Federal Tax Exemption for Volunteer Responders Made Permanent
January 26, 2021
By Dave Finger, chief of legislative and regulatory affairs for the National Volunteer Fire Council
The year-end legislative package (H.R. 133) that President Trump signed into law on December 27, which funded the federal government through the end of FY 2021 and provided COVID-19 relief, included a permanent extension of the Volunteer Responder Incentive Protection Act (VRIPA). As a result, tax benefits and up to $600 per year of other incentives that volunteer emergency responders receive as a reward for their service are exempt from federal income tax and reporting requirements.
VRIPA was originally introduced in 2005 by Representative John Larson (D-CT) after a fire department in his district was audited and fined by the IRS for improperly reporting the $1,000-per-year property tax deduction that volunteers in the department received. The National Volunteer Fire Council (NVFC) worked with Representative Larson and others in Congress to get VRIPA enacted in 2007. That version of the law was in effect from 2008-2010 and exempted tax benefits and up to $360 per year in other benefits from federal income tax and reporting.
In March 2010, the Internal Revenue Service (IRS) responded to an inquiry from then-Representative John Shimkus (R-IL) inquiring about the reporting requirements for payments to volunteer firefighters and the handling of expenses related to volunteer firefighting. The IRS letter explained that:
“Amounts that are excludable (from federal income tax) under (VRIPA) are also excepted from wages for purposes of the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA)… …(T)he amounts excluded under (VRIPA) are not subject to employment tax withholding and employers are generally not required to report them on a Form W-2 or Form 1099-MISC. However, amounts that are in excess of the excludable amount, and which are not excludable under any other provision, are taxable as wages and may be subject to employment tax withholding, and are required to be reported on Form W-2 or Form 1099-MISC, depending on the status of the individual as an employee or an independent contractor (non-employee)…”
“…Whether a worker is an employee or independent contractor is determined under the Employment Tax regulations and the Code… …These regulations provide, in general, that if the worker provides services under the direction and control of the service recipient, the worker is considered an employee for Federal employment tax purposes… …The tax laws generally apply to volunteer firefighters in the same way they do to other workers. The fact that a firefighter may be called a “volunteer” does not determine his or her status as an employee or independent contractor.”
After VRIPA passed in 2007, the NVFC heard from a number of our members who were unhappy that it only applied to $360 per year ($30 per month of active service) in retention incentives. Several fire departments from different parts of the country explained that they had been under the impression that it was unnecessary to report incentives under $600 per year to the IRS at all. Acting on this belief, many departments had actually capped incentives at $600 to avoid having to report them.
Under the tax code, income paid to a contractor does not have to be reported by the employer to the IRS unless it exceeds $600 in a calendar year. If income does exceed $600 for the year the employer must report it to the IRS using a 1099-MISC form, but the responsibility for paying FICA taxes falls entirely on the contractor. By contrast, all income paid to an employee must be reported to the IRS using a W-2 form, and half of the FICA taxes owed are paid by the employer.
Because it is easier and less expensive, many fire departments report volunteer benefits using the 1099-MISC form. The NVFC has heard from members who were audited and fined for doing this, with the IRS determining that the volunteers in question were employees rather than contractors and should therefore have been having their benefits reported as income using a W-2 form. We have also heard from members who called the IRS to ask about how they should report their volunteers’ benefits and were told that it was OK to continue using the 1099-MISC form. This page on the IRS web site provides more detailed information on the compensated-volunteer-as-employee-versus-contractor issue.
VRIPA expired and was inactive but still part of the Tax Code between 2011 and 2019. In December 2019 Congress increased the maximum exemption on non-tax benefits from $360 per year to $600 per year ($50 per month of active service) and reauthorized VRIPA for the 2020 tax year. Reauthorizing VRIPA and increasing the exemption amount to $600 were top legislative priorities for the NVFC.
Unfortunately, the IRS has provided very little information to this point about how volunteer responders and agencies can take advantage of VRIPA, in spite of letters requesting guidance sent by NVFC members. On January 20, the NVFC sent a letter to the IRS formally requesting that they engage with the volunteer emergency services community to develop guidance on how to take advantage of VRIPA. Ideally, now that VRIPA is a permanent fixture in the Tax Code, the IRS will be able to provide straightforward guidance that agencies can implement, and that policymakers can reference in order to adjust state and local income tax policies to conform with the federal exemption.
Dave Finger has worked in government relations for the NVFC since 2005. He is not a lawyer or tax professional. None of the information in this article should be used for tax preparation purposes without consulting with the IRS and/or a lawyer or tax professional. Any questions about the information provided in this article can be directed to Dave at firstname.lastname@example.org.