How Do Nonprofit Founders and Staff Get Paid?

Nonprofit organizations are granted their charitable or not-for-profit by the state in which they host primary operations. Most nonprofits are also tax-exempt, which is achieved by applying for the exemption with the IRS.

To receive the tax exemption, nonprofits must prove that all activities benefit the purpose of the organization. The IRS rules prohibit using nonprofit earnings to benefit any shareholder, so it is very confusing to understand how executive and staff members get paid. 

In this post, we explain how founders and employees of nonprofit organizations are compensated. 

Do Nonprofit Executives And Employees Get Paid?

Yes. Nonprofits are not owned by anyone. Instead, they are governed by a board of directors. Individuals that start these organizations are referred to as the nonprofit’s founders.

Founders, key stakeholders, and employees can be compensated for the work they do as long as it is considered fair compensation, as defined by the IRS. As long as the salary or wage is reasonable for the time, services, and knowledge the employee has contributed, the pay is considered compensation and not a shareholder benefit.

Salaries and wages are included in the organization’s ordinary operating expenses and can be paid from the nonprofit’s gross revenues.  

What Is Reasonable Compensation?

The process of determining whether or not a salary is reasonable is the same for founders, managers, and employees. To be considered reasonable, the wages paid must:

1. Be reasonable, fair, and not excessive
2. Comply with local, state, and federal minimum wage laws
3. Take all benefits into consideration when considering reasonable compensation

How To Set Compensation 

Deciding which salaries to offer at a nonprofit is challenging. Nonprofits are mission-driven, so it is evident that the focus of the organization is to fulfill its purpose. For that reason, a nonprofit usually have less money for staff compensation in its budget. This creates a challenge for nonprofits to attract talent, as it is common for a similar for-profit job description to offer a higher salary.

Nonprofit executives are forced to find an acceptable middle ground between industry averages and the goals of the organization. 

It is also important to note that the total compensation paid to key staff members is listed on Form 990 each year, which is accessible to the public. In addition to the IRS and other governing agencies, potential donors, investors, and board members typically review an organization’s Form 990.

It’s essential to consider the impact of sharing that information on the organization’s future. The key to setting reasonable salary levels is to first consider the duties and responsibilities of the position. 

Once you’ve set some clear expectations for the duties of each position, it’s time to set some reasonable compensation rates for your organization. A great way to make sure you’re offering competitive but reasonable salaries is to review the compensation packages of other not-for-profit and for-profit companies operating in similar industries.

Ultimately, the board of directors should review and vote on compensation on a recurring annual basis and whenever a new position is created. Making sure that the board is involved with setting salaries for the founder, executives, and key staff members is the safest way to avoid allegations of excessive compensation. 

Best Practices For Nonprofit Salaries And Wages

Thus far, we’ve shared that nonprofit founders and employees do in fact get paid, but the salaries must be considered fair compensation. In addition to involving the Board in salary decisions, we’ve gathered a few best practice tips for handling salaries and wages.

• If you are a startup nonprofit founder, there are unique challenges to taking a salary, especially during the first two years of operations. Founders of nonprofits should first work to get their organization to a place where it is mostly self-sustaining. From there, it is required that you make the transition from Board Member to staff member since members of the board do not get paid for that position. 
• Fundraise for overhead costs. It is common for nonprofit organizations to categorize all salaries and wages as overhead or general administrative costs. While many startup organizations rely on grant funding to get started fulfilling their mission, grants do not always provide for overhead costs. We recommend designating some fundraising activities to cover overhead costs, including salaries for executives and employees. 
• Include compensation in program and project budgets. In addition to holding separate fundraisers to cover general office expenses and salaries, nonprofits can also allocate a portion of applicable salaries in the program budgets used to apply for grant funding. Program budgets for grant funding commonly include staff services and/or administrative costs.
• Provide non-monetary compensation and promotions. Staff recruitment strategies include more than dollar amounts. When setting new positions or hiring new employees, consider adding value to the job position that is not money. Consider providing flexible work schedules, increased paid time off, snacks and beverages, or other non-monetary incentives to attract and keep good help. 

Final Thoughts

It can feel like a balancing act when setting salary ranges at your nonprofit. Don’t worry, you’re not alone. It’s imperative to offer competitive salaries, but equally important to be sure salaries are within reasonable compensation guidelines. When determining salaries at your nonprofit, consider the compensation packages of similar organizations and be sure to include the input and approval of the board of directors.

If you have questions about reasonable compensation or the organizational structure of your nonprofit, reach out to JFW Accounting Services today.