10 Steps to Set Up Payroll for Your Nonprofit

10 Steps to Set Up Payroll for Your Nonprofit

Running a nonprofit is all about making a difference, but managing the day-to-day details can be a challenge. One of the most important aspects of smooth operations is setting up payroll. This guide will walk you through the process, from choosing the right provider to managing taxes and deductions. We’ll also cover best practices for allocating expenses, tracking employee hours, and staying compliant with all those regulations – because nobody wants to deal with a payroll audit!

Why is Nonprofit Payroll Important?

  • Happy Employees: Ensuring your staff is paid correctly and on time is crucial for their morale and keeping them around.
  • Staying Legal: Nonprofits are subject to various payroll regulations, and failing to comply can lead to fines and penalties.
  • Financial Transparency: Proper payroll management contributes to the financial transparency that donors and stakeholders expect from nonprofits.

Steps to Set Up Payroll for Your Nonprofit:

Step 1: Choose Your Payroll Provider

The first step is finding a payroll provider that’s a good fit for your nonprofit. Here’s what to think about:

  • Cost: Compare pricing plans and look for providers that offer discounts for nonprofits.
  • Features: Does the provider offer direct deposit, tax filing, and reporting? You’ll want all of that.
  • Integration: Look for a provider that plays nicely with other essential nonprofit software, like accounting and donor management systems.
  • Customer Support: Choose a provider with responsive customer service and comprehensive documentation. You’ll be glad you did!

Popular Payroll Providers for Nonprofits:

Step 2: Decide on Your Payroll Frequency

How often will you pay your employees? Here are the common options:

  • Weekly: Ideal for hourly employees.
  • Bi-weekly: A popular option for salaried employees.
  • Semi-monthly: Offers consistent payroll dates.
  • Monthly: Less frequent but can be efficient for smaller organizations.

Step 3: Gather Employee Information

Before you can process payroll, you need to gather some essential information about your employees:

  • Social Security number: This is crucial for tax purposes.
  • Bank account information: Needed for direct deposit.
  • Tax withholding information: Use the W-4 form to determine federal and state withholdings.
  • Emergency contact information: Important for contacting employees in case of emergencies.

Step 4: Set Up Your Payroll System

Okay, you’ve chosen your provider and have all the information you need. Now it’s time to set up your payroll system:

  • Enter employee data: Input all necessary information about your employees.
  • Configure payroll settings: Establish your payroll frequency, tax rates, and other relevant settings.
  • Schedule payroll runs: Set up a regular schedule for processing payroll.

Step 5: Review and Approve Payroll

Before you hit “send” on that payroll, carefully review everything:

  • Confirm employee hours: Double-check time sheets and ensure all hours are correct.
  • Verify deductions: Check for any deductions, such as health insurance premiums or retirement contributions.
  • Review taxes: Ensure all taxes are calculated correctly.

Step 6: Managing Payroll Taxes for Nonprofits: A Breeze with the Right Tools

Nonprofits often think they’re exempt from ALL payroll taxes because they’re tax-exempt, right? Wrong! While nonprofits don’t pay federal income taxes, they do have to pay payroll taxes for their employees. Let’s break it down:

  • Social Security & Medicare: These are unavoidable. You’ll need to deduct these taxes from your employees’ paychecks and match the employer’s portion.
  • Federal Income Tax: You’ll also withhold federal income tax from your employees’ paychecks, just like any other employer.
  • State Taxes: State taxes vary, so be sure to check your specific requirements.
Chart comparing payroll taxes for nonprofits vs. for-profits

Step 7: Allocate Payroll Expenses By Functional Area

One of the unique challenges of nonprofit payroll is allocating expenses to different program areas or funding sources. Let’s break it down:

  • Track Employee Hours: Use a time tracking system to record the hours employees spend on each program or project.
  • Calculate Allocation Percentages: Determine the percentage of each employee’s time that is allocated to each program.
  • Apply Percentages to Payroll Expenses: Distribute salaries, payroll taxes, and benefits based on the allocation percentages.

Step 8: Don’t Forget Your Volunteers!

Volunteers are amazing! While they aren’t paid employees, you still need to consider some tax implications:

  • Stipends: Nonprofits can offer stipends for volunteer work, but these stipends are generally taxable and must be reported to the IRS.
  • Expense Reimbursement: You can reimburse volunteers for out-of-pocket expenses, but make sure you understand the rules for eligible reimbursements.

Step 9: Keep Accurate Records

This is crucial for any nonprofit! Maintain meticulous records of all payroll-related information, including:

  • Payroll records: Retain all payroll information for at least three years.
  • Tax records: Store all tax-related documents securely.
  • Employee files: Maintain complete employee files, including employment applications, performance reviews, and other relevant documents.

Step 10: Stay Updated

Payroll laws and regulations change frequently. Stay up-to-date by:

  • Subscribing to industry newsletters: Get regular updates on changes to payroll law.
  • Attending workshops and conferences: Gain insights from industry experts.
  • Consulting with a CPA or payroll specialist: Get professional advice and support.


Setting up payroll for your nonprofit can be straightforward with careful planning and the right tools. Remember to choose a reliable payroll provider, gather necessary employee information, and maintain accurate records. By following these steps, you can ensure your staff is paid accurately and on time, while ensuring your nonprofit remains compliant with all relevant laws.

Want to avoid costly errors and ensure compliance? Explore FastFund Nonprofit Payroll! We offer a user-friendly platform designed to streamline your payroll and free up your time to focus on your mission.

Request a demo of FastFund Nonprofit Payroll today!

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