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I'm doing some work in the US for some entity also located in the US, and I've been told:

We will donate xxx USD on your behalf to one of several non-profits that you can choose.

I am a US tax resident. Do I have to report this to the IRS when filing for my taxes?

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  • Are you also paid directly for your work (e.g. W-2, 1099)?
    – yoozer8
    Jun 6 at 14:03
  • @yoozer8 no~~~~~
    – Franck Dernoncourt
    Jun 6 at 14:04
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    Why on earth would anyone agree to this?
    – quid
    Jun 6 at 15:00
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    I can think of reasons why someone might do this. Sometimes I don't want to be paid for something, perhaps because that can cause people to flip their attitude from "this person is doing me a favour" to "this person is my employee". Conversely some people can't seem to abide getting a benefit without somehow paying for it. Getting them to make a donation to charity helps reconcile these two opposing drives.
    – Eric Nolan
    Jun 7 at 10:48
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    @EricNolan the employer here is double dipping: they're evading payroll taxes on one hand, and deducting donations on the other. There's absolutely no benefit to the employee here, unless the employee is also interested in evading tax payments.
    – littleadv
    Jun 8 at 1:42

3 Answers 3

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This is going to depend on the answer to a seemingly simple question:

Will you, or anyone you are connected with, benefit from the donations made?

In the "normal" circumstances, where the donation is going to a well-established registered charity and neither you, your family, your friends nor any business connected with them benefit from that charity's work, then you are pretty safe and you don't have to declare them as income. The donations are not a "payment" or "recompense" for your work, they are just a way of acknowledging your work.

As soon as there is any doubt about whether you, or anyone connected with you, benefits from the donations then you may be in trouble. For example, you may have a problem if the donations are:

  • to the school your child attends;
  • to a non-profit that employs your company to provide services;
  • to a non-profit that someone in your family administers or works for
  • to a non-profit that advances a political position you support

If there is the slightest doubt about whether you benefit I strongly recommend getting a lawyer to look at this. If you are doing this because you think it's a great way of getting paid while avoiding tax, then it's almost certainly illegal and the IRS has almost certainly seen it before.

You are also going to have to make sure you are not in the position of an employee. That would run you up against minimum wage laws and probably other stuff.

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  • "That would run you up against minimum wage laws and probably other stuff" -- is an employee ever punished for working for less than minimum wage?
    – nanoman
    Jun 7 at 2:36
  • Note, $1 executive salaries happen despite being illegal. "The catch is that nobody is going to enforce the law here. If Jobs doesn't complain, nobody is going to complain for him."
    – nanoman
    Jun 7 at 2:43
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    @nanoman the article says that equity compensation doesn't count because "their values not yet fixed", but that's not true. The values are fixed at vest events and are in fact considered compensation. There are also a lot of exemptions for significant stakeholders (that may ran afoul of tax laws, however).
    – littleadv
    Jun 7 at 4:56
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It appears that your employer is violating some laws, and possibly you do too, with this arrangement.

It allows both of you to avoid the payroll/self-employment taxes, and allows you to be able to potentially effectively deduct the entirety of your income as a charity contribution.

Unless you're volunteering with a registered non-profit, minimum wage rules and payroll taxes apply. If you're categorized as a contractor, then you're expected to pay SE taxes on your earnings.

There's no way to report this to the IRS when filing your taxes, but if anyone reports you or your employer to the IRS tip line you may end up in a lot of trouble.

A nit-picking reader may claim that you can always report something to the IRS, but the problem is that there's no way to report such an arrangement in existing forms other than a plain statement, and in writing such a statement you'd be admitting to breaking some laws or helping others to break some laws, or both.

