Nota bene: the information herein is US-specific as that is where my experience lies. Also, I’m not an attorney or an accountant and the information below does not constitute professional advice.
Occasionally I am asked when its okay to use the words ‘donation’ and ‘contribution’ when soliciting money from supports of a project or organization. The answer is a bit complicated, but useful information for both non-profits, for-profit entities, individuals and unincorporated associations, so I’m publishing it here.
For the most part “contribution” and “donation” can be used interchangeably. The IRS doesn’t actually care what word you use when soliciting money from supporters of your project, regardless of its legal structure.
However, a lot of people understand “donation” to mean “tax-deductible charitable contribution.” Because of this, payment processors like Google and PayPal have added their own restrictions about how you can use the word.
PayPal doesn’t place restrictions on individuals or non-tax-exempt organizations using the word ‘donation,’ provided you are not doing so with a non-profit account. Non-profit PayPal accounts benefit from special rates. As such, to have a non-profit account, you have to have non-profit status with the IRS.
Unfortunately, PayPal doesn’t recognize state-level non-profit status. This creates a confusing grey area for organizations incorporated as non-profits at the state level. So, as long as you have an individual or business PayPal account, you are perfectly able to use the word ‘donation.’
Google Checkout (now Wallet)
Google, however, is much more restrictive. They specifically prohibit you from using the word ‘donation’ unless you are a 501(c)(3) or (c)(6) and have your determination letter from the IRS.
I can’t say for certain why they do this, but my guess it’s to save themselves the headache of having to deal with unhappy contributors who thought that their contributions would be tax-deductible.
Instead, they ask that you use the word ‘support.’ We have also successfully been using ‘contribute.’
If you’re taking cash from folks at an event, I generally think it’s fine to use either donation or contribution.
However, you should consider making clear two things: a) whether or not the contributions are tax-deductible, and b) what the funds will be used for. My recommendation for b) is to always say that they go into the org’s general fund, or to the org as a whole. That way you avoid entirely the impression of restricted contributions. Legal statues around restricted funds really only apples to non-profits, I believe, but it’s just a good practice to be clear and honest about where supports’ contributions are going.
If your donations to your organization are not tax-deductible, I recommend getting in the habit of using either ‘contribute’ or ‘support’ to avoid any confusion or trouble with payment processors.
Also, if people are interested, I can write about how to have your accounts unfrozen with PayPal and Google if you’ve happened to have messed up with them and used ‘donation’ in a way they didn’t like.