Donating Your Pay

[webhick]

I've been doing the books for another non-profit for a number of years now (child care). They have several grant-funded programs, many of which allocate funds to pay for a Facilitator and child care for the support groups in that program.

For one of the groups, the Facilitator doesn't want to be taxed on the money she earns for facilitating because she's going to donate it all back to the organization. I've made it very clear that I'm not going to stop withholding taxes on her pay. So she tried to be paid as a consultant. I put the brakes on that too, because that position as always been as a paid employee (they do have one group that uses a consultant but it only happens twice a year). So she stopped turning in time sheets. We're all a bit worried that the grant-issuer may get a little pissy about giving the organization money that isn't getting spent. So now it falls to me (and by extension, you) to figure out a way to make everyone happy or tell them to tell her to nut up.

I was thinking some kind of in-kind juju like a bookkeeping entry that pushes her consulting fee to the donation, but I have issues with that:
1) I talked to the labor board a few months ago on the issue. Because it's always been an employee position, she has to be paid for her time like an employee, like it or not. The board may try to get around this by turning the position into a consulting position. Not sure if it's legal to do that...especially given the reason why. It would certainly be suspicious.
2) the grant may not see that as the money being spent and would instead see them as diverting grant funds
3) Wouldn't that still count as income to her? She's still kind of getting paid for her time.

ETA: I really don't think there's a way to do it.

[Kestrel]

I do admire her benevolence. She doesn't need the money and wants to maximize the cash dollars she returns to the organization. Of course, if she's not getting reimbursed then she gets a tidy little additional tax deduction for charitable donations - mileage and the like. Depending on the situation she may also get a bonus charitable donation on her tax return for providing unpaid professional services.

You could designate her as a true volunteer and book the paid position as "unfilled." The salary expenditure would go unused and the unspent money would eventually be returned to whatever fund it came from, just like allocated funds that go unused for desks or paper or utilities. There would be no issue of recognizing a charitable donation. The year-end fund balance would simply be greater than budgeted, and the overage would be dealt with like any other. Once she rejects a paycheck she loses control of how the money is handled. The organization can not "donate" to itself in lieu of making budgeted expenditures.

But there are practical issues to be considered. As you already deduced, this would have long-term ramifications on the operational budget. One is how much longer she will hold that position. If because of her actions the position gets de-funded on the Master Budget, what are they going to do when she needs to be replaced? Everybody would be SOL. Does she really want to hamstring the organization? Does she realize that her refusal to cooperate could do just that?

Misclassifying an employee as an independent contractor (a consultant) has very nasty employment tax ramifications, for both the employee and the employer. Unless she truly meets the IRS requirements to be a paid consultant you do NOT want to go there. Here's the IRS reference page for charitable organizations:
http://www.irs.gov/Charities-&-Non-Prof ... -Employees.
While you're at it, look at IRS Publication 15-A, pages 7 to 9.

If you do keep her in employee status you can get around the time-sheets pissin' contest by setting a minimum which that position will be paid, like it or not. I don't see any way around making deductions for FICA, Medicare or FITW, short of firing her outright (or redesignating her as an "unpaid volunteer"). If she stays on the payroll and wants to set up an automatic payroll deduction returning all her net pay to the organization, fine. That's an easy bookkeeping entry. You recognize the full payroll expense (and everything gets recognized as income to her and she gets a W-2 for it), then you recognize a charitable donation transferring her net pay to donations.

[webhick]

Just an FYI, this is NH. And if you get paid, you gotta get your entire paycheck minus certain legal deductions (taxes, garnishments, investment stuff). She actually has to receive all her paycheck whether she likes it or not.

Thank you for confirming what I told them months ago. Although, when they talked of consulting, I didn't even think of the IRS requirements. I was thinking that it's always been a payroll kind of position, it's pretty much weekly, it's funded as payroll, etc. so it wasn't going to happen. Really sick of this already. Reminds me of the time that one employe kept pestering them to accrue her vacation and sick time at 3 months instead of six. Board buckled and she got it.

I honestly am beginning to think that she doesn't care whether or not she hamstrings the organization. I've noticed that they, unfortunately, seem to hire people with... entitlement issues. I'm being polite. I think she wants tax-free money to go towards a "scholarship" for a family of her choosing and she will likely annoy the board into getting what she wants.

[Kestrel]

Good luck dealing with the board. You might get a fair amount of mileage out of the IRS publications. The thought of getting charitable donation funds eaten up by tax penalties...

BTW, when does Early Voting start in NH? I already have a preformatted ballot with the hanging chad cleanly detached next to "Webhick" and just need to know when to send it in.

[Judge Roy Bean]

...
For one of the groups, the Facilitator doesn't want to be taxed on the money she earns for facilitating because she's going to donate it all back to the organization. ...
ETA: I really don't think there's a way to do it.

There is - don't pay her for what amounts to volunteer facilitating. In effect, she's trying to get away with using the money temporarily.

