how-do-nonprofits-pay-their-employees

How Do Nonprofits Pay Their Employees?

Danica

Nonprofits are not just bound to volunteers; they can have employees like any other organization! Although, there are specific regulations and guidelines that dictate nonprofit employment. In this article we will tell you what you need to know regarding how to pay your employees and share nonprofit tips that will help you come up with the most applicable salaries. 

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how-do-nonprofits-pay-their-employees-are-nonprofits-allowed

Are Nonprofits Allowed to Pay Their Staff?

The short answer is: yes, absolutely! While nonprofits can get a lot of mileage out of volunteer labor, most do hire full-time staff in order to centralize and strengthen those responsible for deciding how the nonprofit is run and the direction it will take, while ensuring everything operates smoothly. 

Because the term nonprofit seems to imply that charities do not generate profit, many people wonder: "do nonprofits make money?" The answer to this, of course, is also yes; nonprofits need to earn revenue to not only help them further their cause or provide a public service, but to allow them to pay their employees so that they can work toward effectuating their place of employment’s objective. A nonprofit makes money just as any traditional business does. The difference with a nonprofit lies in how that revenue is used. 

how-do-nonprofits-pay-their-employees-are-nonprofits-allowedLouis is happy to hear that nonprofits are allowed to pay their employees!

Any money organizations make must be legally spent on their mission. So as long as your nonprofit employees' primary roles are working toward furthering your nonprofit’s stated mission, you can (and should) compensate them. 

how-do-nonprofits-pay-their-employees-main-sources-of-income

What are Nonprofits' Main Sources of Income?

A nonprofit can earn money in a variety of ways. The best way to establish a healthy and thriving organization is to pull from several revenue streams. 

Donations. Public charities like 501c3 organizations must derive a certain percentage of their income from the public. This is typically done through a series of fundraising events held throughout the year, in the form of email appeals, P2P campaigns, galas, walkathons, silent auctions, and more. 

Grants. Nonprofits may also apply for and receive grants from government and private foundations. These do not typically comprise a main source of income, but can bring in anywhere from thousands to even millions of dollars that help fund special initiatives or help to build the organization. Certain grants can be used to pay nonprofit employees. Many nonprofits have a full-time grant writer on staff (a paid position) because the grant application process can be both lengthy and complex. 

Earned Income. Nonprofit organizations may also earn money through the sale of goods and services. For example, a charity can run a thrift shop or a university could sell tickets to musical or sporting events; many nonprofits choose to sell merchandise that increases their brand awareness and improves their bottom line. Smaller nonprofits may sell tickets to a conference or seminar.

Memberships: This is a special type of relationship in which a contributor subscribes to your organization with the expectation that they will receive something in return. This can be a spot on the board, access to certain events and services, updates and memorabilia regarding a beneficiary’s status and well-being, merchandise, and more. Members should feel intimately tied to your organization in a way that makes them liable to contribute again and again - consistently, and with a feeling of purpose.

Pro Tip: Memberships and grants are some of the most reliable sources of income because you can count on them to be routinely fulfilled and paid out to your organization. Unlike donations, which can be made sporadically, infrequently, and perhaps just one time by a great deal of donors, members reliably provide revenue as long as they are happy and satisfied, and grants unfailingly do so as long as their requirements are met.

how-do-nonprofits-pay-their-employees-how-are-employees-paid

How are Nonprofit Employees Paid? 

Nonprofit employees are paid the same way that any employee is paid. They receive a salary that is determined by their position, and can receive bonuses based on their performance or any additional time they spend working beyond what is required of them. 

An important thing to remember when it comes to paying your employees is that nonprofit payroll is subject to most of the same payroll taxes as for-profit organizations. These include Federal Income Tax Withholding (FITW), Social Security and Medicare (FICA), and State Unemployment Taxes (SUTA). 

501c3 tax-exempt nonprofit organizations are exempt from paying Federal Unemployment Taxes (FUTA), but will have to either pay into their state’s unemployment program or opt-out and directly pay any unemployment incurred by former employees. 

Pro Tip: If your organization can fit it into the budget, your best bet is to hire a human resources or payroll expert. These professionals truly understand the ins and outs of payroll tax rules and can manage the minutiae of the pay schedule. If this is impossible, at least invest in a good payroll software system. 

How Much Should Nonprofit Employees Be Paid?

