Compensation For Nonprofit Employees

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Many nonprofits engage volunteers to provide voluntary, uncompensated services. Many nonprofits also hire employees, whose compensation and working conditions are regulated by state and federal laws. Hiring any employee triggers a host of legal requirements, from filing with the state to report a "new hire," to determining the appropriate wages/compensation, to calculating "withholdings" from compensation for tax purposes. This webpage does not attempt to cover all these issues, but rather to debunk the myth that "all nonprofits only have volunteers." We also want to encourage those managing nonprofits with employees to recognize that nonprofits compete with for-profit workplaces for talented workers, so setting the right level of compensation can make the difference between attracting and retaining qualified employees or, in contrast, suffering from high turnover and/or not being able to retain talented employees. Despite another myth that "good benefits makes up for low compensation," generous benefits are definitely an important factor in hiring talented employees. The definition of gross income for income tax purposes includes benefits, such as health insurance; when analyzing an employee's "total compensation," fringe benefits, such as paid leave and opportunities for professional development and continuing education, are included.

How much should a nonprofit pay its employees?

Tax-exempt charitable nonprofits are required at a minimum to provide minimum wage. At the upper end, compensation must be "reasonable" and not "excessive," which is a fundamental requirement of maintaining tax-exempt status. It is helpful to know what the “going rate” is when you are hiring a new staff member by reviewing “comparability data:” salary and benefits information from other nonprofits in the same or a similar geographic area, with a similar budget and mission focus. Many state associations of nonprofits collect salary and benefit information via regular surveys, and produce state-specific reports that allow you to compare compensation of similar organizations, by job titles/responsibilities. These data may be free to members as a benefit of membership in a state association of nonprofits. There are also national compensation surveys available for purchase, from GuideStar and others.

Minimum Wage and Overtime

Employees must be paid the legally mandated minimum wage, that can differ state-to-state; there is also a federal minimum wage rate. Employers should pay whichever is higher. If employees (not independent contractors - it's important to know the difference!) work over 40 hours in a work week, be aware that the nonprofit may owe those employees overtime compensation. Read more.

Approving executive compensation

It’s a recommended "best practice" for the entire board of directors to be aware of, and annually approve the executive director/CEO’s compensation. This topic is so important we've devoted an entire page of our website to it!

Can we pay nonprofit employees a bonus?

Yes: Bonuses are considered to be part of the overall compensation received by an employee. But care should be taken on two fronts: First, compensation based on incentives, including bonuses, is carefully scrutinized by the IRS to ensure that no prohibited private benefit results. Read about guidelines for bonuses and incentive based pay. Second, be sure to manage employees' expectations so that they realize bonuses are a discretionary add-on to regular salary, dependent upon budget limitations, and often provided in recognition of an employee's extra-efforts or exceptional performance - not automatic. See IRS guidance on incentive compensation.

Practice Pointers

  • Compensation is more than just straight salary. The IRS considers “compensation” to include the total of all “income” received by the CEO, which includes, for example: contributions to retirement accounts, housing and car allowances, as well as insurance premiums paid by the nonprofit to benefit the executive director, and even club memberships if the membership primarily benefits the individual rather than the nonprofit. (See IRS Form 990 instructions, pages 29-31.)
  • Learn why paying a commission or percentage of funds raised to staff or independent contractors with responsibility for fundraising is considered unethical by many: Position Paper: Percentage Based Compensation (Association of Fundraising Professionals)
  • Nonprofits report bonuses (including signing bonuses) and any compensation based on incentives, on Form 990, Schedule J, Part II, Column B 2 (ii). Remember: care must be taken to justify all compensation as reasonable and not excessive.
  • Nonprofits that file the IRS Form 990 or 990-EZ are required to report compensation, so for those nonprofits, it is easy for others to see what the nonprofit paid its highest paid staff members. 
  • Some executive director/CEO positions are governed by a contract for employment: Basics for negotiating contracts with CEOs/executive directors (Venable, LLP)
  • Don’t forget to withhold employment taxes from employees’ paychecks. Not withholding employment taxes? Your board could be personally liable (Nonprofit Quarterly)
  • Review salary and benefit reports that contain comparable data. State specific reports are often available from your state association of nonprofits, with discounts available for members. Several national survey reports are available for purchase (GuideStar, The Nonprofit Times, and Columbia Books are the leading reports), and free reports are available in a few regions from staffing firms and other sources. See below.

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