Can the Founder of a Nonprofit Receive a Salary?

Recent statistics suggest that over 1.5 million nonprofit organizations exist in the United States, and for good reason. It’s important to note, though, that the label ‘nonprofit’ can be pretty deceptive.

Just because an organization is founded as a nonprofit doesn’t mean it can’t make money.

So, can the founder of a nonprofit receive a salary? What about employees? Can a nonprofit earn an income? If you’re considering starting a nonprofit or have already made moves to make it happen, then it’s essential to answer these questions. Learn everything you need to know below.

What Happens If a Non-Profit Makes a Profit?

If nonprofits can make money, you might wonder what gives them the distinction of ‘nonprofit’ to begin with. It can be a bit confusing, but the main difference between for-profit and nonprofit organization is the intent behind the business. A for-profit organization is founded with the intention of making a profit, whereas a nonprofit organization gets created to help others by providing a service or product. Making a profit or income is just simply a bonus.

Nonprofits do not seek to make a profit, but they often do.

Founders and owners of a nonprofit organization can work towards increasing their nonprofit’s income, but they can’t legally take part of that profit. Nonprofit organizations do not have owners or shareholders, so a nonprofit founder cannot become a shareholder or hold a stake in the company. Any income the nonprofit receives should be reinvested into the business to help fund future programs and activities.

Reinvestment can legally mean paying employees, agents, directors, and other individuals who volunteered or shared resources with the nonprofit, but nonprofits cannot distribute dividends to shareholders as for-profit organizations do.

Overpaying is Prohibited

There is one important caveat to this general rule, though. In the Inurement Section of the Internal Revenue Code, there is a stipulation about nonprofit payments. In the section, it outlines that payments can’t be excessive. Moreover, no one individual within the nonprofit organization can benefit from the organization’s net worth.

Overpayments are not likely to slip by the IRS, either. The IRS will regularly audit a nonprofit’s employees’ and founders’ salaries to scan for potential overpayments. If an organization is caught overpaying an individual or multiple individuals, then it could lose its 501(c) status. This status is critical because it helps a nonprofit remain tax exempt. If this status gets revoked, the nonprofit must start paying taxes.

How to Determine a Reasonable Salary

So, excessive payments are prohibited, but employees, directors, and others can receive a reasonable salary. There is not much exact guidance as to what constitutes a reasonable salary, though, other than what “would ordinarily be paid for like services by like enterprises under like circumstances.” The IRS provides more details here and on Form 990.

Many nonprofit organizations operate with the help of volunteers who do not receive any payment for their work. Some agents, like outside vendors, maintenance workers, or other types of help, might expect to get paid, though.

What’s more, your organization might need consistent help with tasks like bookkeeping or advertising. Here are a few factors to consider when determining what type of salary is reasonable:

Scope of Work

The first thing you’ll need to consider when determining what salary is reasonable for an employee is the scope of work they’re expected to perform. Will the individual be doing budgeting tasks? Will they be putting in hard labor to build a shed? The scope of work will make a big difference in the expected pay of each position.

Hours Worked

The number of hours worked by each employee makes a difference in how much they should be paid. It makes sense that more pay will go to individuals who work more hours.

Expertise Required for the Job

Another important consideration is the expertise required for the job or service performed. If you’ll need to hire a professional or expert for a specific purpose, then it’s expected that you’ll have to pay them higher than average fees. Compensation will be higher in these situations, and that’s perfectly reasonable. If the job doesn’t require a certain level of expertise, it might be better to hire someone more cost-effective. You can look up salary data for many positions at the Bureau of Labor Statistics to ensure you’re not overpaying your nonprofit employees.

The Nonprofit Organization’s Budget

One of the top things you’ll need to consider when determining reasonable salaries for employees is the entire budget of your nonprofit organization. This complete overview will help you determine what’s reasonable. Salaries shouldn’t make up more than a third of your budget.

Independent Contractor or Employee?

Despite your nonprofit organization being tax exempt, you might still be liable for withholding taxes if you hire employees. It’s crucial to identify whether the individuals you hire to perform work would be legally classified as employees, independent contractors, or volunteers for this reason.

If the person is a paid employee, you’ll need to withhold Social Security, Medicare, unemployment, and income taxes for the individual. If the person is considered an independent contractor, you will not be required to withhold taxes for their pay. Of course, you won’t be paying anything to a volunteer, so you also won’t need to withhold taxes for them.

Should I Pay Myself a Salary as a Nonprofit Founder?

Now that you know that you can pay yourself as the founder of a nonprofit depending on the scope and nature of your work, you might be asking – should I? The answer to that question hinges on your personal preferences and the amount of work and time you invest in the nonprofit. You’d never want to take advantage of the situation and overpay yourself, but you also don’t want to undercut yourself if you’re sacrificing a ton of your time and money to the organization.

If you do pay yourself, then it’s important to remember that you do not own the nonprofit’s earnings.

Things to Keep in Mind

Salaries need to be budgeted

One important thing to consider is to include your regular salaries in your nonprofit budget. Making these expenses consistent, well-known, and apparent will help normalize them in the event of a future audit. Not only that, but it will also help you plan out your entire organization’s budget. Only a portion of your nonprofit’s income should go towards payroll expenses. Much more of it should be going towards your organization’s philanthropic goals.

Raised money can be restricted

Another consideration is that raised money could be restricted for specific purposes. For instance, if you throw an event to raise money for a cause, it would be inappropriate to allocate most of those earnings towards paying yourself and your employees. Always make sure to consider your budget beforehand and make it clear what percentage will go to charity.

Keep reputation in mind

Further, your reputation as a nonprofit organization matters. Your finances will be up to more public scrutiny than a for-profit business. The public might question your motives if you’re not allocating a huge chunk of your income towards your philanthropic goals. That’s not a good look for your brand!