Can I pay myself from my nonprofit?

Yes, you can absolutely pay yourself from your nonprofit organization. It is permissible for founders, executive directors, and other staff members, including yourself, to receive compensation for services rendered to the nonprofit.

However, a crucial condition applies: the compensation you receive must be considered "reasonable compensation" by the Internal Revenue Service (IRS) standards. Fair work deserves fair compensation, but exceeding these standards can lead to significant penalties.

Understanding Reasonable Compensation in Nonprofits

"Reasonable compensation" refers to the amount that would ordinarily be paid for like services by like enterprises under like circumstances. For a nonprofit, this means the compensation should not be excessive and must be directly related to the services you provide to further the organization's tax-exempt purpose.

The primary concern for the IRS is to prevent "private inurement," where the earnings of the nonprofit improperly benefit private individuals. Providing excessive compensation to an insider (like a founder or board member) is a form of private inurement and can jeopardize the nonprofit's tax-exempt status.

Factors Determining Reasonable Compensation

When assessing whether compensation is reasonable, the IRS typically considers several factors. Nonprofits should take these into account when setting salaries:

• Qualifications and Experience: Your education, training, and professional experience relevant to your role.
• Nature and Scope of Duties: The specific responsibilities, tasks, and time commitment required for your position.
• Compensation for Comparable Positions: Salaries paid by similar organizations for equivalent positions, duties, and responsibilities in the same geographic area.
• Size and Complexity of the Organization: The nonprofit's budget, number of employees, and the complexity of its operations.
• Organization's Financial Condition: The ability of the nonprofit to pay the compensation without jeopardizing its mission or solvency.
• Performance: Your effectiveness and contributions to the organization's goals.

The Risks of Unreasonable Compensation

If the IRS determines that compensation is unreasonable, your nonprofit could face serious consequences:

• Intermediate Sanctions: The IRS can impose excise taxes (penalties) on the "disqualified person" (the individual who received the excessive benefit) and, in some cases, on the organization's managers.
• Loss of Tax-Exempt Status: In severe cases of egregious private inurement, the nonprofit's 501(c)(3) tax-exempt status could be revoked, leading to the loss of its ability to receive tax-deductible donations and potential taxation of its income.

Best Practices for Setting Your Nonprofit Salary

To ensure compliance and transparency, follow these best practices when determining compensation for yourself or any insider:

Board Approval and Transparency

• Independent Review: Compensation decisions for executive staff, especially founders or directors, should be reviewed and approved by an independent board of directors or a compensation committee composed of individuals who do not have a conflict of interest.
• Document the Process: Thoroughly document the decision-making process, including the factors considered, the data reviewed (e.g., compensation studies), and the final approval in the board meeting minutes. This demonstrates due diligence.

Conduct a Compensation Study

• Market Benchmarking: Research and compare your proposed salary with compensation data from similar nonprofit organizations. Utilize reliable resources such as:
  • Nonprofit salary surveys: Published by organizations like Candid (formerly GuideStar and Foundation Center) or other industry-specific associations.
  • IRS Form 990 data: You can review the compensation reported by similar nonprofits on their publicly available Form 990 filings.
• Professional Consultation: Consider engaging a compensation consultant, especially for larger or more complex organizations, to conduct an independent analysis.

Conflict of Interest Policy

• Recusal: If you are a board member or have a direct financial interest, you must recuse yourself from discussions and votes related to your own compensation. Your presence could invalidate the decision and raise questions of private inurement.
• Written Policy: Implement and adhere to a clear written conflict of interest policy that outlines procedures for managing potential conflicts, including those related to compensation.

By adhering to these guidelines, your nonprofit can ensure that compensation practices are fair, transparent, and fully compliant with IRS regulations, allowing you to be appropriately paid for your dedicated work in advancing the organization's mission.