Your not-for-profit’s accounting function affects everything you do. That’s why processes and procedures — and whether staff members adhere to them — should be reviewed regularly. In particular, ensure your organization isn’t making the following five common mistakes:
- Lacking formal, documented accounting processes. All aspects of managing your nonprofit’s money should be reflected in a detailed, written accounting manual. This should include steps for accepting and depositing donations and paying bills. Staff members need to follow these processes to the letter.
- Overrelying on accounting software. Many nonprofits now use accounting software to track their accounts, and it’s an effective tool. Nonetheless, mistakes still happen. Always double-check entries and reconcile your bank accounts to ensure that transactions your staff has entered are complete and accurate. This step is essential even if you use spreadsheets or manual books.
- Failing to report unrelated business income (UBI). IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the top tax mistake nonprofits make. According to the agency, organizations commonly fail to report UBI — or they underreport this income. Contact us for guidance or refer to IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations.
- Wrongly classifying employees as independent contractors. You must withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. If the IRS can successfully argue that one or more of your independent contractors should instead be classified as employees, both you and the contractor could face financial consequences.
- Investing too little in the accounting function. Compared with private industry, nonprofits typically dedicate fewer resource dollars to their accounting function. Make sure you use the services of an accountant or CPA with experience in the nonprofit sector, whether that person is on staff or external. Not having the right professionals handle your accounting and tax issues is a problem that can lead to many other mistakes.
These are only a few of many possible errors. For help performing a thorough checkup on your accounting function, please call us.