Category: Guides & Toolkits

Complete Guide to Donor-Advised Funds

Donor-advised funds (DAFs) are a type of charitable giving vehicle that allow individuals, families, and organizations to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charitable organizations over time. 

DAFs have grown in popularity in recent years as a way for donors to simplify their charitable giving and make a greater impact.

While DAFs were previously only available to the wealthy, Groundswell makes the benefits of a donor-advised fund accessible to everyone.

In this article, we provide a complete guide to donor-advised funds, including how they work, their benefits and drawbacks, and how to set one up.

How Do Donor-Advised Funds Work?

When a donor makes a contribution to a DAF, the funds are invested and managed by a sponsoring organization.

The donor receives an immediate tax deduction for the contribution, and can then recommend grants to charitable organizations at any time. The sponsoring organization is responsible for managing the DAF and distributing the grants as directed by the donor.

One of the main benefits of DAFs is that they allow donors to make a charitable contribution and receive an immediate tax deduction, even if they are not ready to decide which charities to support.

This can be especially useful for donors who want to make a charitable gift but are not sure which organizations to support, or for donors who want to spread their charitable giving out over time.

Learn the difference between a private foundation and a donor-advised fund

Benefits of Donor-Advised Funds

There are several benefits to using a DAF for charitable giving, including:

Simplicity: DAFs are a simple way to make charitable contributions, as donors can make a single contribution to the DAF and then recommend grants to multiple charities over time.

Immediate Tax Deduction: Donors can receive an immediate tax deduction for their contribution to a DAF, even if they are not ready to recommend grants to charitable organizations.

Professional Management: DAFs are managed by a sponsoring organization, which means that donors do not have to worry about managing the investment of the funds or distributing the grants.

Flexibility: Donors can recommend grants to any IRS-qualified charitable organization, and can change the organizations they support at any time.

Anonymity: Donors can remain anonymous when making a contribution to a DAF or recommending a grant, if they choose.

How to set up a donor-advised fund

Setting up a donor-advised fund (DAF) is a simple process that can typically be done online in a few easy steps:

Choose a sponsoring organization: There are many different organizations that sponsor DAFs, including community foundations, financial institutions, and charitable organizations. It is important to choose a reputable organization that aligns with the donor’s charitable goals.

Groundswell is a flexible choice for small to enterprise-sized businesses looking to provide a charitable giving platform for its employees.

Learn to open a DAF account with Groundswell.

Make a contribution: The donor can make a contribution to the DAF using cash, securities, or other assets. The donor will receive an immediate tax deduction for the contribution.

Recommend grants: The donor can recommend grants to charitable organizations at any time, either online or by contacting the sponsoring organization.

Monitor the DAF: The donor can monitor the activity of their DAF and recommend additional grants as desired.

Donor-Advised Fund Tax Deduction Information

One of the main benefits of donor-advised funds (DAFs) is that they allow donors to receive an immediate tax deduction for their charitable contributions. The tax deduction for DAFs is generally the same as it would be for a charitable contribution made directly to a charitable organization.

To be eligible for a tax deduction, the donor must itemize their deductions on their tax return and the contribution must be made to a qualified charitable organization. Contributions to a DAF are tax-deductible in the year that they are made, even if the donor does not recommend any grants from the DAF until a later year.

It is important for donors to keep in mind that there are limits on the amount of charitable contributions that can be deducted each year. 

Limits for charitable contributions that can be deducted for tax year 2022

The limits on the amount of charitable contributions that can be deducted for tax year 2022 depend on the type of organization to which the donation is made and the taxpayer’s filing status.

For tax year 2022, the limits are:

For donations made to public charities and certain private foundations, the limit is generally 60% of the taxpayer’s adjusted gross income (AGI).

For donations of appreciated capital gain property made to public charities and certain private foundations, the limit is generally 30% of AGI.

For donations made to certain private foundations and veterans organizations, the limit is generally 30% of AGI.

For donations of appreciated capital gain property made to certain private foundations, the limit is generally 20% of AGI.

It’s always recommended to check with a tax professional or the IRS to confirm the limits that apply to your specific situation.

It is also important for donors to retain documentation of their contributions to a DAF, as they may be required to provide proof of their charitable contributions in the event of an audit.

A software like Groundswell keeps track of all the important information you need come tax time.

