August 14, 2017
Question: Our organization is a 501(c)(3) not-for-profit organization that relies on volunteers. Sometimes our volunteers incur significant transportation and other expenses in connection with the performance of their volunteer services. We would like to pay for some of those expenses, either directly or by reimbursement, to relieve their financial burden. If we do, would the expense payments be treated as taxable income, or would the payments be excluded from income — as they are when our employees incur similar expenses?
Answer: The taxation of expense payments is typically determined by the rules for accountable plans or working condition fringe benefits. You may already be familiar with these rules and how they apply to your employees.
An “accountable plan” allows an employer to reimburse employees’ expenses on a tax-free basis if three requirements are met: there is a sufficient business connection, the expenses are properly substantiated, and any excess reimbursements are promptly returned.
The IRS has long taken the position that the accountable plan rules apply equally to volunteers if the employer has the right to direct and control how the volunteers perform their services. In other words, individuals providing services without pay under the employer’s direction and control are treated as employees under the accountable plan rules. So long as your volunteers qualify as employees, and your reimbursements meet the requirements of the accountable plan rules, the reimbursements will not be subject to federal tax.
The rules for a “working condition fringe benefit” are similar, allowing an employer to provide property or services to employees on a nontaxable basis so long as the expenses would qualify for a business expense deduction if the employees paid for them. The business expense deduction (under Internal Revenue Code section 162) , however, requires a profit motive, raising the question of whether volunteers can qualify for the deduction. IRS regulations answer that question by specifically stating that “bona fide volunteers” can use the working condition fringe benefit exclusion if the volunteers do not have a profit motive. (This rule applies to volunteers for organizations such as yours that are exempt from tax under Code section 501(a)or for a governmental entity, as defined in the regulations).
For example, the regulations state that an individual is a bona fide volunteer if the total value of the benefits that the volunteer receives in connection with the volunteer’s services is substantially less than the total value of the services that the volunteer provides.
Volunteers that are considered independent contractors, instead of employees, because they don’t satisfy the control test for the accountable plan rules can receive benefits under the working condition fringe benefit rules. That’s because the federal tax exclusion under those rules (unlike the accountable plan rules) also applies to independent contractors.