Charitable nonprofit organizations often use many volunteers to carry out their mission. However, a nonprofit is also a business and must have qualified paid staff who will commit to operating and maintaining 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. But, the staff keeps the organization operational so that it can continue its mission. Paid staff for most charities seems 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.
Can a Charitable Nonprofit Pay Its Staff?
Yes. Both state law (which governs the nonprofit incorporation) and the IRS (which regulates the tax-exempt status ) allow a nonprofit to pay reasonable salaries to officers, employees, or agents for services rendered to further the nonprofit corporation's tax-exempt purposes .
Indeed, most nonprofits have paid staff. Some have thousands of employees, while others employ a couple of key people and then rely on volunteers for most of the essential work.
For example, a hypothetical equine therapy nonprofit might pay an Executive Director, an accountant, a fundraiser, a volunteer coordinator, and a therapist. Volunteers may take care of the grounds and attend to horses at the nonprofit's sprawling ranch. They may even provide some of the therapy to the physically challenged children, who come to ride the horses. Such an organization represents an example of a well-integrated workforce of both paid staff and volunteers.
Each nonprofit organization must assess and decide when it is time to hire employees, how many, and for what jobs.
How to Determine Pay?
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 would violate this mandate.
If a nonprofit does over-pay a staff member, it may have to pay an excise tax and could lose its tax-exempt status.
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.
Avoid High Staff Turnover
Many nonprofits suffer from the issue of offering pay that's considered too low by many. Nonprofits need to avoid overpaying or underpaying the staff. The first could get you into trouble, and the second will hamper your ability to recruit the best employees.
Some studies have found that annual turnover for nonprofits hovers in the 19% range, in significant part because of low pay.
Make sure that your nonprofit's staff receives compensation that is 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 and stay up with federal legislation such as the new rules governing overtime pay .
The cost of living calculator provided by Salary.com makes an excellent 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, an online job and recruiting site, for a frame of reference.
The Chronicle of Philanthropy issues a study of nonprofit executive compensation annually, which subscribers can access. For a fee, you can get the NonProfit Times Salary and Benefits Report. For more information about compensation, see Can Nonprofit Board Members Receive Compensation?
This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.