[The Observer]

There is - don't pay her for what amounts to volunteer facilitating. In effect, she's trying to get away with using the money temporarily.

What he said. Plus, there is always the issue of what happens if she doesn't donate her money back at the end of the year. At that point, the money paid to her is going to be seen as income and your organization will be on the hook for all of the taxes that should have been witheld as well as any taxes that the employer was directly liable for.

I think the argument for turning her into a volunteer is strengthened by the fact that your organization is essentially giving her an unsecured interest-free loan, something that a non-profit can't certainly afford in these tough times.

[Kestrel]

Plus, there is always the issue of what happens if she doesn't donate her money back at the end of the year. At that point, the money paid to her is going to be seen as income and your organization will be on the hook for all of the taxes that should have been witheld as well as any taxes that the employer was directly liable for.

I think the argument for turning her into a volunteer is strengthened by the fact that your organization is essentially giving her an unsecured interest-free loan, something that a non-profit can't certainly afford in these tough times.

Since employer payroll tax returns have to be filed quarterly, and payroll tax money has to be turned over to the gov't bi-weekly (in most cases), the tax issue is going to get ugly a whole lot sooner than that.

The problem with turning her into an official volunteer goes back to the organization budget. The benevolent source of the money approved the budget and funded it. One of the items budgeted was the necessary expense of hiring a competent Facilitator. They got her instead.

Now Little Miss Facilitator wants to make unauthorized changes (rerouting the money) for her own personal benefit, changes which have huge tax ramifications. And while she's at it she wants to use the organization to invent new loopholes in the tax laws.

Makes me wonder what else she is trying to change without authorization.

[Cathulhu]

You'd be surprised how often this one has come up on the IRS toll-free hotline, but inevitably the call is from the employee, who wants to donate the salary and take a tax deduction for it, but without including it in income first. Generally shoots the questioner down when you explain that this double benefit--not including the income, plus a deduction that didn't get included as income--is not possible.

[NYGman]

Can't you just tell her to volunteer her time which would allow you to hire another employee, thus utilizing the full value of her salary. It seems selfish to want to deny the charity resources, because you want to feel good about giving back, just work for free, and allow the charity to use the funds to hire someone for pay.

By doing what she is doing she is denying someone ho may actually need the money, a job, and by giving that opportunity to someone else is double charity.

[Kestrel]

Can't you just tell her to volunteer her time which would allow you to hire another employee, thus utilizing the full value of her salary. It seems selfish to want to deny the charity resources, because you want to feel good about giving back, just work for free, and allow the charity to use the funds to hire someone for pay.

The only hiccup in your suggestion is this:

I think she wants tax-free money to go towards a "scholarship" for a family of her choosing and she will likely annoy the board into getting what she wants.

It seems Little Miss Facilitator wants to control how her "donated" paycheck is spent.

But I like your idea. Let her go all-volunteer, then spend her (former) paycheck the way the grantor directs and not the way she directs - by hiring a competent replacement Facilitator.

[webhick]

Thanks for the input, everyone! The program is a support group that meets once a week. There's only one facilitator position available, as well as a few child care positions during those times. Because it's child care, there's all these rules. Like x amount of paid staff being present per y amount of children, volunteers not being allowed alone with the kids, volunteers not being able to do certain necessary activities with the kids.

Since the facilitator position has to be paid, and there's not enough funding to cover the child care for a second group (not to mention there attendance may not be high enough for a second group) I told the treasurer that either she gets paid as an employee for facilitating or they get someone else to facilitate and shift her to a volunteer position elsewhere in the organization.

It still doesn't solve her little "issue" of wanting to donate tax-free money, but she's going to have to put on her big girl pants and deal with it.

[Cathulhu]

By definition, if she tells the organization what to do with her donation, it isn't a gift. Gifts have no strings attached.

[webhick]

By definition, if she tells the organization what to do with her donation, it isn't a gift. Gifts have no strings attached.

Um, restricted donations have strings attached. Although, I don't think "restricted" is quite as restricted as she wants. If she said to use the money as a scholarship for a family of the organization's choosing, then that would be one thing. Hell even having a final say in which family it goes to, but not in the pre-selection process would be fine. But, the amount of restriction she's placing on it seems like it would disqualify it as a tax deduction.

[NYGman]

Can't you just tell her to volunteer her time which would allow you to hire another employee, thus utilizing the full value of her salary. It seems selfish to want to deny the charity resources, because you want to feel good about giving back, just work for free, and allow the charity to use the funds to hire someone for pay.

The only hiccup in your suggestion is this:

I think she wants tax-free money to go towards a "scholarship" for a family of her choosing and she will likely annoy the board into getting what she wants.

It seems Little Miss Facilitator wants to control how her "donated" paycheck is spent.

