Non-Profit
The Do’s and Don’ts of Volunteer Labor
If you live in the Chicago area, you’ve probably set foot on the Illinois Prairie Path.
Spanning three counties, the crushed-limestone trail runs through 61 miles of sprawling neighborhoods, bustling downtowns, peaceful nature preserves, and (yes) prairies.
The Prairie Path is itself an amazing achievement. But you know what’s really amazing about it?
It was built almost entirely by – you guessed it – volunteers.
Volunteers are a powerful workforce for the nonprofit industry. They help organizations fill budget gaps, stretch funds further, and ultimately fulfill their mission.
At the same time, tax-exempt organizations that use volunteer labor must be careful not to run afoul of government regulations. There are many rules regarding who can be considered a volunteer and what kind of work they can perform. If an organization misclassifies an individual as a volunteer, they may face costly ramifications, from back wages and employee taxes to attorney fees and other penalties.
In short? Volunteers are great, as long as you use them wisely.
To help you stay on the right side of labor and tax laws, here are some of the biggest Do’s and Don’ts of volunteer labor.
DO Know How the Government Defines Volunteers
The Department of Labor (DOL) created the Fair Labor Standards Act (FLSA) to set the ground rules for employers, ranging from minimum wage and overtime to recordkeeping and child labor. Volunteers are exempt from these regulations.
Who’s considered a volunteer? According to the DOL, a volunteer is an individual who:
- Donates their services to religious, charitable or other similar nonprofit organizations. (Note: For-profit businesses cannot enlist volunteers. There is some debate as to whether companies that employ unpaid interns are in violation of this rule.)
- Volunteers on a part-time basis.
- Isn’t coerced into volunteering.
- Doesn’t expect to receive cash or in-kind benefits for their work.
In other words, the DOL defines “volunteering” the way most of us do.
But there are several nuances to their rules that complicate things. For example…
DON’T Have Volunteers Participate in Any Commercial Activities
Many nonprofits make the mistake of having their volunteers participate in commercial activities. For example, a nonprofit museum may have volunteers work at a gift shop, or a public library may have a volunteer serve coffee at their café.
Unfortunately, both organizations would be in violation of government regulations. Although the organizations are nonprofits, entities like gift shops and cafés are commercial enterprises. Any individual working at these would be considered an employee or independent contractor and subject to taxation and FLSA rules.
You should also ensure that volunteer activities don’t become commercial enterprises. For example, several nonprofits have run into trouble for using tip jars to raise cash for their volunteers. When the IRS audited them, it was determined that the tips qualified as compensation, the volunteers were technically employees, and the organizations owed back wages and taxes.
Do: Allocate Fundraising Proceeds to Group Rewards
Chances are, when you were a child, you sold cookies or popcorn to cover fees for a summer camp or field trip.
Offering volunteers rewards for their work can be a great way to get them motivated. However, organizations must ensure that their rewards don’t turn volunteers into compensated employees or independent contractors.
Innocent as they may be, the examples above – selling cookies or popcorn – can lead to tax and labor problems later on. If you set aside money for the benefit of a participant, and the total funds exceed the reporting threshold, then it’s considered taxable income and your organization will have to file a Form 1099-NEC (Nonemployee Compensation).
One way to avoid this is by offering group rewards, rather than individual compensation. If a school runs a fundraiser to pay for a field trip, they can avoid tax problems by combining all the funds into a general pool to pay for the group’s trip – and potentially find creative, non-financial ways to reward students who raise the most funds.
Don’t: Use Your Organization’s Paid Employees as Volunteers
It can be tempting to ask employees to volunteer their time outside of work. But paid employees and contractors generally cannot be considered unpaid volunteers, even if they are willing to donate additional hours outside their normal workday. Only individuals who receive no taxable compensation or benefits from your organization can be considered volunteers.
We’ll include a bonus “Don’t” here: Don’t use volunteers to perform work that would normally be performed by employees. If a volunteer displaces a regular employee, or performs work that would normally be compensated, they may be considered an employee under the FLSA even if they are uncompensated.
Do: Be Careful with Gifts
Your organization may want to give its hard-working volunteers a token of your appreciation –the volunteers who built the 61-mile Prairie Path certainly deserved a commemorative t-shirt or two – but you should be careful that your gifts aren’t too generous.
If the value of a gift exceeds 20% of the fair market value of the volunteer’s services, the volunteer may be considered an employee for tax and labor purposes. In turn, your organization may owe back wages and taxes, and may be subject to other penalties.
In general, you should keep volunteer gifts to a minimum, otherwise they could become gifts that keep on giving.
Don’t: Use Nominal Fees to Substitute for Compensation
Under Department of Labor rules, nonprofits can reimburse a volunteer for their out-of-pocket expenses and even pay a “nominal fee” for their services. But you need to ensure that fees are truly nominal – far below the real value of the volunteer’s work – and you should never tie their fees to productivity or hours worked, as it will be considered taxable compensation.
Do: Establish Clear Policies and Procedures for Volunteer Labor
One of the best ways to protect your organization from unexpected taxes and penalties is by establishing clear volunteer labor policies and communicating them to your staff.
Here are a few tips:
- In addition to your employee handbook, create a separate volunteer handbook that sets clear expectations for volunteers and establishes key policies for expense reimbursement and other issues.
- Have a system in place to ensure that every volunteer understands they are, in fact, a volunteer. Your staff should communicate to volunteers that they are not eligible for employee benefits and that volunteering with your organization will not lead to employment. One good way to communicate this – and document the communication – is by creating a volunteer handbook, as we mentioned above.
- Educate your staff, especially key decision-makers, on your volunteer labor policies, and audit them regularly to ensure they are up-to-date and are being implemented.
Do: Use Volunteer Labor Wisely!
In most cases, the rewards of using volunteer labor far outweigh the risks of misclassification. (Just ask naturalist May Watts, who spearheaded the volunteer effort to build the Illinois Prairie Path.)
By understanding government regulations and implementing policies aligned with them, your organization can minimize its risk – and tap into the amazing potential of a volunteer workforce.
Specialized Accounting for Nonprofits
At Dugan + Lopatka CPAs, we have partnered with Chicagoland nonprofits for nearly 50 years. Visit our not-for-profits page to learn more about our work or explore the wide range of outsourced accounting services we offer tax-exempt organizations.