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I am the new treasurer of a 501(c)(3) nursery school.  Parents are allowed to leave their children after regular hours for an extra amount of money, which the school considers fundraising dollars.  The teachers stay to “baby sit” the children and are given money to do so.  Should the teachers income be considered pay and be put in their paychecks subject to payroll taxes, or because the teachers are there to help raise extra funds for the school, is it all right to pay them cash for their efforts?

As laudable as it may be to allow the parents more flexibility in when they pick up their children, there is a fundamental flaw in the school’s reasoning that the extra payments constitute “fundraising” dollars if by that term you mean charitable contributions.  Unless anyone can leave a child after hours for free, without paying anything, it is a fee for (a very valuable) service, not deductible by the parents as a charitable contribution, and not contribution income for the school.  It should be recorded as exempt purpose income on the theory that the educational mission continues, if only because they learn to play well together.

Even if the service is free and the parents’ contributions are absolutely voluntary, however, it is still employment service by the teachers who stay, work, and get paid for doing so. The pay should be included in their paycheck and the appropriate taxes should be withheld. You should also be sure that you observe any applicable wage and hour laws and pay overtime if required.

9/27/2011