But I like your idea. Let her go all-volunteer, then spend her (former) paycheck the way the grantor directs and not the way she directs - by hiring a competent replacement Facilitator.

I may have misunderstood, but if she is trying to pay for a friends education, by earning tax free dollars, Sorry, in my mind, she needs to earn it and donate the net, then take the deduction. If she really wants to do something charitable, it should be selfless, not selfish. hopefully I am wrong, and she will volunteer without pay, allowing the charity to have an extra hand, even if not as full capacity, hiring another facilitator would replace her, and she could still assist to some degree. With kids I am sure you need all the extra help available.

One last thing, and just my $.02, I think you want someone working for you that wants to get paid. While I am sure volunteers mean well, but when people work for their wage, they tend to have something to strive for, and tend to work harder than a volunteer. I am not saying this is always true, and there are exceptions, but general rule, paying someone is more of an incentive, than not paying them, even if it goes back into the organization.

[Judge Roy Bean]

...
It still doesn't solve her little "issue" of wanting to donate tax-free money, but she's going to have to put on her big girl pants and deal with it.

I believe you have the appropriate answer, but as I've said for many years now, tax law is not my area of expertise.

But IMHO there can be no reliance on a promise of future donations for tax purposes.

[The Observer]

Since employer payroll tax returns have to be filed quarterly, and payroll tax money has to be turned over to the gov't bi-weekly (in most cases), the tax issue is going to get ugly a whole lot sooner than that.

Sadly, it won't. The fact is that it would take probably longer than a year before the IRS noticed that there was an issue regarding a problem with income not showing up on the 941s, W-2s and W-3s. Since webhick has correctly pointed out that the facilitator has to be a paid position, the only other way to report her income would be to declare her as a independent contractor (1099) employee. That is another area that the IRS is going to take time on before it detects that there is a problem with the employer-employee relationship and audit the 941s.

I have seen situations where non-profits have done this exact thing (under legitimate belief that it was okay to do so) and reported the deficiency themselves the next year when closing their books before the IRS ever realized there was a problem. I suspect that webhick's selfish facilitator is probably aware of this to some degree and is counting on falling through the cracks.

Since the position has to be a paid position, I also wonder at the legality of her donating her pay back at the end of the year, effectively meaning that she was an unpaid volunteer. I don't know how the state would view that in terms of the law requiring paid staff. I suppose that this is another area that the state wouldn't know about unless they did a rigorous audit.

[webhick]

The state doesn't care what she does with her money once it's in her hand. But, I got the impression from the labor board that a donation requirement couldn't be agreed upon or enforced.

And can sometimes take only one employee compliant to trigger a labor board audit. IF she managed to get what she wanted all it would take is a phone call from her stating any combination of the following 1) the org refused to pay her as an employee despite meeting the requirements 2) the org isn't withholding taxes properly 3) she was forced to donate back her entire paycheck. And the org can say all they want "she forced us to do it" but the state isn't going to buy that because an employee can't FORCE an company to break the law. Any inspector there will tell you that if an employee insist you not withhold taxes, you fire them. Period.

[Kestrel]

Since employer payroll tax returns have to be filed quarterly, and payroll tax money has to be turned over to the gov't bi-weekly (in most cases), the tax issue is going to get ugly a whole lot sooner than that.

Sadly, it won't. The fact is that it would take probably longer than a year before the IRS noticed that there was an issue regarding a problem with income not showing up on the 941s, W-2s and W-3s.

You have a valid point - that it would take a while for the problem to be noticed.

I was thinking along the lines of the violation rather than its detection. Once detected by the IRS or self-reported by the employer, the IRS acts retroactively to assess the tax and interest plus any applicable penalties. So from my perspective the employer's problem begins as soon as they fail to pay and file correctly.

[Burnaby49]

By definition, if she tells the organization what to do with her donation, it isn't a gift. Gifts have no strings attached.

Um, restricted donations have strings attached. Although, I don't think "restricted" is quite as restricted as she wants. If she said to use the money as a scholarship for a family of the organization's choosing, then that would be one thing. Hell even having a final say in which family it goes to, but not in the pre-selection process would be fine. But, the amount of restriction she's placing on it seems like it would disqualify it as a tax deduction.

Here in Canada that is a definite tax reassessment to disallow the donation. We have had numerous cases where taxpayers have made focused donations for "scholarships" which were actually a way of trying to write-off otherwise non-deductable private school fees. I'd donate a scholarship fund to the charity (set up specifically for this scheme) which would be awarded to your kid, and you'd donate a scholarship which would be awarded to mine. The charity would pick which kids got which parent's scholarship so that there was no directed link from me between my donated scholarship and your kid or your scholarship and my kid. The courts stomped on it.

Also, as Cathulhu, said, you can't get a donation for your time. From time to time individuals up here try that by claiming they have put in say 100 free hours at a charity at a fair market rate on their time of $Y per hour and want a donation for 100 hours X $Y. Courts kill that one too.