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  • I hadn't thought of minimum wage. You have some good points here that I hadn't thought of.
    – DJClayworth
    Jun 6 at 20:33
  • I'd appreciate downvoters to explain what they're disagreeing with
    – littleadv
    Jun 6 at 21:28
  • "There's no way to report this to the IRS when filing your taxes" -- I thought you could always stay good with the IRS by filing truthfully and paying what you owe, even if the underlying income arrangement is somehow illegal. Even Al Capone could have stayed out of prison if he had dutifully filed. OP can simply declare income and pay SE to be safe, right? I don't think the IRS enforces minimum wage and in any case it would be the employer, not employee, who's punished. It doesn't make sense to me that OP will be in trouble with the IRS and there's no possible filing that can prevent it.
    – nanoman
    Jun 7 at 2:01
  • @nanoman well, potentially if the OP knows the amounts donated I guess he could declare it as 1099 income with all the taxes dutifully paid, or if the OP is characterized as an employee he can potentially file a substitute W2, but what I mean is that it wouldn't be a truthful report (see the jurat at the signature line), and in any case is likely to invite audit. As to whether or not the IRS enforces min. wage laws - it's irrelevant, if not the IRS then DOL, or some other acronym, someone will start looking.
    – littleadv
    Jun 7 at 3:27
  • @littleadv Okay, that's what I don't understand -- all the IRS can require is making a truthful report and paying the resulting tax owed. You say this proposed filing wouldn't be truthful -- why exactly, and what filing would be? Are you really saying that there is no IRS form that allows OP to tell the truth in this situation? Remember, even Al Capone had an option for telling the truth to the IRS (he just declined to do so). If OP doesn't declare income and the IRS later comes after OP for that, surely the IRS has to be able to say, "This is what you should have filed"?
    – nanoman
    Jun 7 at 3:41
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It is useful to separate the question of your tax obligations from any other concerns about the legitimacy of the arrangement. It seems the worst-case (for you) position that the IRS could take is that you are being paid as a contractor but have elected to have your customer donate that payment on your behalf.

This would be somewhat similar to elective payroll deductions for charitable donations that many employers offer -- you never see the money directly, but it is treated as paid to you and then donated by you to the third-party charity (normally this is only a small fraction of wages though).

So if you conservatively treat the transaction as (1) your receipt of contractor income and (2) your donation of that same amount, and you pay the consequences of that including full self-employment and income tax on (1) and limited deductibility of (2), then you should be in the clear. And if there is any doubt that the donation has actually happened and has benefited a legitimate third-party charity, you could decline to claim any deduction for (2) to be safe.

You may not like the cost of this approach (working induces negative cash flow), but it may be the best you can do with your "work for donation" setup, unless you can get reliable personal tax advice (which this answer is not) to justify being more aggressive, e.g., not considering the donated payment as income at all.

Apart from the above is any concern about whether, by directly donating your compensation instead of paying it to you, your customer is improperly employing you for less than minimum wage and/or failing to issue a required 1099 or W-2 and/or failing to pay its share of payroll taxes if you are deemed an employee. Any such investigation or enforcement would be directed against your customer/employer and not you, and could only improve your financial position relative to the above.

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    "Any such investigation or enforcement would be directed against your customer/employer and not you" - welcome to the concept of "accessory to a crime".
    – littleadv
    Jun 7 at 16:15
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    @littleadv Hmm, so all the gig workers fighting to be classified as employees are in for a nasty surprise if they win -- since they willingly worked as contractors, they'll promptly be arrested for being accessories to their previous misclassification?! I don't think it works that way. Most labor laws are binding and punishable on employers but not on employees.
    – nanoman
    Jun 7 at 19:40
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    if they're fighting - then not willingly, right? In this case the OP clearly and willingly cooperated with the evasion scheme. This is not a labor law violation, it's a tax law violation.
    – littleadv
    Jun 7 at 20:09
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    @littleadv If OP pays full SE and income tax on the amount donated as I suggested, there doesn't seem to be any tax evasion. The IRS gets what they should. We've established that you think it would be perjury but I don't see it. Re gig workers -- look at those who happily worked for a time before starting to fight, or those who are still fine with being contractors and aren't fighting. The point stands, none of the workers will remotely be charged as accessories even if it is determined they willingly worked while illegally classified as contractors.
    – nanoman
    Jun 8 at 0:58
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    I understand your point, I disagree. The OP in this situation clearly co-operated with the employer's scheme to evade taxes. Even if the OP clears his conscience and pays his share, the employer is still the one evading taxes, and still with the OP's co-operation. This is not the case with the gig economy workers.
    – littleadv
    Jun 8 at 1:39

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