Indianapolis, IN asked in Employment Law, Tax Law and Business Law for Indiana

Q: Can volunteer bartenders working on behalf of a 501c3 accept tips from customers?

I work as a bar manager (as a paid employee) for a nonprofit 501c3 organization that hosts a theatre festival every summer. During the festival we have a handful of volunteer bartenders. We have run into an issue where the jars put out in the past have always been claimed by the organization as donations. However, it has been made clear that patrons are under the impression that those funds go to the bartenders as tips and not the organization. Since this discovery was made we have started setting out two separate clearly marked jars at the bars. Up until now I - as a paid employee - have been the only bartender on for this new system. Heading into the festival however we need some clarification due to the fact that Indiana code says that tips left by patrons are the property of the employee and not the employer, the fact that they are volunteers and not employees (they make no other wages from us), and the fact that the IRS isn't really clear on the matter.

1 Lawyer Answer
Matthew Morris
Matthew Morris
  • Carmel, IN
  • Licensed in Indiana

A: You have an interesting question, and a full answer would require looking at individualized details of your organization and the people who are both working and volunteering for it. But here are some things that you might consider.

As you point out, the general rule is that tips left for an employee (in recognition of a patron being grateful for their service above and beyond what they paid for) are part of the employee's wages and cannot go to the employer. Employees are allowed to take part in a tip pooling arrangement (either by their own voluntary agreement or if mandated by the employer) as long as certain requirements are met. In Indiana, some of those requirements are that the tips are shared among the people in the "chain of service" to that customer, that none of the tips get shared with owners, and that the distribution is fair.

On the other hand, when somebody gives money or property to a nonprofit organization, the organization receives that money in charitable trust for the exempt purpose. If the person leaving the tip is intending that it be an additional donation for the organization, the organization should not distribute that property to its volunteers (or anybody else).

A "donation" jar, in lieu of a tip jar, should be fine as long as it is very clear that anybody who puts money in the jar is giving a donation to the organization, not to the person who just served a drink.

As for your current plan to have two jars, one for tips and one for donations, that would be fine if we were in a world where all of the bartenders were employees. But, because they are not, you have several problems on the horizon. First, if you divide the tips with the volunteers, you have created new problems. First, you have likely converted your volunteer bartender into an employee because tips are considered to be a part of wages under state and federal law. And now you need to be thinking about tax withholding, minimum wage, etc. Second, you might be creating an "unrelated business income" problem for your organization. Selling drinks would normally be considered an unrelated business for a theatre festival, and the organization would have to report that income (and pay taxes on it.) One exception to the unrelated business income rule is for operations that are completed entirely with volunteer labor. By paying tips to your volunteers, you are losing that exception. If you distribute the tips to the paid employees only, and not the volunteers, you might be back where you started: the person leaving the tip intended it for the volunteer bartender who just gave great service, and the fact that it is not being shared with that person is contrary to the tip law and the intent of the person making the tip.

You will want to talk to a nonprofit organization attorney to get an individualized recommendation, but in general allowing patrons to tip your organization's volunteers opens up legal issues that you likely want to avoid.

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