This post is the first in a series of bookkeeping basics which will be follwed by posts on petty cash and internal controls.
Do pay all payroll withholding taxes. When your organization becomes an employer, you become an agent of the I.R.S. Yes, you’ll be working for them by withholding federal, state and city taxes from each employee’s paycheck. These taxes must then be reported and paid to the I.R.S.
This is probably the one area that causes new organizations the most trouble. We have seen too many groups decide to delay paying the I.R.S. the taxes withheld from employees’ checks until more money comes in. However, withholding taxes are not a resource to be used by an organization. The I.R.S. will charge interest and penalties for late payments, and , worse than that, we’ve seen the I.R.S. seize bank accounts and padlock doors to ensure the government gets the money it is owed.
We recommend that you use a payroll service to handle employee payments and payroll reports. You can also authorize the payroll service company to make the withholding tax payments on your behalf.
Do keep copies of documentation verifying expenses. Keep copies of all bills and receipts. Record on the bill the date it was paid, the initials of the staff person approving the payment, the amount paid the check number, and the type of expense (phone, program supplies, etc.). File paid bills by vendor and year paid.
Do keep copies of documentation verifying income. Photocopy all checks and letters accompanying income received by your group. Attach the photocopies to the relevant bank deposit slip. File by the year the income was received.
Do record checks and deposits, and balance the checkbook. This sounds so obvious, but many groups fail to keep track of their checkbook balance, and instead just hope or assume they will have enough money to handle their expenses. Record the amount deposited and keep a record of checks written. Also record any bank fees paid and interest earned.
After you receive a bank statement, reconcile the checkbook. This simply entails comparing the bank’s balance with your checkbook’s balance. The major difference is usually due to outstanding checks – that is, checks that have been written but have not yet been cleared by the bank. The steps involved in balancing your checkbook are often clearly outlined on the back of your bank statement.
Don’t use credit cards, if possible. Pay as many expenses as you can by check. Establish accounts with local vendors so that you can be sent an invoice to pay by check. Don’t forget to provide proof of your tax-exempt status to save on local sales taxes. If cash is absolutely required to make a payment, establish and follow the petty cash procedures (more on this in an upcoming post). As your organization gets larger, you may need to consider getting a credit card to pay travel and certain other expenses. However, a decision to acquire a credit card for your organization should be done only with the approval of the Board of Directors.
Some groups use credit cards to pay bills when the checkbook balance is low, then find themselves without enough money to pay off the credit card company – and stuck with high-interest payments.
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