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Tax Law (Questions About Taxes)/Wage deferral for non-profit that can't afford to pay salaries yet


QUESTION: I started a 501(c)(3) and I have tracked my hours and plan to get compensated for the hours I have put into the non-profit (the board has already approved this).  Money we raise now goes into scholarships for the students we are helping and creating a base for next year... once (if) we are ahead in funds - then, the hope is to get paid retroactively.  I work on the 501(c)(3) part-time and have another full-time job, so rather than take out a loan to pay me, our preference is to simply wait until the non-profit has received enough money to cover scholarships before I accept any deferred wages.  I know there are a lot of different laws in place to deter tax manipulations - however, in this case, I simply want to get paid for what I do - and don't care if that gets paid later.

From a legal standpoint, what are the requirements to defer this payment as described?

Meaning - say, for example that I worked for 100 hours in 2011 and 500 hours in 2012 getting the company running.  If we receive enough in donations to pay a salary in 2013 - what are the legal requirements and/or ramifications of compensating me for those 600 hours through a one time payment in 2013?

Thanks for any help you can provide.


ANSWER: There are no federal regulations about deferred payment due to unavailable cash. You either get paid or your don't.

Most people quit when they don't get paid :)
Or they call it "volunteer time"

If it is not paid out, it is not income to you and is not a deduction for the organization. It is nothing, accounting-wise.

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QUESTION: That makes good sense - and I'm relieved that there are no federal regulations.

However, I'm more curious about the situation when this is paid back (as opposed to the zero-state where I'd never get paid).  

Any chance you could quickly elaborate on this example that I provided (which is likely close to reality) - simply put - are there any legal requirements once I do get paid (likely in one lump sum) well after the hours have been worked?

(I already have "accrued wages" and other such accounting placeholders to make sure that my liabilities are straight - so this is not an accounting question in that regard.)

Thanks so much!  Very much appreciated!!!

ANSWER: Is there any difference between getting a lump sum bonus or getting a lump sum salary in arrears? No.

25% flat federal withholding tax is the only specific thing that applies to both types of payments.

---------- FOLLOW-UP ----------

QUESTION: My concern is that I see a lot of articles going into great depth regarding the taxation of non-qualified deferred compensation plans.  Others talked about the timing of taxation (time of earning vs. time of payment).  I'm just confused by the apparent discrepancy between those articles (that confused me with the details and the potential specifics that aren't relevant in my case) and this response (which seems too-easy-to-be-true).  

So, I guess I'm just curious what specifically makes my case different than a deferred compensation plan - from a legal standpoint.  Meaning, I know it is different because I'm not doing it as a tax benefit - but, from a taxation POV - why is it different?

Thanks again so much!!!  We can't afford to have legal help on retainer yet - so, these answers are extremely helpful to us!!!

Non-qualified deferred plans are those where an employee (typically a high earner) gets some pay deferred in order to avoid personal tax. Those plans are very specific and even though they are "non-qualified", have rules and regulations.

Yours is a case of not getting paid because there is no cash.

But, if you feel you want to be taxed on phantom income, you are allowed to do it. The government needs your money and you are free to give them some of that income you didn't get. But, it's not required, and most people only pay the government what is required.  

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Randall Klein, MBA, EA


I am an expert in personal and small business taxation, including Forms 1040, 1120, 1120S, 1065. I can answer any type of tax question except those that are requesting help in illegal tax evasion. Tax avoidance is legal, however. I do not do offshore trusts, or opt-out of the tax system type of queries.


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