Our PTO gives an annual Christmas "gift" to each of our faculty and staff. Althought this is not part of employment compensation but a gift from our group to thank them for thier hard work, we are now advised that we must report this as income and withhold taxes. We've worked hard to raise the size of each gift and we want all of the increase to go to them. Any clarification would be appreciated.

You should only need to report it as income if somehow it could be shown that the PTO is the employer. That is, if the PTO actually employs the teachers, or if the PTO is an official part of the school governance. Assuming that your PTO is set up as a separate organization, I wouldn't think so.

We certainly do not report any gifts we give our teachers.

Even if an argument were made that the gifts are compensation for services provided, and therefore the teachers are contract employees of your PTO, you would not be required to issue a 1099 for anybody who receives less than $600.

PJoyce,
I'm curious who gave you this advice. I agree with KCSwan & also feel it is quite odd that even though the PTO is in no way involved in employing the teachers, you would be required to withhold taxes. It would make sense to me that perhaps the teachers are required to declare it (as a gift or something, I'm not sure what). I think I would double check the source of this advice.
Jo

When we were researching the requirements for 501(c)(3) status, we were advised by the IRS that our PTO should no longer give $$ outright to anyone (specifically our teachers) unless it is a reimbursement or a donation to another 501(c)(3) organization.

The reason was that, as a registered non-profit org., we agreed that our money would be spent within the guidelines of such an organization. When you give money away, you lose that control and can no longer guarentee that the $$ is being spent within the guidelines. Beginning this year, we gave our teachers a "credit" against which they can turn in receipts. You might want to contact the IRS for their official explanation and more details regarding your specific circumstances.