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4 HR Challenges Facing Nonprofit Organizations

Jerika Holton
Jan 17, 2023

Nonprofit organizations play a vital role in the U.S. economy and the day-to-day lives of millions of Americans... but managing these organizations can be challenging. They contend with the same HR, personnel, and staffing challenges as for-profit organizations, yet their budgets can be volatile and subject to the charitable donations of others. For this reason alone, nonprofits need to ensure they're partnering with an organization that can save their teams both time and money, so they can focus on what matters most, the commitment to their community. Let’s explore four major HR challenges facing nonprofits and how the use of technology can help.

Costs of Manual Labor

Due to limited funding, nonprofits must keep costs on back-office activities low, and the use of technology that can cut down manual labor hours can be an excellent way to reduce expenses. Human resources, HR, is a critical part of ensuring organizational success. With many moving parts in an HR department, it takes manual labor and compliance knowledge to keep the department running smoothly.

Payroll software can automate complicated deductions based on jurisdiction and automatically keep you in line with FLSA workforce requirements. Streamlining your HR functions like applicant tracking, onboarding, benefits, certification management, learning management, and performance management can allow employees to be managed in one centralized location. Managers can save time by eliminating duplicate entries and countless paperwork. Employees stay engaged with a self-service portal that allows them to take control of essential HR functions such as time management, pay history, and access to forms or documents. The process for filing year-end forms with the assistance of payroll and HR software makes the end of the year easier for organizations. The software can quickly populate data into forms for quick review and easy distribution through print and mail or electronically to employees and vendors.

Finding the perfect mix of human touch and technology can help nonprofit organizations save time and money on back-office processes. If you want to explore technology that can help your organization conserve funds, consider implementing payroll and HR technology into your technology stack. Providers, such as Greenshades, give a perfect blend of human touch and technology. Since Greenshades payroll solution doesn’t require pre-funding of your payroll, organizations can hold onto their funds longer. Greenshades also offers unlimited pay runs at no extra charge, issue trouble-free termination checks, and more, giving organizations the flexibility to run the payroll on their terms.

Employee Classification

The mix of part-time, full-time, and salary employees, plus contract and volunteer workers, presents a unique challenge for employee classification and tracking hours worked. Having the proper employee tracking system can help to reduce misclassification confusion, it is crucial to understand how to handle each type of employee classification.

The FLSA defines a volunteer as “an individual who performs hours of service for a public agency for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered.” Individuals who are volunteers freely offer their services and are not employed by the organization. Volunteers are not covered by FLSA guidelines and should not be paid for their services; if they are paid, then the payment will be subject to income tax and FICA deductions. You can compensate volunteers through reimbursements, discounts, education awards, or stipends. However, in some situations, according to the IRS, it may be considered taxable income. If you proceed to compensate a volunteer, be sure to add them to your payroll and HR system so you have assistance calculating the proper payroll deductions.

Year-End Forms Based on Classification

Contract workers are popular for nonprofit organizations because since cash flow is limited, avoiding expenses such as taxes, benefits,401k matches, and more can cut down on labor expenses. If a nonprofit organization hires an employee, they receive a W-2. If you hire a contract worker, then the employer must issue a Form 1099. The classification must be correct inside your system, so when the year-end forms generate, it will create the correct form based on the employee classification. Since the employer pays taxes for employees, not independent contractors, misclassification can also lead to tax evasion. According to the National Conference of State Legislatures, another penalty that can result in misclassification is underpaying the employee since when they are listed as a contractor, they are responsible for paying self-employment taxes.

Complex Compliance

Before determining how to comply with payroll taxes, it is important to understand the different types of nonprofit organizations. The IRS describes 501c(3) organizations as tax-exempt organizations that do not seek commercial or monetary profit for private interest and do not benefit from any net earnings. All funds collected by nonprofits go towards the organization’s purpose. Private organizations differ in that they have one major donor instead of many donors like 501c(3) organizations. A political organization subject to Section 527 is a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.

You may qualify as a 501c3 organization if you are an:

  • Religious Organization
  • Charitable Organization
  • Scientific Organization
  • Testing for public safety
  • Literary Organization
  • Educational Organization

As a tax-exempt entity, there are certain requirements that the payroll department must be aware of when processing pay for employees. For example, withholdings for FICA (the tax that funds Social Security and Medicare) and federal tax withholdings are required. However, nonprofits like the 501c3 are exempt from FUTA (the federal unemployment tax).

Nonprofits must stay compliant with ACA requirements along with upholding FLSA requirements such as overtime compliance, minimum wage compliance, recordkeeping, child labor requirements, and hours worked standards. Doing manual calculations and maintaining compliance without software assistance can be time-consuming and costly if errors are made, or deadlines are missed. Using a payroll and HR provider, organizations can automate complex withholdings, file and distribute year-end forms with ease, and have oversight of ACA compliance year-round.

Increased Turnover

It was found that 42% of nonprofit leaders expected their employee turnover rates to increase in the coming year in a survey conducted by the Nonprofit HR's 2021 Nonprofit Talent Retention Practices. According to Gallup, replacing a full-time employee can cost between half to two times that employee’s annual salary. Turnover can have a substantial impact on a nonprofit’s bottom line, so understanding methods to retain employees is crucial.

Nonprofit organizations are not typically known to offer competitive salaries, employees choose the nonprofit industry for employment because they love what they do and the cause they support. However, it is important to explore internal ways to give back to employees that are not monetary, this can include:

Employee Recognition

It is important to acknowledge your employees for the hard work they do. Gratitude in the workplace can boost company morale. You may be surprised to know there are creative ways to celebrate employees that are also tax deductibles like business meals, travel, and holiday parties.


Affordable dental, vision, and health plans can reduce deductions from employee’s paychecks, giving them the coverage they need and more money in their pockets. Consider unique ways to use your payroll and HR operations as a benefit to employees, SHRM composed a list of well-sought-after perks your HR department can use to help boost employee retention. The list included flexible PTO and work locations, pet-friendly perks, educational assistance, student loan repayments, and more. Utilizing HR software can help educate employees on plan eligibility. Managers can delegate the process by allowing employees to self-enroll in benefits, and easily keep track of benefits packages inside the self-service portal.

Communication and Growth

The employee self-service portal gives 24/7 access to important HR functions from any location. Employees can update personal information, look at payment history, submit expenses, access important documents, and more. With questions to HR managers limited, there are still ways inside the self-service portal to maintain communication. Managers can post alerts, send messages, and post bulletins to keep employees informed and up to date.

Listening and understanding your employees’ feelings about the workplace can help to catch any problems before the problem escalates. Open communication can also allow you to understand your employee’s goals, so together you can generate a plan to help them to obtain their goals. The assistance of performance management software can help managers track conversions with employees to set goals and track progression. Learning management software can also be helpful for growth and development by tailoring employee’s training schedules to fit their growth plan.

Leverage Technology to Simplify Back Office  

Nonprofit organizations must get creative when thinking of ways to control funds, properly classify employees, maintain compliance, and retain employees. Finding a payroll and HR provider that can support the creative methods to overcome HR challenges, will allow nonprofits to focus on their people and their mission.

To learn more about Greenshades Payroll & HR Platform, contact or visit

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