When employees participate in Transition2Work, they perform modified duty tasks at a nonprofit organization while recovering from an injury. This arrangement not only keeps employees engaged and productive but also creates meaningful community impact. Naturally, employers want to understand whether the wages paid during these off site assignments provide any tax advantages.
Are wages a charitable contribution?
To determine whether wages paid during modified-duty assignments with nonprofit organizations qualify as charitable contributions, we can reference IRS Publication 526 (Charitable Contributions http://www.irs.gov/pub/irs-pdf/p526.pdf) for important guidance. This publication provides guidelines on charitable contributions including explanation of how to claim a deduction for charitable contributions and the types of organizations to which you can make deductible charitable contributions. The Publication addresses the most common scenarios on what is considered a deductible contribution, and the payment of wages for volunteer services by employees receiving worker’s compensation is not a typical scenario addressed.
This publication explains that deductible charitable contributions generally consist of cash or property given to a qualified organization. It also notes that individuals may deduct unreimbursed out‑of‑pocket expenses incurred while performing services for a charity. However, the IRS explicitly states that the value of personal services—including time, labor, or professional expertise—is not deductible as a charitable contribution.
Because wages paid to employees are compensation for work performed, not a voluntary donation, they do not meet the IRS definition of a charitable contribution. Accordingly, wages paid during modified‑duty assignments at nonprofit organizations cannot be deducted as a charitable contribution under current IRS rules.
Are wages a business expense?
Next, we can review IRS Publication 535: Business Expenses, which outlines common business expenses and explains what is and is not deductible. This publication explains that “you can generally deduct the amount you pay your employees for the services they perform.” Under this guidance, an employee on modified or transitional duty remains an active employee performing work on for the employer, even if that work is completed at a nonprofit organization rather than on the employer’s worksite. The employer will pay a wage that is consistent with a light duty wage for on-site modified duty. Therefore, an employer should be able to deduct the wages paid to the employee while they are in off-site transitional duty as a qualified deductible business expense. Publication 535 provides further tests of deductibility– for example, how to determine if the wage is “reasonable” – but the core principle remains consistent that generally, wages paid to employees for the services performed are tax deductible, regardless of where those services take place.
Our Conclusion
Because of the many nuances in the tax code for corporations, we always encourage employers to seek advice on questions of deductibility of contributions from a qualified tax professional. Our conclusion on the matter: wages paid to employees performing modified‑duty work with nonprofit organizations cannot be treated as charitable contributions, but they generally remain deductible as ordinary business expenses. Because the tax treatment ultimately depends on the specifics of each situation, employers should consult a qualified tax professional to ensure proper reporting and compliance.
Disclaimer: This article is for informational purposes only and is not intended as tax advice. For further information, please consult a tax professional.