The answer could easily be ‘yes.’
Corey Pfaffe, CPA, writing in “Benevolent” Gifts to Volunteers, says if you pay your volunteers you can generate taxable income that should be reported to the IRS.
There is a gray line that NPOs can easily cross. Mr. Pfaffe quotes a paragraph from IRS publication 3079:
“Example: ABC Organization operates a private school and sponsors [fundraisers] to raise revenue for the school. Parents who work at the [fundraising] session are given a tuition reduction of $50 for each week they work. This reduction of tuition is compensation to the parents; they are not working as “volunteers.”
If you go beyond insignificant compensation or non-monetary benefits, there is a very serious danger of turning a volunteer into employee. That means the amounts paid should be reported as taxable income.
There is a cascading effect as well. Think about what happens if you have an employee but didn’t realize they were an employee. Would be the same as keeping someone off the books. This next idea is from Frank and Elaine Sommerville at a Christian Leadership Alliance conference.
Let’s say your church is fundraising for a major youth event.
To motivate young people to help out, the church might reduce the cost of participating in the event by some amount each time they help out with a fundraising event. For example, let’s say the cost of that big event next summer is $2,000 per person and a young person will have that amount reduced by $50 for each of the fundraisers he or she helps out with.
Let’s look at this from a different perspective. So by helping out for four or six or eight hours, the young person will earn $50. That will happen 5 or 10 times during the six months or year before the major event.
They have earned $50 for each of those days worked. That young person is now essentially an employee. Let’s examine the implications.
- There’s taxable income which should be report on a W-2.
- Social Security withholding should have been taken out.
- The employee’s withholding should be matched with the employer’s 7.65% and sent to the Social Security Administration.
- Might be some state income tax that should have been withheld.
- Those wages should be reported under the workers compensation insurance policy and additional insurance premiums paid.
- Depending on the state, young people under a certain age are required to have a work permit before they can work for pay.
- Minimum wage rules could be a big problem if you ‘pay’ $50 and that fundraising event stretches out to 10 hours.
- There are overtime requirements that could kick in under federal and state law. In California that 9th and 10th hour for a Saturday event requires overtime.
Some of those implications might go away if a person meets the criteria of an independent contract, but not all of them.
Watch out. “Paying” your volunteers can create huge issues.