Avoid the Taxable Compensation Pitfall When Acknowledging Volunteers

By: Stephen Cox, CPA

For many non-profits, volunteers are the heart of the organization. Volunteers can range from individuals in the day-to-day operations to the board members steering the mission and values of the organization. Regardless of the level of involvement, acknowledgement from the organization can promote repeat volunteerism and a stable supply of volunteer hours. It may seem reasonable to issue gift cards or cash in small amounts to recognize the hard work of volunteers, but there may be unintended tax consequences for the volunteer and your organization.

Value Recognition

The IRS understands the need to acknowledge volunteers, but limits the types of recognition an organization can provide tax-free. The IRS uses a standard called “de-minimis” when evaluating the taxability of volunteer gifts. De-minimis simply means minimal in value. There are numerous benefits that you can provide to volunteers such as:

  • Free refreshments at volunteer events
  • Small gift baskets
  • Thank-you cards or letters
  • Limited discounts on programs run through your organization
  • Host a picnic or reception

There is no clear-cut determination for what is considered de-minimis versus what is not. Some judgement must be used in developing effective policies for volunteer appreciation. The policies should resonate with your organization’s goals and the level of volunteerism that your organization requires to operate. For instance, an organization with an established volunteer base may send out thank-you letters while an organization trying to draw in new volunteers may offer free pizza and drinks. The organization’s board and executive team should evaluate the needs of the organization to ensure funds are properly allocated to volunteer appreciation.

Cash Gifts

A common problem area for many organizations is the gifting of gift cards to their volunteers. A $5 gift card to the local coffee shop seems like it would fall under the de-minimis rules established by the IRS, right? Regardless of the dollar value, the IRS views all gifts of cash and cash equivalents as taxable income to the recipient. This can also create additional tax filings for the organization if the cumulative value of cash and cash equivalent gifts exceeds $600 for an individual. Once the $600 threshold is breached, a 1099-MISC form needs to be filed and issued to the recipient. The last form an individual wants to receive during tax time is a surprise 1099-MISC from the organization that they volunteered at throughout the year. Clear communication with your volunteers during the year about the taxability of cash and cash equivalent gifts can mitigate any unhappy surprises come tax time.

Volunteer Vs. Employee

Another problem that could arise is a volunteer being classified by the IRS as an employee. If volunteers regularly donate their time and the organization provides a cash or cash equivalent consistently, then the volunteers could be considered employees. Reclassifying a volunteer as an employee can be costly to the organization for a number of reasons. An organization must pay at least minimum wage to all employees, pay additional taxes such as FICA and unemployment taxes, and incur fees for payroll services and quarterly tax filings.

Regularly evaluating the value of tax-free benefits and the types of benefits provided can help mitigate the risks of benefits intended to be tax-free to volunteers becoming taxable. Reviewing your current policies with our advisors can be beneficial in avoiding the pitfalls of volunteer acknowledgement.

 

 

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