Like any other employer, nonprofits are required to follow both federal and state law regarding hours and wage. Federal minimum wage needs to be paid at the rate of $7.25, unless the nonprofit’s home state has a higher minimum - then that amount must be paid. Any employee that works over 40 hours in a work week may be entitled to overtime compensation. 

how-do-nonprofits-pay-their-employees-how-are-employees-paidSadie is having a good think on how much to pay her employees!

How to Find Salaries of Nonprofit Employees

What your nonprofit employees are paid depends on a number of factors: your organization’s size and location; the duties and responsibilities of the role in question; a recruit’s experience and qualifications; and more.  For example, if your nonprofit is located in NYC, you will pay higher salaries than if it was located in Ohio. Likewise, a position that requires a Master's degree is naturally going to offer a higher salary than one that requires a high school diploma. 

A good way to get an idea of what is fair to offer your recruits is to do some comparison research. You can type something as simple as "salary for program manager" along with your geographic location into your search engine of choice and check the results. But even more specialized help is available through the websites of many state associations of nonprofits. Some of them conduct regular surveys that collect data from organizations in their area regarding salary and benefits, and they allow you to search salary specifics by nonprofit size and location. 

Pro Tip: There are some practical benefits to paying out salaries. If you want to compete with traditional businesses in hiring the most talented employees, you need to offer attractive compensation. You also want to avoid high turnover of your workers. Essentially, if you want your nonprofit to thrive, you want to both hire and keep the best people - just like any business. 

Can I Pay Myself in a Nonprofit Organization?

The founder of a nonprofit will often struggle with the idea of drawing a salary for their work. They become accustomed to thinking of their work as their mission, and can feel guilty about getting paid. But fair work deserves fair compensation, and a paid executive director can avoid burnout by devoting all of their energies to the organization.  

A nonprofit board of directors must approve the salary proposed in regards to the executive director or CEO. It is a best practice that the board makes this decision because it negates the potential for overcompensation or conflict of interest. The board of directors should review an entire compensation package including bonuses and benefits. They should then meet to review this amount annually. 

Pro Tip: Remember when calculating the salary for your employees that you need to consider the amount added by benefits and bonuses. The total amounts will be scrutinized by the IRS to ensure that there is no private benefit prohibited under law. 

how-do-nonprofits-pay-their-employees-protecting-tax-exempt-status

Protecting Your Tax Exempt Status

Paying the employees of your nonprofit fairly will help you protect your tax-exempt status. The process of filing a Form 1023 is a long and involved process, and you are required to report nonprofit finances annually. The IRS will review the highest paid staff as part of Form 990. Any amounts that are not deemed "reasonable compensation" under the admittedly vague language of the IRS can be penalized to the point where you lose nonprofit status. This means that you need to be extremely careful when setting salary amounts, especially for your directors. 

how-do-nonprofits-pay-their-employees-final-thoughts

Final Thoughts

While working at a nonprofit organization offers any number of nonmaterial benefits like emotional fulfillment, variety, and excitement, at a certain level it becomes essential to be paid for your work. 

It is a good idea when first launching your nonprofit to give some thought to employee salaries - even if you are not quite at the point of hiring yet. While hammering out the basics like your nonprofit bylaws, figuring out the best bank for nonprofit accounts, and choosing volunteer management software, the board should at least begin outlining salary ranges for basic positions. 

It is important to remember that salaries for your employees should be fair, even enticing, but above all must be reasonable. The IRS takes their guideline of reasonable compensation seriously. Obtaining tax exemption is something of a sacred trust, and your nonprofit is expected to adhere to all regulations or risk losing it. 

Working for a nonprofit is a valuable and uplifting experience and often attracts high-level talent. Hire the best and make sure that your recruits remain passionate by offering good wages and benefits, and your organization is sure to thrive!

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FAQ

💡Is a nonprofit allowed to make money?

Absolutely. A nonprofit is expected to make money, because without money it can’t be expected to function. What makes a nonprofit different than a for-profit corporation is that it must follow a series of rules and regulations about how it spends income. Money received must be put back into the mission or into the nonprofit operations (this includes paying employees). Find out more. 

🔑 Can a nonprofit pay its employees?

While volunteers are the lifeblood of the nonprofit, most of these organizations hire people into specialized roles that require compensation. Not only can they pay these individuals, they should. Find out more. 

📝 How are nonprofits employees paid?

Nonprofit employees are paid the same way for-profit employees are paid. Minimum wage and labor laws apply to nonprofits, and payroll is set up in a very similar way. There are a few exemptions or exceptions available for nonprofit payroll if the corporation is 501c3. Find out more.  

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Danica
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