When an employee is in our Transition2Work program, both the injured worker and their employer are making a positive contribution to the community through service. Naturally, this causes many employers to wonder if their contribution is tax deductible as a charitable donation.
Are wages a charitable contribution?
To address the issue of a charitable contribution, first we can look to IRS Publication 526 (Charitable Contributions http://www.irs.gov/pub/irs-pdf/p526.pdf). In Publication 526, the IRS 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. According to IRS Publication 526: Charitable Contributions, providing professional services for free to a qualifying nonprofit organization cannot be claimed as a tax deduction for the value of your time or services. The Publication states that businesses and individuals are able to deduct documented, un-reimbursed, out-of-pocket expenses paid in order to volunteer. Based on Publication 526, it is unclear whether the wage paid can be deducted as a charitable contribution.
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. According to the Publication, “you can generally deduct the amount you pay your employees for the services they perform.” When an injured employee is performing modified duty off-site in a nonprofit agency, that assignment is considered an extension of their current employment. The employer will pay a wage that is consistent with a light duty wage for on-site modified duty. Therefore, an employer would be able to deduct the wages paid to the employee while they are in off-site transitional duty. Publication 535 provides further tests of deductibility– for example, how to determine if the wage is “reasonable” – but generally, wages paid to employees for the services performed are tax deductible.
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: In general, wages paid to employees are a tax deductible business expense. If the wage can be written off as a business expense, therefore, deductibility as a charitable contribution is a moot point.
Disclaimer: This article is for informational purposes only and is not intended as tax advice. For further information, please consult a tax professional.