Under the right circumstances, nonprofits may receive “free labor” without being subject to coverage by the Wage & Hour laws. However, there are many compliance traps associated with nonprofit volunteers and interns. One of the common ones is paying stipends.
Taxable Income?
There are multiple problems here. First, the IRS takes a broad view of “taxable income.” If you pay a stipend, it’s still taxable income to the recipient. This is significant, because organizations label payments as “stipends” to avoid having to treat the payments as taxable wages.
Second, paying stipends sends a confusing message, straddling the line between work and volunteerism.
Relevant Thresholds
Two thresholds are relevant here –
- $500. The Volunteer Protection Act provides qualified immunity for an individual’s negligence while volunteering for a nonprofit. However, a volunteer forfeits this immunity if he or she receives compensation of more than $500 annually or greater than 20% of what an employee would be paid for doing the same work.
- $600. As a practical matter, most organizations won’t issue 1099s for payments below this mandatory threshold.
Below these thresholds, you may fly under the compliance radar. Above them, your risks increase dramatically, both with the Department of Labor and the IRS.
What you are calling a “stipend” probably constitutes wages, subject to FICA, Medicare, workers’ compensation, unemployment, and I-9 compliance. Plus, if your volunteer or intern is more properly classified as an employee, the Wage & Hour laws come into play, including the minimum wage and overtime.
In summary, the circumstances that make paying stipends a good idea are narrow and should be considered very cautiously.
Put it in Writing
Even when you’re following the strict rules around these issues, it’s advisable to have a written agreement with each volunteer and intern. You’ll want to clearly establish the nature of the relationship to avoid misunderstandings later.
Volunteerism is critical to the survival and success of many nonprofits. Don’t allow it to become a liability.
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFOs specializing in nonprofits. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.