailing 1099s to most taxpayers.)
This feels like the right time to re-emphasize the importance of implementing a system and process to keep an accurate account of all these details as early as possible. In today’s paperless, digitalized world, we love software like GUSTO that has digital payroll options for managing your contract employees Additionally, we use Track 1099 when it comes time to e-file on behalf of clients. Still, whether you choose to use the latest software or hire outside professional accounting help, the most important thing is that you have a process in place to ensure you don’t forget about your contract employees and vendors.
At System Six, we pride ourselves on staying up to date with the latest tools and technologies to help clients keep their books clean and organized all year long, setting them up for success during tax season and beyond. So, we focused year round on 1099s (collecting vendor information throughout the year, for example), but now that it’s approaching year end, it’s your turn as well to prioritize 1099s!
Does the process of preparing to issue 1099s to your contracted employees confuse or frustrate you? Are you feeling overwhelmed about your 1099s? We’d love to chat. Please reach out.
In October, I attended two different accounting conferences back-to-back – the first industry events we’ve been able to attend in the last 18 months! Meeting, networking and learning from so many great industry partners and experts was quite invigorating. Importantly, I also left the conferences excited about the continuous evolution of our industry and the opportunities it creates for System Six to continue to grow. Here are the main takeaways from Thriveal’s Deeper Weekend and Scaling New Heights.
The currency of our industry is shifting. While transactional services still underpin everything we do, clients more and more expect and need value-add advisory services. Clean books will always be the foundation of quality accounting, but the rise of cloud technology has led to endless integration possibilities, making transaction management less cumbersome than in years prior. So what does this mean for bookkeepers? We’ve got to continue to build and lean into our relationships as agnostic, trustworthy advisors. We’ve got to continue to educate ourselves on all the problems our clients are facing – not just their accounting challenges – so we can provide advisory services beyond just finance. So for System Six, in the coming months and years, we’ll be working on finding new ways to deliver value to our clients, whether through deeper financial advisory capabilities, additional support for HR management, or even technology advisory. Ultimately, we hope to continue to deepen our relationships with customers so that we may best serve them and enable their success. Building this deeper foundation of meaningful relationships rather than transactional services is the future of our industry.
Innovation is the heartbeat of the tech world. In every industry, new services, programs, apps, and vendors emerge every quarter. At these conferences, I had the opportunity to hear firsthand about the latest initiatives, features, and products heading to market. Some will provide healthy competition for some of our favorite vendors like Bill.com and Gusto, who themselves continue to improve. At the same time, others are finding success in filling niche spaces in security or uncategorized transaction automation. We will keep tabs on several vendors as they develop and expand so that we can provide the best service to our clients.
Quickbooks is Reinvesting
While Quickbooks is still our go-to cloud-accounting software, they’ve gotten flack across the industry in the past few years. Whether from the launch of QB Live, a competitor to many bookkeepers, or because of less than satisfactory customer service, the ecosystem has been frustrated with them of late. Fortunately, they are focused on doing right. They are reinvesting in their accounting partner community by overhauling their customer service, reducing wait times, and providing robust training for firms. We look forward to continuing our partnership with Quickbooks and appreciate their efforts to better serve firms like System Six.
Great Industry Ecosystem
The business world often gets a bad wrap as having a cut-throat, competitive culture, but I was pleasantly surprised otherwise. Everyone I met was friendly, encouraging, and supportive. The atmosphere was full of camaraderie and different individuals championing one another. Rather than approaching the industry with a scarcity mindset, other firm owners recognize the endless number of potential customers and the wide variety of unique services in the market to differentiate firms. I left feeling immensely appreciative of “competitors” who treated System Six more like a partner, willing to share information, resources, and encouragement. Take heart; there are fabulous firm owners leading the charge into the next iteration of cloud accounting services.
If you’ve ever gone through the process of selling a house, you probably know about that in-between season that lies between living normally in your house and handing the keys over to the new owner. It’s a season of cleaning up and making necessary improvements so that when you eventually do put your house on the market, it’s being presented in its absolute best light.
