Giving programs work when the rules are written first, and the money is kept at arm’s length.
Employers set up giving funds for three reasons: to help coworkers in a crisis, to send employees’ children to school, and to give employees an easy way to support causes they care about. Each one is tax-treated differently, and the structure that works is rarely the one that feels most natural.
Four kinds of fund. Four sets of rules.
Whether a program is a gift, a benefit or a charity decides who pays tax and who controls the money.
Crisis Funds
Employees and the employer give into a fund that helps coworkers after a fire, a death or a serious illness. When the employer controls the fund and pays employees directly, the payments are generally taxable wages unless they are qualified disaster relief under IRC 139. Funds run by an independent charity, with its own board and selection rules, can be tax-exempt, and need counsel to set up.
Scholarship Funds
A fund that sends employees’ children to school can be excluded from the recipient’s income as a scholarship under IRC 117, but only if it meets conditions. IRS guidance in Revenue Procedure 80-39 asks for selection by an independent committee, objective criteria and limits on how much of the eligible group can win. A fund that just rewards favorites is taxable compensation.
Charitable Donation Accounts
Employees give through payroll deduction, with or without an employer match, to charities they choose. The employee’s deduction depends on their own return, and an employer match is generally deductible by the business. The employer is not the charity, so records are for donors to use.
Giving Savings Accounts
Employees set money aside from pay for giving later, and can take it back if they change their minds. Because it is the employee’s money, it is taxed as pay going in, and a gift to charity later is a decision for the employee’s return.
Payroll Deductions Need Consent
Michigan law requires written consent before an employer can deduct from pay. A giving program needs a signed authorization and a way to stop.
Who Runs It Matters
An employer-run fund has the least cost and the most tax friction. A fund held by a community foundation or other public charity has more cost and cleaner treatment. We help weigh the two against what you are trying to achieve.
Three mistakes that turn goodwill into a tax problem.
Calling Taxable Pay a Gift
A cash payment from an employer to an employee is wages unless a tax rule says otherwise. Calling it a gift or a fund does not change that.
Letting the Employer Choose Recipients
If management picks who receives help or scholarships, the payments look like compensation, and may favor highly paid employees.
No Written Rules
Without written criteria and records of decisions, a fund invites complaints and cannot be defended when questioned.
The questions employers ask about giving funds.
Six questions that come before the first donation.
Is help from a crisis fund taxable?
If the employer controls it and pays employees, generally yes, unless it is qualified disaster relief. A fund run by an independent public charity can be treated differently.
Can we run a scholarship for employees’ children?
Yes, with conditions. The IRS safe harbor in Revenue Procedure 80-39 asks for independent selection, objective criteria and limits on the share of eligible children who receive awards.
Do we have to match donations?
No. A match is optional, and when offered should have a stated cap and be available to everyone on the same terms.
Can employees get their giving savings back?
Yes, in a giving savings account. The money is theirs, and the plan document should say how and when they can take it out.
Is the employer deduction different for each?
A charitable gift by the business and compensation paid to employees are deducted under different rules. Your tax adviser should review the structure before the first deposit.
Does a giving program help recruiting?
Employees say it matters, particularly younger ones. It costs little to run and shows up in how people describe their employer.
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General information about giving funds, not legal or tax advice. Plan-specific questions belong with your tax adviser or counsel, and we will bring them in.
Related guides.
Education, Giving and Financial Wellness
The wider set of non-medical benefits.
Emergency Assistance Accounts
Grants and loans repaid through payroll.
Lifestyle and Specialty Accounts
The accounts that cover what insurance does not.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
Qualified Disaster Relief (26 U.S.C. 139)
When disaster-related payments are excluded from income.
Michigan Payment of Wages and Fringe Benefits Act (MCL 408.477)
Limits on deductions from an employee’s pay.
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