How Much Can I Pay Myself if I Start a Nonprofit Organization?
Launching a nonprofit organization can be incredibly rewarding, but it can also be a lot of work. While you are passionate about your mission, unless you are moonlighting with another job, you are going to have to pay yourself enough to live healthfully and prosperously.
Yet striking the right balance - especially when you are the one deciding how much you will get paid! - is difficult. A startup nonprofit is not typically overflowing with money, and you may not want to dip into your funds enough to draw a decent salary. You may even be wondering: how do nonprofits pay employees in the first place? In this article we will explore how to reconcile any feelings of confusion or doubts you have around procuring your own salary, while following guidelines set by the IRS.
- From Passion to Paid: Can I Pay Myself in a Nonprofit Organization?
- How Much Does a Nonprofit Founder Get Paid?
- Convincing the Board
- IRS Disclosure
- Final Thoughts
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From Passion to Paid: Can I Pay Myself in a Nonprofit Organization?
The answer to this question is unequivocally yes! You are doing work, and workers should get paid! When your nonprofit is brand new, you often cannot afford to hand out salaries to anyone, even yourself. But at some point this has to change - at the least so you do not jeopardize your own financial situation.
So how do you get started?
When is the Time Right to Start Getting Paid?
The first thing you must determine is when paying yourself a salary will become possible, and what circumstances will make that possible. Your organization must reach a point where you can expect to have money coming in beyond what is needed to cover program expenses. You will have to examine both your budget and revenue forecasts to see what is available.
Trish is contemplating if it's time to start paying herself...read on, Trish!
Finding the Revenue
How does your nonprofit bring in money - grants? Donations? Memberships? Do you sell services or merchandise? What funds are available from your revenue? Essentially, how steady is your income, and what kind of funds are left over after you spend it on sustaining your programs?
The difficult thing about finding the funds to pay nonprofit employees is that early organizations do not typically have a steady income. Even established organizations that do have regular cash flow are still subject to the whims of the standard donation cycle, unless they rely on memberships or grants, which generally offer more stability. The donation cycle is quite cyclical - rather than money coming in at a steady clip, the biggest income usually arrives during the holiday fundraising season, in November or December.
The kind of uncertainty that comes with not knowing how much revenue your charity will make through donations means that there has to be a lot of wiggle room involved in the way you budget, set fundraising goals, and plan your fundraising events calendar. By having a thoroughly thought-out fundraising plan, however, you can usually ensure that you will not miss a paycheck.
You can apply for grants to pay nonprofit employees. Not all grants allow their money to be paid out to salaries, and are restricted solely to project operating costs. However, there are some without these restrictions. You may have to do the initial research on this yourself, but as your organization grows you can hire a grant writer to take on this project. They can then keep a fairly steady flow of revenue through grants that will make paying salaries simpler, since you will not have to scramble for the money.
The Benefits of Being a Salaried Employee of Your Nonprofit
One of the issues a lot of nonprofit founders struggle with is feeling guilty for taking money away from their mission to draw a salary. But try to shift your perspective. All the big nonprofits that are doing important work are where they are at because they invested in their mission by paying people to take on some of the high-level work. Here are some of the benefits to getting paid as a founder or executive director:
Getting paid will help decrease chances of burnout. If you are paid for your work with your nonprofit you can make it a priority, rather than a side activity that drains you.
You will be able to focus more of your time on your mission, and therefore see greater results.
You will set your nonprofit up for a sustainable future by investing in a steady, paid workforce. You need a dedicated and long-term staff to grow.
Experienced grant makers are not impressed with nonprofits that underpay their workers or that are run solely on a volunteer basis. You want these grant makers to be pleased, as they can offer a solid source of income for many nonprofits.
Pro Tip: The bottom line is that an investment in human capital is also an investment in your nonprofit organization. Do not be afraid to invest in yourself or the people that make furthering your mission possible.
How Much Does a Nonprofit Founder Get Paid?
There is no hard and fast rule for how much a nonprofit founder should get paid. The IRS offers guidelines, but not regulations. There are a lot of variables, including the size of your organization, your net income, your nonprofit’s location, your data from salary market surveys, and board negotiations.
The best place to start is to check out what the IRS has to say about the salaries of founders of nonprofit organizations. Their regulations state that a nonprofit director may be paid a reasonable compensation for services rendered. But what does that mean exactly? The IRS tends to judge reasonableness by comparing it to salaries from similar organizations.
Comparing salaries on this basis can be difficult to do, and there is some wiggle room here. However, it is best to follow "safe harbor" procedures when deciding the amount, so that you do not end up facing claims for excess benefits taxes if it is deemed that you are being paid too much for your work.
How to Find Salaries of Nonprofit Employees
To find that golden mean, begin by doing some research on what executive directors of other nonprofits in your area get paid. You can make some calls to these organizations and simply ask, or search job ads. You could even use Google. Simply type in what you want to know, such as "salary for program manager nonprofit" and your location to get results.
Guidestar publishes a Nonprofit Compensation Report that can be helpful to consult, while a Compensation Survey is available through the Association of Fundraising Professionals. Or you can check to see if your state has a nonprofit association - they may have salary information posted on their website.
When you have a good idea of the going rate, you can then decide how much to start paying yourself.
Convincing the Board
Now it is time to negotiate with your board of directors. Sometimes, especially in the first few years of a nonprofit’s existence, they can be reluctant to approve a salary for the executive director. It is easier to play it safe, especially when you have already been working for free all this time.
Oliver is having a chat with his board members – it looks like it's going well!
But kicking the ball down the road is not going to get you paid. Approach a member of the board and have them help you build a solid financial plan and presentation to show the rest of the board that coming up with a salary is the right choice.
When you earn a salary as a director at a nonprofit organization, you are required to disclose it to the IRS on Form 990. Your nonprofit will also have to report the amount of money spent on fundraising, programs, and administration. Finally, you will have to report the salaries of the five highest-paid employees as well as any contracts being paid over $50,000. Failure to report annually can lead to losing your tax exempt status.
Creating a salaried position for yourself as the founder of a nonprofit may require some careful thinking, and even bold action. Remember that you are working hard for your cause, and that this work deserves compensation. Be ready to defend your position. Do the research to find out what is reasonable, and present it with confidence to your board of directors. After all, you want to set a precedent for paid positions if you expect your nonprofit organization to grow and thrive far into the future.
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💡Can I pay myself in a nonprofit organization?
Absolutely. Fair work deserves fair compensation. You will just have to be sure that what you are being paid is considered "reasonable compensation" by IRS standards to avoid penalty. Find out more.
🔑 How does the founder of a nonprofit get paid?
Find the funds first by taking a look at the nonprofit revenue. Then do some research into what comparable nonprofits are offering their founders. Finally, put together a solid plan to present to your board of directors to get this salary approved. Find out more.