This is not the most eloquent title, and it is not even that precise. Here is some more context. Find the words “main question ” for my main question. I figured I would say that to avoid berrying the lead.
Consider a salaried employee making N1 = $ 100000 in the US in year 2020. Let’s estimate their taxes with assumptions and round numbers.
Calculation 1.
1. No investment taxable stuff. Taxed as Single
2. Payroll taxes of about 7650 total. (SS 6.2, Medicare 1.45)
3. They take the standard deduction for an individual, 12200. No extra tax credits.
4. Their federal income tax is against a taxable income of about 87800. (Yes, I believe that it’s 100000 − 12200, not 100000 − 7650. The payroll taxes do not lower the amount 87800). The federal income tax is about 15000.
5. Their state income tax is also against 87800 for about 4000. (would be about 5700 in California)
6. 100000 − 7650 − 15000 − 4000 = 73350
Calculation 2: They make the same salary and donate 10000 to nonprofits that year. (Or to a deferred fund which counts the deduction in 2020, ….)
2. Same payroll taxes 7650. As far as I’m aware, donating normally cannot lower this
3. Let’s estimate their itemized deduction as 16000 instead of 12200.
4. Their federal income tax is against a taxable income of about 84000, not 87800. At a marginal rate of around 23%, (I think it’s in between tax brackets. I don’t want to worry about absolute details!) the federal income tax decreases by 0.23 * 3800 = 874
5. Their state income is against 84000. At a marginal rate of around 7%, the state income tax is about 266 less.
6. Their income after donation is about 73350 − 10000 + 874 + 266 equals 8860 less (not 10000 less).
Calculation 3: Let’s suppose that their itemized deduction would have been exactly 12200 without donation and is thus 22200. Skipping steps, their income after donation is about 73350 − 10000 + 2300 + 700 = 7000 less. Generally, by donating 10000 around these tax brackets, the most you can hope to get back by the standard tax code is 3000.
Calculation 4: Let’s suppose that this employee is about to agree with their employer on a salary of 10000, and the employer donates 10000, to any choice of most 501c3 nonprofits registered in US (that is A LOT) at the employee’s choice.
2. Their payroll tax is about 765 less.
3. They take the standard deduction for an individual, 12200.
(skipping some steps)
Compared to Calculation 1, They lose 10000 in base income, pay 765 less payroll, 2300 less federal, and 700 less state = 6235 less. This is better than Calculation 3 by 765. I also claim that it is realistic and fair to compare Calculation 4 to Calculation 2 (because without conventional donations, people might be quite far from the 12200 standard deduction), for which Calculation 4 is 2625 better. Also, the company saves 765 in payroll taxes, and it is conceivable for the employee to ask the company to give up that differential, instead donating 10765 to charities. (Note 1) I claim that this contract is thousands of dollars better for the employee, with further benefits like ducking under the IRA limits or lowering salary for need-based scholarships. I also claim that this big differential persists with the consideration of investment income and equity compensation.
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With these calculations, I hope to make it convincing and as clear as I can, that someone who would have donated a significant amount to 501c3 nonprofits should rationally consider if their employer would agree to a new contract in which they take a gross salary deduction and donate that amount to charities at the employee’s choice. (Moreover, their consideration is stronger if they’re far from the standardized deduction, and if they were planning to give more, and if this gross deduction lowers them below IRA thresholds (124000) / other things, … https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2020 )
This is NOT the only rational choice of course. There is a considerable cost to asking for this in the first place. Also there are technical corporate tax things in which a corporation’s charitable donation carryovers expire faster than their NOL carryovers. Also, a corporation could decide to lower their discretionary nonprofit donations in response; basically a big crowding out effect. This might affect their future comp. I claim that this future-comp effect is mitigated if you ask for it after an agreed raise, but I’m not sure. Also they might be resented by coworkers. Also, I completely acknowledge that a lot of US companies have X2 corporate matching programs to an appreciable limit, like thousands. If these programs are generally un-restrictive (as opposed to restricting to local nonprofits, e.g.), then these companies could very reasonably say no. (Note 2)
So my main question is more or less: How many US employers would agree to this contract fully faithfully? Could there be a crowding out effect, especially at larger employers? And maybe to be a bit more precise than “proportion of US employers,” because of wildly varying sizes, I would like to try to pose my question as this. Consider a subset of the US labor force that you choose first, such as “college grads present − 1990 as salaried employees in the US or looking for salaried work, without tricky income stuff.” What proportion of this subset, (weighted equally), if they each hypothetically asked for this contract individually (not all at the same time / collectively) at some specified level, like 10% of their salary, would have their employer agree?
(So this is weighted roughly by employer size.)
I unconfidently estimate that the answer is 15%, excluding employers which have a 2X matching program with a limit > 2000 or comparable / better.
Extra questions which are also hard:
I am aware of payroll deduction / donation mechanisms like Gusto ( https://support.gusto.com/team-management/hr-tools/giving/1066220501 ) and one by MIT in-house: https://giving.mit.edu/payroll-deductions ). I don’t know exactly how these work, but I think that these do not give the benefit in my “Calculation 4.” In particular, I think that these do NOT give the benefit of lowering payroll taxes nor ducking under IRA limits, and they are effectively the same as donating yourself but with the valid value of less paperwork. But, I’m looking for more evidence on these and other mechanisms in the US. (Yes I’m lazy and haven’t asked their support centers.)
(Note 1). If you think this is not conceivable, my employer agreed to it.
(Note 2). I work at a startup. Before I asked, I am 90% sure that we had no corporate donations and had none planned for a while.
I’ve not heard of anyone doing this but in principle sounds like it should work since you can contact for all kinds of benefits. You’re right that employers might not like it, some reasons include
it’s different and weird and makes payroll more complicated
might be hard to explain to investors
might have strange, unforeseen tax consequences for the employee or the employer
Not a lawyer, but couldn’t this be tax fraud if the employee is working under market rate?
Any thing of value given in lieu of salary is considered taxable income (eg room and board) unless specifically tax advantaged (eg health insurance). Consult your local tax advisor.