The government is making it easier for small companies and their employees to give to Hurricane Katrina victims, allowing businesses of any size to donate the value of employees' unused leave and vacation to Katrina-related charities.
Companies can get a double break: a tax deduction and an exemption from employment taxes on the money. But here's some advice from management consultants — don't take those breaks and run. Make sure your employees who've given up their time off feel appreciated by you.
Under what the IRS is calling its leave donation program, employees can forgo vacation time, sick leave or personal days, and their employers can then donate the value of that time — computed according to their salary or wages — to a qualified tax-exempt organization specifically for the relief of Katrina victims. The program runs through 2006, so employees who have used up all their 2005 leave and vacation can still donate time next year.
The program is likely to be quite helpful for small companies that don't have the resources to make sizeable charitable contributions. It also gives employees who want to donate but don't have available cash a way to help Katrina victims.
The one possible catch that employers need to look out for is the fact that the employees don't get a tax benefit from the contribution. Employees aren't taxed on the money, but they also can't deduct it in the same way they would deduct a direct cash contribution on their income tax returns. And so some workers might have some hard feelings when the boss gets a deduction and they don't.
Leslie Yerkes, president of Catalyst Consulting Group in Cleveland, suggests employers match the contribution by sending in extra cash. "Matching gifts is another way of saying, 'we're all together,'" she said.
Yerkes also noted that some companies give employees paid time off to work for charitable organizations. That's another way an employer can be sure that workers won't view their Katrina-related philanthropy as less than altruistic.
Something as simple as a thank you note can also work well, said Beverly Kaye, an employee retention consultant in Sherman Oaks, Calif.
"A 'thank you' means more than we ever think," Kaye said. "It's a small thing to do to make a big deal out of a contribution" by an employee.
Another possibility, Kaye said, is to bring lunch one day to say thank you to everyone.
The mechanics of the leave donation program are quite simple. The IRS isn't requiring that employers file any forms with the tax agency; employers must document within their own accounting systems the fact that employees did not use their leave or time off and that the money was donated to a qualified charity. You can find a list of most qualified charitable organizations at the IRS Web site.
The employer can decide how to treat the donation when it comes time to file tax returns; it can be noted on Schedule C or corporate tax returns as either a charitable contribution or a business deduction. It should not be included in compensation listed on employees' W-2 forms or payroll tax forms. And if you give employees thank you notes, they cannot use them as receipts for tax deductions, since they are not entitled to the deduction in the first place.
The employer can select the charity or charities that will receive the donations, but it's a good idea to consult with your employees about where they'd like to see the money go.
The IRS has a list of frequently asked questions for both employers and employees on its Web Site.