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In the US as I understand it, there are corporate tax deductions for charitable giving.

For this or any other reason, would a company with large salary expenditures and positive profits (sometimes) reduce their tax liability by changing my employment contract, reducing annual salary by $1, and obligating the company to contribute $1/year to a charity?

I'm assuming no, since salary expenditure would otherwise reduce profits and charitable donations would not?

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    Did this happen to you, or is it a hypothetical? – RonJohn Jan 14 at 15:13
  • It's hypothetical! Great question. I want it to happen to me (and only me), but I don't know whether it is effective, whether it has been tested, or whether there are unintended consequences I haven't thought of. – capet Jan 15 at 16:04
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When it comes to making financial changes to reduce tax liability, there's (usually) no free lunch. You generally can't save money on taxes without directly or indirectly incurring costs or losing money elsewhere. There are lots of ways to shift things, but not many (easy) ways to "win" in the sense that you seem to be wondering about.

In your scenario, the company may come out ever so slightly ahead the money donated compared to paid as salary would both be deductible from corporate tax, but their payroll tax liability would go down. However, that advantage for the company is offset by the employees losing on $1 of salary. If all of the employees decide they are okay with this charitable giving, they'd (potentially, depending on how they file their taxes) be better off by keeping their higher salaries and donating the money each themselves.

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When I was first working after college the company I worked for, and other companies competing for US government contracts, liked to be able to claim in their bids for contracts that the were patriotic and good citizens.

They did this by being able to claim 100% participation in purchasing US Savings Bonds and 100% participation in donating to charities though the United Way. Each year there was pressure to participate. They even provided a pizza lunch where they would help employees fill out the forms. There were stories that even if you didn't donate to the United Way by payroll deduction, some manager up the chain would donate a dollar in your name. The US savings bonds were probably harder to fake.

The pressure for these programs seemed to go away in the early 2000's and it has been a long time since any employer has mentioned them.

It sounds like somebody in the company is trying to do the same thing as the old programs did. They want to claim higher participation or more money donated compared to the previous year.

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  • Yes, some kind of PR angle was going to be my answer. – Mattman944 Jan 14 at 21:06
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In the UK, the company would benefit a tiny bit. For every pound of pre-tax salary, the company has to pay an additional (I think) 13 percent in employer health insurance / pension contributions. So giving up £1 in salary saves the company £1.13; since they donate £1, they save a grand total of 13 pennies. I don't think it's worth it.

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  • That's 13%. With 5,000 employees it adds up to £650, and probably pleased a narrow-minded bureaucrat to no end. – RonJohn Jan 14 at 20:00
  • In the US, too, just not as much. The employer portion of the payroll tax would save 7.65 cents, only if the employees salary is below a certain amount. – Damila Jan 14 at 20:33
  • 13 pennies pre-tax, so even less after tax – ssn Jan 14 at 21:27
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    There is no real sense in which employer NI contributions are "health insurance". They are just another tax. – Martin Bonner supports Monica Jan 15 at 13:25
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The company is ending up exactly as before, only difference is that the employees donate some part of their salary to charity.

The reason for this is that both salary and charitable donations are deductible from corporate tax, leaving the company in the exact same state in both cases (perhaps the charitable donations give the company a better image, but from an accountings point of view it is the same).

Consider below (simplified) example where Scenario A is before the donation and Scenario B is after.

|-------------------|------|------|
| Revenue           | 1000 | 1000 |
| Salary costs      | -200 | -199 |
| Charity           |    0 |   -1 |
|-------------------|------|------|
| Profit before tax |  800 |  800 |
| Tax (30%)         | -240 | -240 |
|-------------------|------|------|
| Profit after tax  |  560 |  560 |
|-------------------|------|------|

Basically in accounting you pay taxes out of your revenues, however you can deduct certain items from your revenue before tax is calculated; items such as cost of production, materials, labor, pension, finance expenses, charitable donations etc etc etc.

Profit is just a word to describe what you have left after you have deducted all these items from your revenue.

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    I'm not sure that's the whole picture though, payroll taxes and other obligations based on payroll amount would be reduced in the charity scheme. – dwizum Jan 14 at 19:01
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Their primary gain would be indirect - public view of the company. They can represent themselves as 'having donated such and such', and hope that the public opinion of the company - which directly influences their attractivity as employer - gains from it.

Any direct financial impact is minuscule, and probably negativ, as the overhead cost of setting the program up and executing it would easily eat any potential tax savings. They are doing it for publicity, not for direct gain.

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  • This is a good point not addressed in the answer I marked as "the answer." – capet Jan 15 at 18:43

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