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katieinny

A not-for-profit organization would like to offer a holiday pay benefit

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A not-for-profit organization receives donations in December that are meant to be disbursed to employees as a holiday benefit. In the past these dollars have been going through payroll, but it seems like there should be another way to pass this money around without incurring payroll taxes. Most of these employees are in the lowest tax bracket, so income tax isn't the issue -- it's payroll tax we're trying to avoid. Is there a VEBA or Welfare Benefit Plan that would support this type of arrangement?

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A VEBA or welfare benefit plan (WBP) is not a pass-through that gets funds into the hands of the employees for who they are intended. Think of it as being like an insurance policy (life or health). The money can come into the VEBA or WBP but will only be paid out upon the occurrence of the insured event: death, disability, need of long-term care, incurring medical expense, etc.

The funds could go into a medical expense (or health) reimbursement account to reimburse the employee for medical expenses incurred over the next several months. This is as close as you can come to achieving your goal using a VEBA or WBP.

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Vebaguru: If a VEBA won't work, there must be some other way to get this holiday gift to employees without going through payroll. Keep in mind that the money does NOT come from the employer. This money is donated by many generous and well-meaning people with instructions that it be allocated to employees of the not-for-profit organization as a Christmas gift. It doesn't make sense that this money has to have payroll taxes applied to it, although they've passed it through payroll in the past because they couldn't think of another way to distribute it.

Any thoughts would be appreciated.

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The problem is that too many people abused cash gifts in the past so Congress and the IRS closed basically every door on non-taxable cash to employees. What you've described is essentially like a tip pool at a restaurant. The fact that the employer is a non-profit doesn't change the equation. If it puts spendable cash or equivalents into the employee's hands, then it's taxable.

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Guest Sieve

It makes sense to me (that it must go through payroll)--and, in fact the dollars are coming from the employer, and the dollars are in the form of a bonus for services rendered. All other dollars given by donors that pass through the non-profit to employees must go through payroll, even though donors undertstand that some of their annual contribution will be used to pay employees. If the non-profit found a donor to make an annual gift of $1,000,000 specifically to cover payroll, that doesn't allow the employees' checks not to pass through payroll. If it is the non-profit employer making the payments to the employees, then it is compensation subject to all payroll taxes, unless there is some exception (like certain safety/longevity awards, small gifts, etc.).

If the donors wrote checks directly to the employees, then that might make a difference. But I still think those payments would be subject to payroll taxes. After all, the defnition of "wages" for purposes of payroll taxes includes "all remuneration for employment", with no requirement that those "wages" come directly from the employer. Tips to restaurant wait-staff (paid directly by the patron to the employee) are considered wages for this purpose. If grandparents directly pay the in-home day-care expenses for their grandchildren, even though the grandchilren's parents really are the "employer" of the nanny, that doesn't eliminate the requirement that withholding must occur (if applicble to the nanny in the first place).

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