Standard Practice for Paying Board Members
Concerns about conflicts of interest dictate that a line be drawn between paid staff and volunteers for nonprofit 501(c)(3) organizations. While many volunteers at nonprofits perform essential tasks, only one set of volunteers has an official role in governing a charity. That group comprises the board.
Even though compensating board members is standard in the corporate world, only a small percentage of nonprofits compensate board members. Those nonprofits that do pay board members are usually large, complex organizations such as health care systems, large foundations, or art institutions because of the complexity of those institutions and the expertise board members may need. Even though there is no federal rule against compensating board members of charitable nonprofits, most charities do not pay board members. However, board members may be reimbursed for certain expenses or receive a deduction on their personal income taxes .
Exceptions to the Rule
However, although nonprofit board service is most often a volunteer activity, reasonable compensation for services provided by a board member (an example would be an attorney providing legal advice) is permissible if the bylaws allow and if safeguards are in place. Such safeguards include making sure that compensation is fair and in line with what similar organizations provide . If a board member is paid more than $600 per year, the organization must submit IRS Form 1099 Msc.
Why do charities usually not pay board members? Because charitable nonprofits serve the public good and should not enrich any person or group of individuals . Board compensation can call into question a nonprofit’s financial integrity. Also, some state incorporation laws address board compensation, so check with your state. Also, be aware that paid board members might lose the immunity provided by incorporation from lawsuits filed against the organization.
At a time when unusually high nonprofit CEO compensation is often criticized, we do not recommend that most nonprofits compensate board members.
There should be no problem finding community leaders to serve as volunteer board members. The payoff for those board members includes enhancing their professional reputations, meeting other people influential in their community, learning about community needs, and feeling good about their contribution to the community welfare.
However, board members may be reimbursed for expenses, such as travel and lodging for a board meeting in another city or for attending a conference. Uncompensated costs, if not reimbursed, might be tax deductible for board members.
May Staff Members Serve on the Board?
It is not a good idea to have a paid staff member serve on the board and may even be limited by your state's nonprofit laws. The chief reason staff members do not usually sit on a nonprofit's board is the risk of a conflict of interest.
That said, most nonprofits have at least one staff member on their boards, especially in small nonprofits where the founder may be on the board. We often see an executive director serve as a non-voting member of the board or in an advisory position.
Executive Directors are hired, fired, and supervised by the board, so being a voting member of the board would be a conflict of interest. However, the board needs the ED's presence at board meetings to keep it informed and educated about what the organization is doing. In volunteer-only organizations, those volunteers might do the work, and some may serve on the board. Sometimes state laws permit staff to serve on nonprofit boards.
The Better Business Bureau's Wise Giving Alliance suggests that a nonprofit board should include no more than one paid staff member., and that paid staff should not serve as president or treasurer.
Staff may attend board meetings, especially the CEO or Executive Director. But they usually don't vote. Other team members may participate in the meetings as well, either regularly, on an ad hoc basis, or in an advisory position. It is common for the chief financial officer to attend board meetings as well as the chief development (fundraising) officer.
IRS Form 990 Disclosures
IRS Form 990, the tax return for nonprofits, requires disclosure of potential conflicts of interest, so make sure that having paid staff on your board does not create any problems.