At a recent presentation we gave to nonprofit practitioners, the topic of providing gift cards to say “thank you!” to volunteers arose. Most attendees were surprised at how complex such a simple prospect could be for a nonprofit. Could it be viewed as compensation or a taxable event to the recipient?
Classification: When the Volunteer becomes an Employee or Independent Contractor
In “Volunteers: A Primer of Possible Perils,” we debuted Valerie Volunteer and Ed Executive-Director in a morning of mishaps and mayhem.
Volunteers are a great asset to nonprofits, but there are risks as well as rewards. Valerie and Ed meandered through a mess of them — risks, that is — apparently oblivious of any lurking dangers.
The first one popped up in the first paragraphs of that tale:
A startup community organization; let’s call it Organization X – is welcoming an energetic college student on summer break.
The young woman is offering her time, but drops hints that she could certainly use a few bucks an hour, if possible.
The Executive Director of Organization X is ecstatic that he’s getting some much-needed office help. To Valerie Volunteer’s delight, she’s not assigned to envelope-licking duty, but is asked to tackle the nonprofit’s fledgling social media presence . . .
What’s the problem here? It’s an issue of classification. Is Valerie Volunteer a bona fide volunteer if she gets a few bucks an hour? Maybe not.
Who decides how people involved with your organization are classified? Not you. There are laws and regulations, rules and tests. You can call someone a “volunteer” until the cows come home, but you may be stepping into a big pile of manure if you get it wrong. How big? Quite big, indeed. Big penalties; big liability.
In previous posts including “The Crackdown on Unpaid Internships: Do Nonprofits Have to Worry?” and “New California Worker Laws: How Do They Affect Nonprofits? . . .” we introduced this classification issue. Most recently, in “Volunteers: A Primer on Possible Perils,” we wrote:
What is a “volunteer”? Regardless of the label chosen by the organization and the worker, if the worker is not a true “volunteer,” then all labor and other laws pertaining to employees must be followed. This includes payment of at least minimum wage and overtime rates, observance of meal- and rest-break rules, and anti-discrimination standards.
In addition to these significant wage-and-hour-law problems, if a volunteer is paid too much, then that person generally loses important immunity against lawsuits available under the federal Volunteer Protection Act.
Who’s Who and What’s What
According to the U.S. Department of Labor, a volunteer is: an “individual who performs hours of service … for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered.”
There are additional ways to spot a true nonprofit/volunteer relationship:
- the worker performs services typically associated with volunteer work;
- the worker doesn’t displace any regular employees
- the activity is less than full time; and
- the services are truly voluntary, and not offered as a result of any pressure or coercion; for instance, an employee who is asked to “volunteer” extra time
The cornerstone of the volunteer/organization relationship, of course, is “service without contemplation of pay.”
But many nonprofits want to give their volunteers “a little something” as thanks for their dedication, time, and effort: stipends, reimbursement for out-of-pocket expenses, discounts on services, gift cards, and in-kind benefits.
The law acknowledges this reality and allows “bona fide volunteers” to receive “nominal” or de minimis compensation or a “stipend” along with reimbursement for expenses and reasonable benefits. But what’s “nominal?” How much is too much?
What is a Stipend That Will Pass Muster?
There’s no definitive answer, but there are some clues in the federal regulations under the Fair Labor Standards Act and some opinion letters issued by the Department of Labor. The FLSA is the federal law that governs and defines classification of workers, including who is an “employee” or a “volunteer” or an “intern”; the DOL is the federal agency that administers the FLSA.
“Although a volunteer can receive no compensation, a volunteer can be paid expenses, reasonable benefits or a nominal fee (or any combination) to perform … services.”
“…(A) fee is not nominal if it is a substitute for compensation or tied to productivity.” And “… determining whether the expenses, benefits or fees would preclude an individual from qualifying as a volunteer under the FLSA requires examining the total amount of payments in the context of the economic realities of a particular situation.”
The agency “presumes that fees paid to volunteers are nominal as long as the fee does not exceed twenty percent of what an employer would otherwise pay to hire a full-time employee for the same services.”
But – and this is a big “but” – if the “volunteer” receives anything of value exceeding $500 a year, that person must be treated as paid staff or as an independent contractor and relinquishes important liability protection under the federal Volunteer Protection Act (as well as becoming potentially liable, in the case of independent contractor classification, for a whole slew of self-employment taxes).
An even BIGGER BUT emerged in a recent “Good Governance Makes Sense for Exempt Organizations” phone forum held by the IRS on January 23, 2014… According to the IRS, even $25 gift cards provided to volunteers are “taxable events.”
“Taxable Event”: What does that mean?
So that $25 gift card you gave your volunteer to say “thanks”? Guess, what? That’s a taxable event according to the IRS. Stipends or cash gifts of any amount (even allowable “nominal” stipends to bona fide volunteers) are generally taxable income. The volunteer recipient must report the amounts on his or her tax return and pay applicable taxes AND the organization must withhold taxes and make FICA payments – just as it does for employees.
So where does that leave the nonprofit practitioner?
A few helpful tips:
- Don’t Tie Stipends or Benefits to Hours of Work: That looks too much like a prohibited “substitute for compensation.” A test to help evaluate whether a payment to a volunteer is a compensation substitute is “whether the amount of the fee varies as the particular individual spends more or less time engaged in the volunteer activities.”
- Don’t Base Classification Solely on Your Financial Means: A person doing what would ordinarily be considered employee-type work doesn’t magically become a volunteer because you can’t afford to pay.
- Don’t Offer Benefits That Regular Employees Receive: You should differentiate the volunteer as much as possible from employee status and compensation.
- Know the effect of your appreciation gifts: The last thing you want to do is make your organization’s withholding obligations greater, or to “gift” your amazing volunteer with is a more complex tax return at the end of the year. Maybe that bouquet of flowers, rather than a $50 gift card, would be more appreciated as an appreciation gift!
By allowing “nominal” stipends, the law recognizes that nonprofits routinely show appreciation to their volunteers with small amounts of money or benefits:
The FLSA recognizes the generosity and public benefits of volunteering, and does not seek to pose unnecessary obstacles to bona fide volunteer efforts for charitable and public purposes. In this spirit, in enacting the 1985 FLSA Amendments, Congress sought to ensure that true volunteer activities are neither impeded nor discouraged. Congress, however, also wanted to minimize the potential for abuse or manipulation of the FLSA’s minimum wage and overtime requirements in ‘volunteer’ situations.
So any decision to reward volunteers must be approached with due care and consideration. In addition to “nominal” cash stipends, bona fide volunteers can safely receive reasonable in-kind benefits and reimbursement of expenses. But that’s another kettle of fish that we’ll tackle in a later post. There are some tricky twists and turns.