We are often asked about how best to deal with the “freeloaders" – those who benefit from an organization’s fundraisers without helping out. Providing the same benefits to people that don’t do any work doesn't seem fair. We get it: reviewing the basis for 501(c)(3) tax-exemption may help your organization and volunteers understand why “freeloaders” must benefit.
Organizations with 501(c)(3) tax-exempt status are excused from paying federal income tax on their earnings. This tax benefit is given only to groups that support a public (rather than a private) purpose, (e.g. amateur athletics or the arts). Therefore, 501(c)(3) school fundraising groups must support their public mission by supporting the entire team or group. Consequently, this means groups cannot be operated to reduce the personal costs of those who volunteer or raise funds. All of the income and assets of a 501(c)(3) organization must be used exclusively to benefit the group's tax-exempt public purpose.
Fair Share Donation Program
So, how do you deal with the freeloaders? One option is to set up a fair share donation program. Fair share donation programs work by telling parents the actual per student cost of operating a specific school program. This can include sports teams, music groups, or other activities during the year. Next, ask parents to donate their “fair share” of the operating costs, or alternatively to volunteer to help raise the funds needed. One such way of doing so:
All families are asked to donate or raise their “fair share” of the true costs of operating our program. The total cost of our program not funded by school money is $XXX, or about $YYY per student. Your participation in our fundraising events or your voluntary “fair share” contribution is essential to the continuation of our program. Please let us know by [DATE] if you plan to opt out of fundraising.
Donations Must Be Voluntary
Fair share donations must be truly voluntary to be tax-deductible to the donor. Thus, payment is not required to participate in the activity. Likewise, nothing is given in return for the payment. Care must be taken when describing a fair share donation program. It should never be stated or implied that a donation is required for participation in the activity.
- Create a detailed budget describing costs covered by the school and how much money the booster club needs to raise.
- Ask for the fair share amount based on the number of students involved in the program.
- Explain these donations are not required for participation. That is, they only represent an evenly distributed amount in order to meet costs for the year.
Ready to start your own fair share donation program? See our sample fair share donation form for a good example you can follow.
Another option is setting up a separate taxable cooperative organization. If your group relies heavily on cooperative fundraising to operate, you can form an organization that can legally undertake these activities. Specifically, it is a business entity set up to benefit only the cooperative’s members.
That said, the funds raised are taxable on the personal income tax returns of the members who receive the income. Equally important, one of the key requirements from the IRS for operating a cooperative is the group must issue the IRS Form 1099-PATR to each member showing the earnings received each year.
For other key requirements and details on setting up a cooperative, please see Chapter 8 of School Fundraising: So Much More Than Cookie Dough.
In every organization there are people who simply do not do their share. For this reason, freeloading is an uncontrollable factor in the nonprofit world. A tax-exempt organization cannot require participation and still maintain tax-exempt status. So, planning ahead for this factor and casting wider nets for fundraising are options. Alternatively, a nonprofit can change to a for-profit organization where participants can be required to pay or play. Changing people’s attitudes toward your fundraising approach can be challenging. However, with proper planning and communication – plus providing a variety of ways for parents and students to get involved – you will set yourself up for getting the greatest involvement in your PTO, booster club, or other school fundraising group.
The only organization of its kind in the US, Parent Booster USA is about helping school support organizations (parent teacher organizations, high school booster clubs and other school fundraising groups) handle the state and federal government paperwork required of fundraising groups.
Founded in 2004 by an attorney skilled in nonprofit and tax law, Parent Booster USA has more than 5,000 member organizations in 50 states and DC with a 95% annual renewal rate. We provide peace of mind for parent volunteers, school administrators and school district leadership.