Donor-Advised Funds Distribution Rules

The distribution rules for donor-advised funds vary depending on the specific terms of the fund and the sponsoring organization. In general, however, the following rules apply:

  • Donors must make an irrevocable contribution to the fund in order to participate. This means that the donor cannot change their mind and take the money back after making the contribution.
  • Donors can recommend how their contributions are invested and how the earnings are distributed to charitable organizations, but the sponsoring organization ultimately has the discretion to approve or deny the recommendations.
  • Donors cannot receive any personal benefit from the fund, such as the use of donated assets for personal purposes or the receipt of goods or services in exchange for their contribution.
  • Distributions from donor-advised funds must be used for charitable purposes. This means that the funds must be used to benefit a charitable organization or to support a charitable program.
  • Donors must follow all applicable federal and state laws, including laws related to self-dealing and excess benefit transactions.
  • Sponsoring organizations may have additional rules and requirements for donor-advised funds, such as minimum contribution amounts or distribution frequencies. It is important for donors to understand and comply with these rules in order to maintain the tax-advantaged status of their contributions.

How Groundswell Uses the DAF to enable corporate giving programs.

Groundswell is a cooperation giving platform revolutionizing access to DAFs.

Groundswell accounts are powered by donor-advised funds. Groundswell’s DAF infrastructure gives companies and its employees a better, smoother experience when compared with traditional workplace giving programs.

With Groundswell, companies can deposit gifts directly into their employees’ accounts.

Groundswell’s infrastructure also enables privacy and security for employees and employers. Since charitable giving can be deeply personal, adding a level of privacy aids in fostering a corporate culture of generosity and giving.

Learn more about setting up a corporate giving program and DAF with Groundswell.

The Workplace Giving Handbook: Everything You Need to Know

Workplace giving programs offer employees an important benefit. 

It gives employees a way to support the causes they care about and trust that their support is actually doing good in the world. 

It’s not news that people are skeptical of corporate charity — it’s why words like pink-washing and greenwashing have entered the public vocabulary. Workplace giving programs offer a way to combat that skepticism and give employees a reason to feel good about the places where they work. 

But what exactly is workplace giving, and how do you set up an employee-powered giving program at your company?

What is Workplace Giving?

By definition, workplace giving is any kind of organized program that collects employee donations for charitable causes through payroll deductions and/or one-time donations. The company then disburses those donations to nonprofits. 

Over the years, the term has evolved to include volunteer giving programs, and other forms of employee giving programs. Today, these giving programs take many forms, including payroll deductions, donation match programs, and volunteer giving programs. 

Matching Gift Programs

Donation match programs are among the most popular types of workplace giving programs, offered at nearly 65% of Fortune 500 companies, and accounting for $2 billion to $3 billion in donations annually. 

The concept is simple in theory: an employee donates to a qualified nonprofit, and the company then makes a matching donation to the same nonprofit. 

In practice, matching gift programs can be cumbersome and difficult to manage. In fact, for every dollar donated through matching gift programs, more than $2 goes unclaimed.

Volunteer Programs

In addition to typical volunteer programs — serving dinners at a local shelter or reading to school kids, for example — many companies create or participate in volunteer fundraising events, such as walk-a-thons or charity 5k runs. 

Employees participate as a team, and the money raised is donated to the specific non-profit named. These campaigns can be great for team building and bonding, not to mention providing high-profile PR opportunities for the company.

Volunteer Grants

Many companies offer grants to organizations where their employees volunteer. This kind of program ensures that the company is helping to support genuine community organizations that their employees care about. They help deepen the ties between the company and the community and send the message to your employees that you care about the things that are important to them.

Volunteer Hours Matching

The third iteration of volunteer donation programs rewards your employees with extra cash they can donate to others based on hours that they spend volunteering with community organizations. 

Giving employees paid time off for volunteering can make it difficult for workers to keep up with their workload and make more work for nonprofits. Some companies have found ways to reimburse employees for the time they already spend working in their communities. 

One way is to deposit the equivalent of their salary for the hours spent into a Groundswell Personal Giving Account. From there, the employee can direct the donation to the cause they choose, effectively doubling their impact on the ground. 

Donations Through Payroll Deduction

Many companies offer employees the opportunity to make giving easy by enrolling in an automatic payroll deduction for a chosen charity. Payroll deductions allow employees to essentially budget their charitable contributions over the course of the year. 

However, the choice of charities to support is usually very narrow — often only one or two charities are chosen by the board. 

A growing number of CEOs are moving away from the top-down approach to corporate giving, and moving to a model that puts the choice in the hands of their employees.

What Is a Workplace Giving Campaign?

Workplace giving campaigns are typically annual events held by companies to encourage employee donations to a cause. 

They’re often held in the fall, to coordinate with the holiday season — and of course, the end of the tax year. They can, however, take place at any time. Their purpose is to publicize and raise awareness of any company-sponsored employee giving programs, and get more people involved in them.

Campaigns may also revolve around a specific need or event. These campaigns include disaster relief campaigns, or campaigns to support specific needs in the local community — supporting the unhoused, or providing funds for meals during a pandemic, for example.

How Does Workplace Giving Work?

