A r c h i v e d  I n f o r m a t i o n

Managing Volunteers Within the Law

Taxation

General Tax Rules

Federal and state taxing authorities will expect their share of almost any compensation you give to your volunteers. In general, for tax purposes, you must treat payments to volunteers the same as payments to employees. Consequently, absent an exception from federal or state tax laws, you must withhold income taxes and FICA (Social Security and Medicare) contributions from the compensation you pay your volunteers.[43] Living allowances, stipends, post-service benefits, and in-kind benefits are usually treated like wages.[44]

The Internal Revenue Code contains a number of exceptions, discussed below, that exclude some items from tax. In addition, some federally funded programs provide exceptions in their legislation. Moreover, although volunteers may receive a taxable benefit, some may not earn enough during the year of service to owe any income tax. For example, although your program may award volunteers a $1,000 taxable living allowance, if these volunteers have no other earnings for the year, they escape income tax, since their income will be less than the minimum taxable amount. FICA must still be paid, however.

State tax rules generally follow the Internal Revenue Code with respect to definitions of "taxable income" and withholding requirements. (Many states start with the federal rules and merely add several modifications in the computation of the tax due.) Because state tax codes are not standardized, some may contain applicable exceptions that are beyond the scope of this booklet.

Living Allowances, Stipends and Other Payments During Service

To the extent living allowances, stipends and other forms of cash awards constitute "compensation for services," they are taxable under the Internal Revenue Code and subject to FICA withholding just as if they were wages paid to employees. The IRS taxes income, and these cash awards are a form of income. The FICA tax is a bit narrower, but the definition of "wages" used for FICA is broad enough to include living allowances, and most other forms of compensation for services.

Only if a program qualifies for special tax rules, which are sometimes part of legislation for the program, will living allowances be totally exempt. Job training programs fall within one of the few exemptions. Earnings of individuals enrolled in government-sponsored job training programs who render no service as part of the training experience are not taxed.[45]

Non-Cash Benefits

In-kind benefits, such as meals, lodging, uniforms and health insurance are subject to special tax rules. Although the IRS treats many in-kind benefits as taxable compensation, exceptions apply to most non-cash benefits volunteers typically receive. (Scholarships are discussed separately below.)

Meals and lodging are exempt if they meet the following tests.[46]
Meals Provided for the convenience of the program; and; Served on the program premises or work-site (not in a restaurant).
Lodging Provided to recipients required to accept the lodging a condition of their service to enable them to better perform their duties.

If your program satisfies these rules, the value of meals and lodging is not taxed. Housing must be provided to further the purpose of the program rather than merely to provide shelter. Meals should be served at program sites or facilities. Feeding volunteers at the golden arches five days a week can turn every Big Mac they eat into taxable income.

Health and accident insurance coverage can generally be provided tax-free.[47] Likewise, uniforms required as a condition of employment and which are not suitable for everyday wear are not taxed.[48] Child care is not subject to tax if it meets certain IRS guidelines.[49]

Inexpensive items may be excludable from income as de minimis fringe benefits. This imprecise exception encompasses items such as holiday gifts, coffee and doughnuts, soft drinks, local telephone calls, and use of the copy machine.[50] The more expensive the item, the less likely it is to qualify as de minimis, especially if given more than once.

In-kind benefits that do not qualify for a tax exemption must be assigned a dollar value for tax purposes. You will be responsible for determining the fair market value of the goods distributed and for withholding the tax from the volunteers' living allowance or other cash income. Generally, the fair market value of a benefit is the amount an individual would have to pay for the item at a local store or restaurant.[51]

Scholarships

The Internal Revenue Code exempts "qualified scholarships" from tax.[52] These rules have gotten much tighter over the years, so that many scholarships are now fully or partially taxable. Because these rules were not written with volunteers in mind, their application to your program may not produce a clear answer without a ruling from the IRS. The explanation here draws on the tax treatment of scholarships for graduate students.

The first requirement a scholarship must meet to be "qualified" is stated in the negative. The scholarship must not be given as compensation for services the recipient performs on behalf of the granting program or institution. Thus, a graduate student who is required to teach in exchange for a scholarship is taxed. Similarly, scholarships awarded to your volunteers could be taxed as income if a volunteer must perform work to receive the scholarship.

Taxation may depend on how a volunteer "earns" a scholarship. The more the scholarship appears to have been given in exchange for labor, the more likely it is to be taxed. If scholarships are given in addition to a living allowance that alone adequately compensates the volunteer for service, taxation is less likely. Similarly, scholarships based exclusively on merit or need are "qualified." If, for example, your scholarship is a "Merit and Achievement Award" the recipients are less likely to surrender some of their funds to the IRS than if you offer "Scholarship Compensation for Community Service Work."

Words alone are not determinative, however. The program's judgment as to whether or not the award constitutes compensation is not binding on the IRS. Similarly, whether or not the grantor of the award withholds tax on the benefit will not sway the IRS determination.[53] IRS opinion is similarly unaffected by the rulings of other agencies and tribunals. For example, a National Labor Relations Board ruling that an individual is not an employee is not binding for tax purposes.[54]

Even "qualified" scholarships are taxable unless used for permitted purposes: tuition, fees, books, supplies and equipment required for courses of instruction. The IRS taxes any portion of a scholarship used for living expenses or other non-qualifying purposes. A volunteer who uses his scholarship award to wine and dine his college sweetheart may find himself washing dishes to pay the IRS.

Taxable benefits will remain taxable even though volunteers never receive any cash directly or hold the benefit itself in their hands. For example, your organization may write a check directly to a college for tuition payment of a former volunteer. The individual who is credited with the value of the tuition payment then becomes liable for federal and state taxes on it, which the organization is ordinarily responsible for withholding.

Tax liability arises when a volunteer receives the benefit, for example, by requesting payment to the college where he or she enrolls after the program. Program managers should advise volunteers that no tax need be paid until they exercise the right to use the benefit, but should also advise these individuals to budget for the upcoming tax liability.[55]

Reimbursements

Reimbursements to volunteers are taxable to the same extent as reimbursements to employees. Only if the expense qualifies as a tax deduction for an employee does it avoid tax.[56] Thus, reimbursement for a volunteer's purchase of a uniform, required for program participation, would not be considered part of the individual's taxable income.

Reimbursements for ordinary living expenses like food, clothing and commuting to and from home are taxable income. You may be able to provide meals tax-free in some circumstances, but reimbursements for meals or for groceries to cook meals will ordinarily be subject to tax. [57] (An exception is allowed if an individual is traveling away from home for the program.)


-###-
[Child Labor Laws] [Table of Contents] [Conclusion]