Would allowing my company to pay me less in order to donate that money to charity lead to net increase in charitable donations?

Question

To give context for this question I first need to explain that I am lucky enough to make very good salary, and also live like I'm on minimum wage, which allows me to donate a pretty decent percentage of my income to charity. Maximizing the amount that goes to charity is very important to me.

Recently my company has given me a pretty large pay increase, literally more then 33% of what I was making, to keep me from changing companies. At the time my CEO offered that instead of adding it as direct salary he could instead have the company donate that money directly to the charity of my choice (givewell.com, the most efficient charity to support!), thus cutting out the middle man and possible the taxes. I'm currently trying to determine if having them donate money directly to the charity actually is a net gain to total money donated to charity or not.

I should also mention that even if my company does donate all my salary increase directly to charity I would still be donating well over 30% of my income every year, in fact I think it may be 50% or more though I've never really done the math on the exact percentage. That means that even with my company donating some money to charity I will still likely have to itemize each year and lose the standard deduction. My company has already stated they wouldn't be willing to take enough money out of my salary to drop my total income enough that not itemizing every year would be reasonable, apparently their afraid it will look suspicious to be paying me half of my expected pay rate.

I'm located in Maryland, USA. I'm filing as single and would have a salary of $220,000 if I didn't have my company donate some directly to charity.

If my company donates money directly to charity they have offered to add both the money that they would have had to match from my 401K contributions if my salary went up and the money they would have payed towards medicade taxes. This means a small amount of money would be donated directly to charity above and beyond the amount my salary would be lowed by, but it wasn't a significant difference.

There are a number of downsides to the lowered salary as I see it.

1. It would limit how much I can can donate next year in taxes. Since I currently have a significantly larger then normal amount of money to donate, from various inheritances and not donating last year in hopes tax laws would be more favorable this year (a mistake....), I suspect it will take a few years to actually donate the money and so a lower income, and thus lower maximum amount I can claim for charitable donations, could delay my donating of the money.

2. The money I get for unused vacation time when I leave my job would presumably be lowered by the lower effective salary, though this is something I could probably negotiate, or worst case I could just have them switch to paying me my full salary shortly before putting in my resignation so I get the full payout for unused leave whenever I leave the company.

3. If they try to base my future pay increase as a percentage of my current salary I get screwed, but I already expect to have to haggle with them each year when pay raises are due (part of the reason I got such a hefty salary increase is I let them get away with giving me far less of a pay raise then I deserved for a number of years), so this may not be a big deal if I'm haggling over pay anyways.

4. My life insurance (which is covered by my company) would be lower. Right now that insurance is set to donate directly to givewell, so if I get run over by a bus tomorrow my charity profits a bit less from my untimely death if I let my company lower my salary. Though I don't particularly plan to be run over by a bus any time soon...

5. When I donate the money directly I can prove that the money goes to the charity I intend for it to go to. While I do trust my company and don't think their plotting any shady behaviors I still feel odd just trusting that much money to another entity who claims, but I can't really prove, they are donating it.

6. It's less fun to brag about my salary if it's lower :P :)

All of these would be potentially minor if my company donating the money directly actually saved on taxes. However, I'm not sure I'm seeing any tax savings by cutting myself out as the middle man. Since I'm inevitable still going to have to itemize each year I'll already be claiming the charitable donations and having them removed from my taxable salary.

Having said that I think I will need to worry about the Alternate Minimum Tax (something I think I forgot to properly calculate last time I itemized...don't tell the IRS!). I'm not sure I will actually be able to claim the full amount I donate to charity due to hitting the AMT, in which case it would presumably be better to go along with my companies suggestion of having them donate the money directly?

So after all that rambling I guess I just need advice, should I let my company donate the money in lieu of salary, or just take the full salary and donate it all myself?

As a bonus question, my company claims that they are not gaining any benefit from donating money to charity instead of paying me, since both are write-offs on their taxes. If my company would conceivable gain any other kind of tax benefit from the former option which I could use as a justification to request they pay out more to charity to compensate for those savings I'd be interested in knowing about it.

Answer 1

The first thing that jumps out to me is payroll taxes. When the company pays you and you donate the money, the tax deduction for the donation offsets the income tax owed for that money; however, you're still paying payroll taxes (i.e. Social Security and Medicare taxes). At your income level, you have already exceeded the annual cap on social security tax, so you won't get any help in that regard from your company directly paying the charity. But you would avoid having to pay the Medicare tax on the dollars your company donates for you as well as the Medicare surtax which kicks in at income levels of $200,000 for individuals or $250,000 for married people.

Another thing to note is that this arrangement keeps your MAGI lower, which affects your eligibility for certain tax benefits. Depending on how much of that $220,000 total pay they're donating instead of paying you, it may allow you to remain eligible for things like Roth IRA contributions with no phaseout (or less of a phaseout). It could also affect whether you're subject to the Net Investment Income Tax (NIIT) and whether you are eligible for the Child Tax Credit.

You mentioned AMT as another reason why the company donating the money directly might be a benefit. This is true, though note that after you pay AMT you can typically eventually recoup the extra amount by claiming AMT credits in future years in which you don't pay the AMT. So I think it's not a huge consideration in this case unless you anticipate paying AMT every year for many years.

You mentioned several trade-offs in your question and, as far as I can tell, they're all valid concerns. In the end of the day, it's up to you whether these benefits are worth it to you for those trade-offs.

Answer 2

You mentioned a bunch of potential downsides to this arrangement but I'm not really seeing much benefit. If your company makes the donation for you, they'll save 1.45% on Medicare tax and you'll save somewhere between 1.45%-2.35% on the same. (And you mentioned there may be an AMT savings too but you'll need to crunch those numbers to confirm.) In theory, if you're donating every last penny you have left over every month, then your total donation would be reduced by your portion of the tax difference of the raise amount (so, say 2%-ish of the raise amount).

Regardless, this arrangement is strange and I feel you should simply avoid it. Take the raise, say "Thank You", and do what you want to do with your own money. If you want to donate to your favorite charity each month, or a different charity one month, or build a new playground for a local local school, or go on a volunteer trip, or invest in a new thing, or help a friend, or anything, you have that flexibility, but only if you control your own money. IMHO it's not worth locking up some of your funds and also involving your employer, just to save a couple of percentage points on taxes.

Interesting idea though...

Answer 3

You would have to talk to a professional about this: this is dangerously close to an illegal tax evasion scheme.

This probably depends a lot on how exactly you structure this. You can do it "silently", i.e. take a pay cut and hope that the company will honor their part. There would be no contract or an no way for you to control or check on what the company does. This could also be interpreted as tax evasion. The company donates not because or any business needs, but because you want it that way.

You can make it a part of your contract and spell out the rules of the agreement. At this point it becomes official a part of your compensation and you owe taxes on it the same way as it if would be paid directly to you.

Answer 4

If I understand what you are saying, here are the two options:

1. You are paid the money and donating it
2. The company donating directly

For both, the amount that goes to charity remains the same.

In the first case, you get the tax break, and you continue to get that money in following years (to donate, or not).

In the second case, the company gets the tax break, and can discontinue it at any time.

It is in the company's interest (for tax reasons, as well as your future compensation) to go with the second case.

I can't think of any benefit to you (or your charity) to go with the second case.