The nuts and bolts of employee giving programs are rapidly evolving. Legacy workplace giving programs collected donations from employees, then combined them and funneled them to one or two charities chosen by the board of directors or the CEO. Historically, there are two major models for doing this.

Payroll Deduction

Programs that collect charitable donations through payroll deductions are the most common type of workplace giving programs, accounting for nearly 75% of all employee giving annually. Payroll deductions make charitable giving easy on employees — they fill out a payroll deduction form once, and HR/Payroll does the rest. It’s so easy, in fact, that when Google implemented a pilot payroll giving program, it increased the likelihood of donations to a promoted charity by 50% without reducing the average amount donated. 

In addition, each participating employee has a running record of their deductions on their pay stub, with both the current and the year-to-date donation recorded. That’s a big boon at tax time — their pay stub serves as proof of their donation, so they don’t have to scrounge around looking for acknowledgement letters from the nonprofits to which they donate.

Nonprofits also benefit from this type of workplace giving program in several ways: they get predictable, sustainable donations, and often get more donations. Just as important, a payroll deduction model reduces the amount of work that falls on their shoulders by transferring a lot of it to the company’s payroll department. Managing a workplace giving campaign is a complex undertaking involving multiple steps and responsibilities.

  • The company creates a campaign to engage and encourage employees to sign up for the giving program. This is no small undertaking — there are entire toolkits devoted to teaching employees and volunteers to run successful campaigns.
  • The employee fills out a pledge card, designating the amount of the donation and/or the amount to be deducted each pay period. If the company allows it, they may also choose one of several pre-approved nonprofits to receive their donation.
  • The payroll department — or the company’s payroll provider — sets up the recurring deduction for each employee. 
  • If the company also operates a matching donation program, HR processes all donations to set up the matching donation.
  • Each pay period, the payroll department deducts and deposits the funds from each employee into a central account, then sends the final donation amount to the paying agent, such as the United Way.
  • The paying agent distributes the funds to the designated organizations.

Donation Matching Programs

Donation match programs can also be time-consuming and difficult to navigate — so much so, that billions of dollars in matching funds go unclaimed every year. A typical donation match program works like this:

  • The company determines which organizations will qualify for a matching gift and makes the list of qualifying organizations available to employees, and creates rules to determine the amount of the match. There may be differing amounts depending on the employee’s position or other criteria. For example, all full-time employees may qualify for 100% matching, while managers qualify for 200% matching.
  • The employee makes a donation to the charity of their choice.
  • After determining that their chosen organization qualifies for a match, the employee fills out and submits a request to HR for their employer to match their donation.
  • HR processes the request and determines the match amount based on the rules.
  • The company sends a check for the matching amount to the qualifying organization. 

Emerging Trends in Workplace Giving

Since the early 2000s, there’s been a growing movement to allow employees more choices of donors. Many donation match programs, for example, will match employee donations to any 501(c)3 charity. New platforms are streamlining corporate and employee giving, reducing the amount of work and time that goes into managing workplace giving campaigns and employee giving programs in general. 

The newest trends in corporate giving include making charitable giving part of the employee’s benefits package and providing granular control and choice on when and where to donate their funds. 

Advances in technology provided new tools — yes, there’s an app for that — to help companies manage and deploy their corporate giving programs in ways that make sense for their workforces. As the workplace and trends in giving continue to evolve, employee giving programs will also evolve to keep pace and provide the most seamless, empowering giving experience.

Benefits of Workplace Giving Programs

Employee giving programs are not just good for the causes that get the donations. They provide important positives for employees, the company, and the community. These are a few of the most important.

  • Improved Employee Recruitment: 55% of employees — including 75% of Millennials — would choose to work for a socially responsible company, even if they got paid less. 
  • Increased Employee Engagement: Employees are more engaged at work when they feel their employer aligns with their values.
  • Increased Profitability: Companies with the most engaged workers are 21% more profitable.
  • Better Public Image: People think more positively about businesses that give back to the community.
  • Deeper Community Connections: A well-planned employee giving program helps the business connect and cement relationships with organizations in the community.
  • Increased Employee Loyalty: Employees are more likely to recommend businesses that support them and their interests.
  • Higher Retention Rates: Employees who take advantage of employee giving programs stay with the company 75% longer.

What Employees Care About

According to a recent Deloitte Workplace Giving survey, 37% of workers donated to charity through a workplace giving program, but — and this is a big but — when they looked at Millennial and Gen Z employees, that percentage skyrocketed to 58%. 

Younger workers, those destined for leadership positions of future companies, care deeply about doing good in the world, and they reflect it in their behavior. They donate because they are connected to a cause or charity, because they want to support their community, and because giving makes them feel good. 

