One of the most common misconceptions about nonprofits is that nonprofit founders are unable to receive salaries. This idea is untrue! Read our blog to learn four steps to receive a salary from your nonprofit.
Is it legal to pay yourself?
There are thousands of nonprofits throughout the United States that employ individuals to work on a full-time basis. It is perfectly legal to pay individuals for their work! Our government realizes that it would be challenging to ask people to do the work needed to grow a charity without any form of compensation.
It is legal for nonprofit founders and officers to receive a salary for their work for the nonprofit. Let’s talk about how much you can pay yourself.
How much salary can you receive?
The amount of salary you can receive is called “executive compensation.” The rule for this amount is based on the rebuttable presumption test of the Internal Revenue Code and Treasury Regulations Section 53.495 8-6. Essentially, a nonprofit cannot pay you more than what is reasonable for the services you have performed.
What is a reasonable amount?
So, how do you know if a salary is reasonable? Your nonprofit will need to form an Executive Compensation Committee. This committee will need to research the market and get data to help them decide what a reasonable amount should be.
Here are the steps to do this legally:
Appoint a committee.
The board of directors of the nonprofit should appoint a Compensation Committee. Here is an example of reasonable criteria for the committee members:
- Individuals serving on the committee should be knowledgeable about the area of executive compensation.
- They should not be in a position where they will financially benefit from the result.
- Your nonprofit should not pay committee members.
- There should not be a close relationship between the committee member and the person whose salary they will be determining.
Conduct a survey.
- The Compensation Committee will do a market survey of nonprofits to determine average wages for similar positions.
- The committee will need to find nonprofits that offer similar programs, in similar locations, have similar numbers of employees, and have similar gross revenue.
- Committee members will also need to consider how much the nonprofit can afford to pay.
- Compensation of key personnel and staff should not be the majority of the nonprofit’s budget, or donors may not feel that enough funding is going towards actual programs.
- The committee needs to document its data. That way if the IRS ever audits the nonprofit, there is a paper trail to substantiate the reasons that the committee chose the salary amounts.
- Committee members can confer with experts in human resources or similar consultants to ensure that their conclusions are reasonable.
- The committee can also hire a third party to compare compensation data from similar nonprofit organizations and prepare a report for their consideration.
Make a recommendation.
- The compensation committee will then recommend a Compensation Package to the Board of Directors for approval.
- This Compensation Package will include a salary level for the position based on the findings from the research.
- Meeting minutes should document the committee attendees, data evaluated, analyzed results, and the actual recommendations.
Vote on the proposal.
- The entire board of directors will need to vote to approve the package.
- There has to be transparency in the process, which means that all board members should vote on package adoption.
- A meeting should be called.
- There must be a quorum as defined by the nonprofit bylaws.
- Written meeting minutes should be taken to document the meeting.
- A resolution should be written and adopted affirming the decision of the board.
Should you pay yourself?
Not everyone is interested in being paid a salary from their nonprofit. I have never been paid for any of the work I’ve done for Revolution Leadership, and I do not have any plans of asking for anything in the foreseeable future.
However, if it is your desire to receive a salary from your nonprofit – there is nothing wrong with that either! Running a nonprofit takes both time and effort, both of which deserve compensation if you so choose.
Speak with an Expert
While it is perfectly legal to receive a salary from your nonprofit, it is normal to have some concerns and hesitations towards setting it up. Speaking to an expert can help. Here at Chisholm Law Firm, we can help you work through the pros and cons of this process.
Chisholm Law Firm has helped thousands of people start and grow nonprofits that impact the world. If you want the best for your nonprofit, look no further than Chisholm Law Firm. Our clients have a 100% success rate for nonprofit and trademark filings*.
You can rest assured that your nonprofit is in the best hands and that we’ll get everything done right the first time. Call us today to schedule your free consultation.
It shouldn’t be this hard to be a superhero.
*Past results do not determine future outcomes.
