Tax pitfalls for nonprofit organizations, especially paying volunteers

There are lots of places NPOs can get themselves into trouble by violating rules they didn’t know about.

Katie Thomas, CPA, has a great survey of a few places that can cause problems for NPOs in her post, You Don’t Know What You Don’t Know, at the Nonprofit GPS blog. She mentions:

  • Raffles
  • Taxes on raffle prizes
  • Nondeductible portion of special event tickets
  • Nominal gift cards
  • Donated cars

She has a superb, brief recap of the problem with giving gift cards to volunteers:

Nominal gift cards – if you give a volunteer a gift card or cash, they cease being a volunteer and become an employee. This is especially important if you have a part of your operations, like a thrift store, that are exempt from UBIT because the activities are conducted primarily by volunteers. It also means you should be giving them a W-2 and withholding taxes. Instead, if you want to give volunteers a gift to express your gratitude – consider something non-monetary.

Read the full post. It is a quick, helpful read of stuff that maybe you didn’t know you didn’t know.

Those gift cards are a huge danger.  Let me give you a survey of the cascade effects:  

  • giving more than a very tiny amount makes a volunteer an employee, then
  • there should be W-2s and I-9s on file, then
  • there should be withholding taken out and paid to the federal & state governments, then
  • the thrift store’s no longer exempt from UBIT, then
  • a 990-T should be filed, and then
  • taxes should be paid on the UBIT.

Each of those consequences has reporting requirements, takes money and time to comply with, and has penalties for failure to report.

Oh, then there’s also

  • unemployment insurance,
  • wage and labor issues such as minimum wage & overtime,
  • child labor laws,
  • compliance with internal employment policies, and
  • potential problems from increasing the employment count and crossing any one of a variety of thresholds which would trigger additional legal requirements.

Things can go downhill fast. Be careful.

I discussed this earlier here, and linked to a post by Corey Pfaffe.  I also gave an illustration of the cascading effects of rewarding youth for helping out at a fundraiser.

5 Responses to Tax pitfalls for nonprofit organizations, especially paying volunteers

  1. Laurie says:

    I’m the President of the Board of a non-profit. My executive director wants to give me a $700 gift of my choosing (not monetary and other Presidents have recieved iPads and golf clubs – and the BoD and members doesn’t voted on these. Good or bad idea? Illegal or not?

    • Jim Ulvog says:

      Laurie, I don’t know the details of your situation, so I can’t give any advice. However, I can ask a few questions.

      Why are you not bringing this to the board for a vote?

      Are you planning for the NPO to issue you a 1099 or W-2 for the compensation?

      What does your workers comp insurance carrier think of this?

      What does your attorney say about minimum wage laws in your state?

      Is it legal in your state for an NPO to compensate a board member?

      How would this look on the front page of your local newspaper?

      What would your donors think about using their donations to give board presidents an iPad or set of golf clubs?

      Oh, one other thought. Any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or applicable state or local tax law provisions.

  2. […] have more discussion in my posts here and here. That first post links to another discussion by Ms. […]

  3. Omar says:

    Can 501c (10) nonprofit provide for hotel, airfare and other expense payment to its president and or other key officers for their attendance at meetings or conferences of the nonprofit?

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