When you make it easy for them to plant a tree, buy a kid a desk, or adopt sheltered puppies, your company is showing them that they respect and support the people that they are, not just the work that they do for your business.

Why Is Employee Giving Important?

In addition to the benefits to your employees and your business bottom line, employee giving also brings an immense benefit to the community. 

In 2021, workplace giving programs raised more than $5 billion, with about 50% of that coming from matching gift programs. Those donations went to

  • Education related causes: 29%
  • Health and wellness causes: 25%
  • Community and economic development causes: 15%

Employees who donated through workplace giving programs reported that they donated to

  • Hunger and homelessness relief: 47%
  • Education: 23%
  • Social and racial equity causes: 20%

The right workplace giving program empowers your employees to support the causes closest to their hearts, without judgment and with the confidence that their employer trusts them to put their money where it will matter the most.

How to Set Up a Workplace Giving Program

If this is your first time setting up a workplace giving program, there are some important steps to consider. You want a program that reflects your company’s mission and core philosophy, one that your employees will embrace and be proud to use. These are some key principles to keep in mind and some action steps to get you started.

Evaluate Your Company’s Corporate Social Responsibility Policy. If You Don’t Have One, This Is A Good Time To Brainstorm.

  • Create a vision for your CSR that balances your responsibilities to your shareholders/owners, your employees, the community, the planet, and any other stakeholders.
  • Evaluate your current activities in light of community service. Do you partner with local organizations? Host volunteer activities? Make donations to local charities? Any of these would fit under the umbrella of CSR.
  • Establish a corporate code of ethics detailing how your company will treat employees, customers, the environment, and competitors in all your dealings.
  • Get strategic with your giving program to ensure that it aligns with your company’s values and ethics.

Set a Budget for Your Giving Program.

  • The amount you budget for corporate giving should be no more than you can afford to give without affecting the cash flow you need to operate your business.
  • Many large companies earmark 1% – 5% of their pre-tax earnings for charitable giving. Small companies often donate 6% or more to charity.
  • Consider designating profits from one particular product for giving.
  • Use the Sabsevitz Ante-Up Formula — multiply last year’s pre-tax net income by 1.2% to come up with a donation budget.
  • Check out more suggestions for setting your budget in this blog post.

Set Up Guidelines for Your Program

  • Employees: will all employees be included in your benefits program? Will they all be level-funded, or will some positions qualify for a higher workplace giving benefit? 
  • Moments That Matter: Can you make donations more meaningful by tying deposit amounts to specific events in the lives for your employees? 
  • Decide which charities/causes your company will support. Will you restrict employee giving to designated nonprofits? How expansive will your list of eligible organizations be? 

Establish A Process For Collecting, Matching, And Donating Contributions. 

Publicize The Program.

The key to a successful workplace giving program is awareness. Your employees can’t use a benefit they don’t know about, and your company won’t reap the benefits if your customers and employees don’t know what you’re doing. These are a few suggestions for raising awareness of your new employee giving program.

  • List it as a benefit in your recruitment materials.
  • Provide an easy — and very visible — way to access your program’s front end on your employee website, Discord, or other communication software.
  • Highlight your program in the company newsletter.
  • Create and distribute flyers explaining the program, its benefits, and how to use it to your employees.
  • If you offer donation matches, make sure that local nonprofits are aware of it.
  • Partner with local nonprofits and community organizations when it makes sense.

Is Workplace Giving Tax Deductible?

The simple answer is yes, in most cases, workplace giving is tax deductible, and has been since 1935 when Congress passed a law allowing corporations to deduct up to 10% of their pretax income on their tax returns. That limit was raised to 25% to encourage more giving during the pandemic. 

Maximizing Tax Benefits for Workplace Giving

It’s important to understand how tax-deductible donations work in order to maximize the benefits of a workplace giving program. 

Some types of corporate giving offer more benefits than others. 

DAFs offer unique tax benefits, but until recently, they’ve been reserved for high-dollar donors. Briefly, a DAF allows your company to make a donation at the most advantageous time — before the end of the tax year, for example — and take the deduction immediately, and decide when and where that money should be donated to nonprofits. In addition, DAFs make it more efficient to donate non-cash assets, such as stock and real estate, to charity, without incurring an additional tax burden.

Workplace Giving with Groundswell

Groundswell’s innovative Philanthropy as a Service model democratizes workplace giving by setting up a Personal Giving Account — an individual DAF — for each employee, effectively putting the power of a DAF in the palm of their hand. 

The company can make donations into each Personal Giving Account as part of an overall corporate giving strategy, timing the donations to provide the most benefit. The employee then decides when and where to make donations to the causes that are most important to them. 

If you’re ready to increase the impact of your workplace giving programs, contact us to learn more about how Groundswell can empower you and your employees to do more good and make the changes they want to see in the world.