How do you raise $100 Million dollars in 6 months? Get a few thousand people to challenge each other to pour buckets of ice water over their heads, video tape themselves doing it, and post it on social media websites using #ALSiceBucketChallenge. Easy right?

No one expected the ice bucket challenge to take off so stupendously and you can’t always know what project or endeavor is going to be a grand slam home run. However, we are truly in an era where social media is the easiest form of communication and charities must embrace the power of individual fundraising through this medium.

Whether it is for the ALS Ice Bucket Challenge, the local fun run or the PTA Read-a-thon, individual fundraising is on the rise and people are using their social media accounts and email contacts to solicit donations for their favorite charities. Charities, looking for alternative ways to fundraise, and individuals, fundraising on behalf of their favorite charities, use crowdfunding or online fundraising sites such as GoFundMe, Indiegogo, Crowdrise, Fundly, and others.

How does online fundraising for or on behalf of charities work? The first and most important step is that the charity selects the online service provider it wants to work with, such as GoFundMe or Indiegogo.  These unregulated sites act as agents for charities and distribute information to the public about the fundraising goals of the charity. Once a charity establishes a relationship with a crowd funding site, an individual can set up an account with the site and fundraise on behalf of the charitable organization.

There are a number of online fundraising sites so charities must do their due diligence prior to signing up. Each site has different offerings. One site may offer services for charities while another site may only offer services for personal fundraising efforts.

In addition, each site may charge different fees in exchange for the services they provide. Some sites only charge a fee to the charity (remitting the donation net of the fees to the charity) which allows the donor the full charitable deduction. Others charge the fee to the donor, limiting the charitable contribution to the donor. Still some other sites may charge a fee to both the donor and the charity. Charities must fully understand the fee structure and clearly communicate it to its donors and individuals who may be soliciting on its behalf to avoid public relations problems. The fees usually include both a fee (usually $0.30 per transaction) and a percentage fee based upon gross amount of funds raised (up to 7.9% of amounts raised).

Charities interested in participating in online fundraising should use crowdfunding sites cautiously and consider the following:

  • The charity should make sure the agreement provides that they get all of the donor information collected by the online service provider. Some sites offer the capability for a charity to download an Excel file of donor information which includes names, addresses, amounts, and times donated.
  • The charity should make sure the online service provider has a donor acknowledgment script built into their website and that it is approved by the charity’s legal counsel. Some sites, such as GoFundMe, partner with FirstGiving, will process contributions and issue donor acknowledgement letters when donors make online contributions through their site. Charities may also follow up with issuing a donor acknowledgement letter of their own, once they receive information about their donors.
  • The contributions made through the online fundraising sites should be deposited into the charity’s bank account as soon as possible to make sure the charity has use of those funds immediately, rather than the online service provider making use of the float on those funds. Most online fundraising sites offer both weekly and monthly deposits, electronically or via check.
  • Do not use these websites to hold raffles. This would likely constitute interstate gaming because it is almost impossible to limit web-based participation to a single state.
  • For states that require the online service provider to register as a professional fundraiser, the charity should require the online service provider to provide proof of such registration.

It is important to note that a charity must report on its annual Form 990 the gross amount raised, the donor’s information (if they exceeded a specific threshold) and the fees paid to the online service provider. Therefore, having donor detail is essential from both compliance and public relations perspectives.

The other side of crowdfunding is what the donor needs to be aware of. Donors will need to independently verify that the organization they are contributing to is a 501(c)(3) organization. Some crowdfunding sites will provide certifications or verifications of a charity’s status and those are usually sites contracting directly with those organizations. If there is no certification or verification, contributions to these organizations would likely be disallowed as a tax deductible contribution. Donors should always make sure that they receive a donor acknowledgement letter, especially amounts over $250, in order to claim a charitable contribution deduction on their personal tax return.

Crowdfunding sites can help smaller organizations that do not have the resources to develop a robust website and payment processing capabilities while at the same time harnessing the power of social media fundraising.  Social media is clearly a trend that is taking hold and to the extent your organization has an active and engaged group of volunteers, harnessing the power of social media fundraising is something worth exploring.

© Clark Nuber PS, 2015.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.