Can You Pay Your Nonprofit Staff? How Much Can You Pay?

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Nonprofit organizations often use many volunteers to carry out their mission. However, a nonprofit is also a business and must have qualified staff who will commit to operating and maintaining the business side of the operation.

However, since nonprofits exist to benefit the needy, it seems contradictory to pay money to the staff rather than supporting the organization's cause directly. While the staff keeps the organization operational so that it can continue its mission, 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 Nonprofit Pay Its Staff?

Yes. 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 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, an equine therapy nonprofit pays an Executive Director, an accountant, a fundraiser, a volunteer coordinator, and a therapist. Volunteers take care of the grounds and attend to horses at the nonprofit's sprawling ranch. They even provide some of the therapy to the physically challenged children, who come to ride the horses. This small organization makes a good example of a combined staff and volunteer effort.

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. Large salaries in the millions often occur at large institutions such as medical centers or universities.

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. It's all relative, according to Stan Hutton and Frances Phillips, authors of the Nonprofit Kit for Dummies (Buy from Amazon):

"Whether the IRS considers benefits "excessive' depends on the situation. For instance, a staff member earning $100,000 annually from an organization with a budget of $125,000 probably needs to worry, but someone earning $100,000 from a nonprofit with a $5 million budget probably doesn't."

In the event that 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. It's important for nonprofits 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.

Recent discussions in the nonprofit sector have highlighted the inability of some charities to pay a "living wage" to their employees. In fact, some studies have found that annual turnover for nonprofits hovers in the 20-percent 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. 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.