

A nonprofit organization has a purpose other than turning a profit—but that doesn’t mean nonprofits aren’t profitable. If nonprofits weren’t viable, revenue-creating entities, they wouldn’t be able to pay their bills and wouldn’t exist.
Instead, all proceeds are invested into the organization to further its reach, used as donations to a charitable cause, or used in a way that benefits the public.
So how is a nonprofit able to pay its employees? The basic premise is fairly simple: all wages, like in any other business, are considered an expense. If a nonprofit requires employees, the employees’ wages are simply costs of doing business.
Nonprofits often make use of volunteers, but it’s both common and practical to have paid staff as well. Paid employees can include both regular staff and those in leadership positions, such as CEOs and executive directors. Board members, however, are typically volunteers. Board members may be reimbursed for board-related expenses, such as travel, but they usually should not receive compensation.
Occasionally, however, a board member might also be a paid employee or might provide a contracted service, such as legal advice. Because of the potential for conflict of interest, these situations are best avoided when possible. However, this isn’t always realistic or practical, particularly for small nonprofits just starting out. In these cases, nonprofits should, of course, provide compensation for services received, but the nonprofit should take a few extra steps as well.
Ideally though, if a board member wants to move into a paid position in the nonprofit, they would typically resign from the board before applying for the paid position.
Once you’ve determined whom to pay, it’s necessary to determine a wage or salary. The IRS guidelines for compensation (found in Schedule J for Form 990) are somewhat vague, noting that wages or salary should be “reasonable” and not “excessive.” So how do you determine what is reasonable?
Using the above factors, you should be able to calculate a reasonable salary and document your rationale. It’s also a good idea for the board to approve salaries each year, even if no changes are being made so that there’s a consistent record of oversight.
In addition to following good practices for calculating salary, it’s also useful to note some potential missteps that could draw negative attention. In particular, the IRS is not fond of salary calculations based on incentives or percentages.
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