The same is true when you’ve made the enormous decision to sell your business! Even if you are confident in its value, a season of catching up and cleaning up your financial operations is essential to getting the most value out of the sale of your company.
Of course, like haphazard cleaning and cheap improvements to your house before selling won’t add value to its sale, making last minute improvements in your business’ financial operations won’t pay out – in fact, the opposite may be true. Savvy buyers are on guard for unorganized, sloppy bookkeeping. If your books don’t add up, or there are expenses that can’t be categorized correctly, you’re going to lose value in the sale.
There’s also the matter of reputation to consider here. You’ve invested years into creating what your business is today. What do you want the sale of it to say about your company? What do you want it to say about you?
You could be seen by potential buyers as an “old-school” unprofessional, or you could be seen as someone whose confidence in the value of their business shows clearly in the way you pay attention to even the most minute detail in your business’ bookkeeping
The choices you make in this in-between season before selling will not only impact the value you get out of the sale, but will also affect your legacy.
We’ve honed in on three specific areas that should be top priorities as you get your business’ books cleaned up and ready for a sale.
Every dollar needs to be accounted for in as much detail as possible.
When you’re preparing to sell your company, there is a ton of information you will need to have ready to show potential buyers. These include your financial records, a minimum of three years worth of profit/loss statements, net income statements, tax returns…the list goes on.
It may seem obvious, perhaps, that all these numbers need to be properly balanced and accounted for. What may be less obvious is the value of breaking down these numbers in greater detail than you might assume necessary.
You may be used to using one Quickbooks entry for your company’s “expenses,” but breaking those expenses down into specific, detailed categories (such as regular salaries vs. overtime pay, differentiating travel and entertainment expenses from regular expenses, highlighting parts and labor, etc,) will give potential buyers a lot more confidence in the true profits and expenses of the business.
Identify and remove personal expenses you’ve been running through your business.
Sometimes business owners try to “add back” the value of the personal expenses that they’ve written off through the company, such as family health insurance or personal travel expenses. Problems arise, however, if you have insufficient data to prove to your buyer that these expenses were truly personal.
We recommend identifying and removing these personal expenses from your books, ideally 18 months to a couple of years before putting your business up for sale. This protects your reputation as being transparent and honest, and lessens unnecessary confusion when it’s time to show your statements to potential buyers.
Identify and stop occasional expenses that aren’t recurring.
In that same vein, identifying random, occasional expenses will go a long way in helping clean up your bookkeeping. Perhaps you paid a large, one time payment for a marketing campaign, or sank some money into updating your company’s website. These aren’t recurring expenses for your company, but it can be hard to prove that to potential buyers as they’re looking over your books. We recommend starting to identify and stop spending money in these one-off categories at least two years in advance of selling your business. This will increase your profitability, which will help you sell for a higher value!
Is the reward worth the extra effort?
It’s a simple yes. With clean books, you’ll be a more trusted and therefore desirable target for buyers.
But, don’t just spend time ahead of your sale simply cleaning up your books. The next buyer is likely going to come in and implement updated, efficient systems to the business’ financial operations when they take over. This saves them time and money and therefore increases the value of the business right from the start. They’ll make sure you’re using the latest accounting software, and leveraging good third party tools for efficient bill pay and payroll processing.
Why leave this work for the next buyer? While you are cleaning up your books, also take the time to modernize your financial operations, thereby saving you time and money and increasing the value of your business.
The value you gain will be more than worth the extra effort – and you don’t have to do it alone.
At System Six, we are here to help. Day in and day out, we are helping businesses manage their financial operations and bookkeeping efficiently and accurately. And we love helping organizations get to that point – nothing gives us more joy than sitting back with a client after a few years of hard work and seeing decreased stress and increased profitability as a result of improved bookkeeping.
Are you looking towards the future, and considering what you can be doing right now to get the most value out of your company when it comes time to sell? Consider letting us help you improve your bookkeeping and the overall efficiency of your financial operations.