Charitable nonprofit organizations often use many volunteers to carry out their missions. However, nonprofits are also businesses, and most have qualified paid staff who operate and maintain the business side of the operation and deliver its services.
Since nonprofits exist to benefit societal needs, it sometimes seems contradictory to pay money to the staff rather than supporting the organization's cause directly. Yet, the paid staff keeps the organization operational so that it can continue its mission.
Salaried employees for most charities seem essential. However, it's not an easy task to determine a pay level that attracts qualified candidates while not spending precious funds on overpaying salaries.
What Are the Laws on Nonprofit Salaries?
The IRS (which regulates tax-exempt status) allows a 501 (c)(3) nonprofit to pay reasonable salaries to officers, employees, or agents for services rendered to further the nonprofit corporation's tax-exempt purposes.
Most nonprofits have paid staff. Some have thousands of employees, while others employ a couple of key people and rely on volunteers for most essential work.
For example, an equine therapy nonprofit might pay an executive director, an accountant, a fundraiser, a volunteer coordinator, and a therapist.
Volunteers, though, may take care of the grounds and attend to the horses. They may even help provide some therapy to the physically challenged children who come to ride the horses. This type of organization represents an example of a well-integrated workforce of both paid staff and volunteers.
Each nonprofit organization must assess its needs and decide when it is time to hire employees, how many, and what jobs.
How Much Should a Nonprofit Pay Its Staff?
The nonprofit pay scale is typically far from excessive, especially compared to salaries in the for-profit world. Sometimes, though, organizations get into trouble because a staff member, usually the CEO or executive director, is paid an excessively high salary.
No hard and fast rules exist for compensation in a nonprofit, but the IRS can penalize both an organization and an individual for excessive pay. This expectation is embodied in the inurement clause governing nonprofit organizations. Inurement means that the resources of a nonprofit must not benefit a private party. Excessive pay could violate this mandate.
The excessive salary issue is covered under the private inurement clause for charitable nonprofits. That clause says that no income from the nonprofit can benefit a private individual, and this includes excessive salaries.
On the other hand, nonprofits should not be so hesitant to pay an adequate salary that they cannot compete in the marketplace for well-qualified individuals. After all, nonprofits are a type of business and must be able to recruit a staff that can best fulfill its mission.
When Can I Use Volunteers?
Volunteers are often the backbone of a charitable nonprofit. Indeed, some small charities have no paid staff, only volunteers. However, most nonprofits manage a diverse workforce of both paid staff and unpaid volunteers.
Volunteers are recognized by the Fair Labor Standards Act, under which certain rules apply. For instance, volunteers should be part-time, not supplant paid staff, and paid employees may not also serve as volunteers performing the same duties as their paid work. The work that volunteers perform must be in service to the organization's charitable purpose and not for any commercial venture.
Many people think that volunteers only do "grunt" work for a nonprofit—this is not true. Some volunteers have skills honed by their careers and education and volunteer those skills to a nonprofit. A good example of this is a nonprofit board of directors. The board likely brings a wealth of experience and expertise to the nonprofit while serving in a volunteer role.
Other volunteers may be in the midst of their careers and serve as pro bono volunteers (also known as "skilled volunteers") with the permission of their companies.
Pro bono volunteers often bring specialized skills to the nonprofit for a limited time that it might not otherwise be able to afford, such as legal expertise, accounting skills, or digital know-how.
Volunteers of all ages and backgrounds serve nonprofits in various roles and for varying lengths of time. Some, especially retirees, show up year after year, while others may volunteer for a special event or help out with a special project for one day or a weekend.
Many companies now have employee volunteer programs where staff is granted leave for a day to perform volunteer work with local charities.
Successful nonprofits learn to manage a mix of volunteer and paid staff to accomplish their missions and serve their communities.
Why You Need a Fair Nonprofit Salary
Many nonprofits offer salaries that are considered too low by many.
Some studies, such as one from NonprofitHR, have found that annual turnover for nonprofits hovered in the 19% range in recent years, potentially because of low pay.
On the other hand, it can be difficult to compare nonprofit salaries with for-profit salaries because of the diversity of nonprofit organizations.
Nonprofits need to avoid overpaying or underpaying the staff. The first could get you into trouble with the IRS, and the second will hamper your ability to recruit the best employees.
According to the Bureau of Labor Statistics, nonprofits sometimes have higher salaries than for-profits. That may be possible because many nonprofits are large organizations that hire highly educated and well-compensated employees. A nonprofit medical center, for instance, has many doctors on staff, and a nonprofit university has well-paid professors and administrators.
Salaries for a nonprofit will likely differ markedly depending on its size and the sector within which it works. Ensure that your nonprofit's staff receives compensation in line with salary surveys of similar groups. Factor in the cost of living in your area, the size of your budget, and the type of service your organization provides. Additionally, be sure to adhere to your state's minimum wage rules.
Salary.com's cost of living calculator is a good resource for comparing pay for various types of jobs. You can search for job titles and related salaries in any geographic area free of charge. You can also browse the nonprofit job category at Glassdoor for a frame of reference.
Frequently Asked Questions (FAQs)
How can I find the salaries of nonprofit employees?
There are many ways to research salaries for nonprofit positions. Candid, a website for nonprofits, suggests starting your research in these ways:
- Check out your state nonprofit association: State nonprofit associations often keep track of salary information in their states. You can use your search engine by typing in "nonprofit salary [state name]." Or you can find a map and list of state associations at The National Council of Nonprofits.
- Purchase a salary report or survey: These include Guidestar's Nonprofit Compensation Report and the Economic Research Institute's Nonprofits Salary Survey.
- Use commercial or government job listing sites: These sites include PayScale or the Bureau of Labor Statistics' Occupational Outlook Handbook.
As you research, keep in mind the variables that may affect salaries such as geographic location, size of organization and types of services, employee duties, and required qualifications and experience.
What percentage of a nonprofit's budget should be salaries?
The answer to how much of one's budget should be dedicated to salaries is influenced by both accountability and perception. The bulk of the nonprofit budget should go to program expenses. For instance, the Better Business Bureau standards for charities say that at least 65% of a nonprofit budget (including salaries) should be devoted to programming expenses.
Form 990, a nonprofit's annual tax return for the IRS, does require the salary of the organization's top employee and the rationale used for the amount of that salary. But there are no specifications for the amount other than it is "reasonable."
"Reasonable" comes down to perception. Salaries should be proportional to the overall budget. A small nonprofit should not pay the CEO half of its budget, for instance.
If a nonprofit can pay salaries, what makes them a nonprofit?
A common misconception is that nonprofits cannot earn a profit or pay employees. The fact is that a nonprofit is a type of business. Many nonprofits are even incorporated.
Unlike a business, a nonprofit's profit (or income beyond expenses) does not go to any person or group of people such as owners or stockholders. All income must go to the exempt purpose of the organization.
However, to fulfill that purpose, the organizations will likely need to hire employees. The salaries of those employees are expenses, as are items such as rent, supplies, utilities, computers, etc. While some tiny charitable nonprofits with limited purposes run on volunteer help, most nonprofits use volunteers and paid staff to fulfill their missions.