July 17, 2009

Employees Foregoing Compensation to Make Contributions

Question:

A church would like to replace its air conditioning system, but does not have the funds yet. Most of the employees have asked that it take the equivalent of one paycheck each month and deposit it to the “air conditioner fund." What are the pitfalls of handling it this way?

Answer:

The foregone compensation may be considered taxable (and an equal amount of donation deduction) under the taxation doctrine called "Constructive Receipt." IRS Publication 17: "Generally, you constructively receive income when it is set apart in any way that makes it available to you." This is at least one potential pitfall when the employees are given the option of receiving taxable income, but choose to have it contributed to some other purpose.

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