One of the biggest myths about nonprofits is that nobody is allowed to get paid. That is not true. A nonprofit can pay its founder, its directors, and its staff — but the pay has to be earned, reasonable, and documented.
Here is where the line is:
1. Pay is for real work. Salary must be for services the organization actually needs — running programs, managing operations, fundraising — not just for holding a title.
2. Pay must be reasonable. "Reasonable" means what a similar organization would pay a similar person for the same work in the same area. Way above that range is not a salary — in IRS language, it can become an excess benefit.
3. Insiders do not set their own pay. No part of a nonprofit's money may benefit a private insider unfairly — that is the rule against private inurement. The safe way: independent board members approve the pay, using comparable salary data, and the decision is recorded in the minutes. The person being paid does not vote on it.
4. It all gets reported. Compensation for officers and key employees goes on the annual Form 990, where anyone can see it. Pay that cannot stand up in public should not be paid in private.
Get this wrong and the consequences are serious — extra taxes on the excess benefit under IRS rules, and in the worst cases, risk to the organization's tax-exempt status.
Get it right, and there is no problem at all. Paying good people fairly for real work is how a nonprofit grows beyond one volunteer doing everything.
— 501c3 Expert
We handle all your 501(c)(3) paperwork — nonprofits set up from start to finish, and Form 990s prepared every year.
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