Your staffers and volunteers have likely worked hard this year, seizing opportunities and overcoming challenges in the pursuit of your not-for-profit’s mission. Many of your stakeholders probably consider successful outcomes and smiles on the faces of the people you serve reward enough. Nevertheless, your organization may want to give them a gift or host a holiday party as a token of your appreciation — and, of course, to celebrate the season. Just know that even not-for-profits need to follow certain tax rules.

Think de minimis

If you distribute holiday gifts to employees, you should keep them small and inexpensive. In general, de minimis presents, such as food, flowers, books and branded merchandise (for example, t-shirts or tote bags), can be gifted without triggering tax liability. On the other hand, cash, gift cards, gift certificates or anything cash-equivalent is considered taxable to the recipients. If you give cash-based gifts, you’ll need to report them as wages and withhold income and payroll tax from them. In either case, you’ll be able to deduct gifts from taxable income (such as any unrelated business income).

There’s no bright line amount above which employer gifts are considered taxable. The IRS stipulates that nontaxable employer gifts must be infrequent and of nominal value. A commonly cited guideline for de minimis gifts is less than $100. But that’s not an official number, and you shouldn’t rely on it.

The rules for gifts to volunteers are similar to those for gifts to staffers. But be conscious of possible perception issues: Donors and grant-makers may not appreciate the idea that you’re spending some of their financial contributions on nonpaid workers. And if you give a volunteer a generous taxable gift, it might be considered compensation. That could open a whole can of worms your not-for-profit would rather keep closed!

Party time

Holiday parties for staffers are typically considered to be of de minimis value and, therefore, nontaxable to them. Your not-for-profit can deduct the full cost of the party from any taxable income as long as you:

• Invite all staffers (and their family members, if you wish), not just highly compensated employees,
• Exclude clients, vendors, donors and other nonemployees, other than volunteers,
• Keep costs “reasonable” and avoid any expenses that might be thought of as lavish or extravagant, and
• Maintain good records of your party’s expenses and attendees.

You can include volunteers on your guest list without negative tax consequences. For this purpose, volunteers are generally considered employees because they perform work supervised and directed by your organization. However, if guests other than employees or volunteers attend, party costs associated with them aren’t deductible.

Job well done

There’s nothing wrong with rewarding faithful staffers and volunteers for a job well done. Just make sure you know the potential tax consequences of those rewards. Contact us with your questions.