Does your ministry ask your staff to raise some portion or all of their compensation as an employee? Some ministries make it part of the job description, while others merely encourage it and make it voluntary. The technical term for this type of fundraising is “deputized fundraising” and it is legally permissible for individual staff members to raise monies from personal friends and other contacts for their salary and expenses with the ministry for which they serve. While this type of fundraising is a common practice in many ministries, the methods that are used differ greatly from organization to organization. Many however, would not pass IRS scrutiny if audited. Let's look at the ways to avoid that happening in your organization.

      The foremost IRS requirement is that the organization and the staff person cannot make any commitments to a donor that the monies will be dedicated, earmarked or restricted only for a specific staff person. Doing so would make the organization a mere conduit for the benefit of the employee. No agreement, whether stated or implied, can be made with a donor that his or her gift will be earmarked for a particular staff person. If the IRS learns of such earmarked gifts, they can deny the deduction taken by the donor, and can also challenge the tax-exempt status of the ministry. So the impact of doing this wrong can fall upon both the nonprofit and the subject donor.

      The IRS dictates that the only proper way to conduct “deputized fundraising” is to make sure that all of the funds raised by staff and others will always be under the full and complete direction and control of the governing board of the ministry. In other words, the organization must ultimately control the use of these funds for its organizational purposes, regardless of what a particular donor or staff member may expect or demand. This control should be well documented in ministry minutes, personnel manuals and the like.

  Now let’s look at the practical requirements of doing that. Here are some key steps that should always be taken.

  1.  Establish Annual Salaries: Annual budgets that incorporate salaries and expenses and are based on job descriptions and each person’s experience level and skills, should be set by the Board, or a committee of the Board, for each officer, ministry department or program, and for all employees therein. For example, no staff member that happens to network well with wealthy donors can make a salary that is greater than other staff performing the same responsibilities but do not have those same fundraising abilities. Staff salaries should be established using objective criteria for the position with no regard to any person’s fundraising capacity.
  2. Monitor Budgets: During the fiscal year, the officers of the organization should review and monitor program funding and expenses and when necessary make adjustments. This authority would stem from the Board as part of the day to day management responsibilities of the officers. Bottom line here is that the organization and the employee cannot adjust up and down the employee’s compensation level based on how personal fundraising is going during the year.
  3. IRS Reporting: The salaries and other payments to staff must always be reportable on Form W-2 and Form 1099-Misc. It should be noted that the salaries and other items of compensation for the top paid executives of every nonprofit are reported on the Form 990 annual nonprofit tax return and is available for public review.
  4. Reimbursement for Expenses: Reimbursements of out of pocket expenses should also be approved according to organizational guidelines objectively established in comparison with other organizations. One staff member should not fly first class because they raised more money than their coach flying colleague.
  5. Donor Communications: The organization should have regular communications with its donors stating that all monies donated will come under the direction and control of its Board of Directors in furthering its ministry goals. Fundraising literature, websites, newsletters, pledge cards and donation receipts should all reinforce this policy. Receipts should state something like the following: “Contributions are solicited and received with the understanding that the Board of Directors has complete and final discretion and control over the use of all donated funds.”
  6. Records of Support Accounts: In these areas, most organizations track donations and keep records of each staff member's level of personal support (“earmarked gifts”). While this practice is permitted, it must be done very carefully and with proper terminology that does not suggest that the monies are earmarked for a specific individual. Using terminology to the contrary can create serious hurdles for the ministry in an IRS audit. It can also cause confusion with staff that may come to believe that they alone, or they and their donor, can make the ultimate decision on how those monies are utilized. It is not uncommon for staff members to leave a ministry and demand payment to them of the balance in their personal account, or they may demand that the monies be transferred to another nonprofit organization where they plan to work in the future. Regardless of any such misunderstandings, the funds must be utilized for the benefit of the organization to which the donor made the gift.

This information is not considered to be legal or tax advice or services. Professional advice on specific issues should be obtained from an attorney licensed in your particular state.

© Carl F. Lansing, Lansing Legal, Denver, Colorado June 2011 - [email protected]

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