Most nonprofits are understandably laser-focused on their mission which can cause critical matters to fall between the cracks. But if the finance function doesn’t receive the attention it deserves, your nonprofit will run the risk of IRS penalties, reputational damage and lost revenue.
Here are two common mistakes related to managing the finance function:
- Failure to report unrelated business income
According to the IRS, unreported business income ranks as one of the most common tax filing errors made by nonprofits. Revenue generated from a trade or business that your organization regularly engages in, but that isn’t substantially related to furthering its tax-exempt purpose (other than the need for funding), may well be subject to the unrelated business income tax. Generally, an exempt organization with $1,000 or more of gross income from an unrelated business activity must file Form 990-T. And the nonprofit must pay estimated tax if it expects its tax for the year to be $500 or more.
Our last webinar, Tax Reform and the Impact on Nonprofits, the MJ tax team focused extensively on provisions related to UBIT and Excise Tax reporting. We encourage you to visit our resource page online to review a recorded version of the class.
- Misclassification of employees
Nonprofits have long turned to independent contractors in the face of tight budgets and small staffs. Contractors can provide valuable flexibility, reduce administrative work and cut your costs and potential liability. The IRS, however, has strict tests for determining whether an individual is indeed an independent contractor or is actually an employee for whom you must withhold, and pay, payroll taxes. If the IRS reclassifies any of your contractors as employees, you’ll likely find yourself on the hook for back payroll taxes, interest and penalties. You also might be subject to minimum wage and overtime laws, Social Security and Medicare contributions, and unemployment and workers’ compensation premiums.
The bottom line…. Mistakes in the oversight of the finance function can get in the way of accomplishing your organization’s mission! By allocating sufficient resources to this area, you can fortify your financial footing, protect your reputation and arm your leadership with vital information for decision-making.
Tene Thomas is a licensed CPA with more than 19 years of technical experience in tax compliance and is well versed in collection regulations and procedures. As partner of the tax and small business solution practice, Tene serves a myriad of industries. This diverse knowledge allows her to provide high quality and comprehensive services to clients with these specific tax and accounting needs.