How to Pay Your Nonprofit’s Staff
A couple of weeks ago we looked at some key points regarding nonprofit executive compensation. This week, we want to take a closer look at best practices for paying everyone else your organization employs.
Payroll for nonprofits is a complex issue. Certain rules and exceptions apply that are different than what applies to for-profit companies. As if that complication isn’t bad enough, many nonprofits seem bound and determined to create their own rules and exceptions that are categorically incorrect… and destined to get them in hot water with the IRS and/or their state.
Fortunately, the principles we discussed last week apply to ordinary employees, as well as executives: compensation must be reasonable, due diligence must be performed, and all decisions should be made at arms-length.
In addition to those things, other considerations should be made. This article is going to focus on two big issues: 1) payroll classification and, 2) types of payments.
This is a biggie…and it gets asked about by clients on a weekly basis. That is, “Should I pay my staffers as employees or independent contractors?” 95% of the time, the answer is employee, regardless of any other extraneous information that gets tossed into the mix.
It is a widely-held belief that an employer has the choice under which status to pay its workers. The most common justification is the savings the nonprofit will experience if it doesn’t have to cover payroll taxes. The problem is, it’s not your choice. Even if your staffer agrees to be treated as a contractor, it may still be contrary to IRS and state regulations. The IRS, in determining whether or not a worker is a contractor or employee, looks at several factors. They are:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
- Type of relationship: Are there written contracts or employee type benefits, i.e., pension plan, insurance, vacation pay, etc.? Will the relationship continue and is the work performed a key aspect of the business?
The IRS also uses a multi-point test to evaluate such classification issues. Click here to see it.
So what are the consequences of improperly paying employees as contractors? Plenty! If the IRS reclassifies your workers from contractors to employees, your nonprofit will be held liable for both the employer’s and employees’ share of payroll taxes (Social Security and Medicare), plus very expensive penalties and interest. Then the state comes along to take their share. This type action, especially if it applies to multiple years, can put any business out of business.
By type of payment, we mean things like straight salary or wages versus bonuses and commission. The IRS calls the latter non-linear compensation…and it isn’t too fond of it in a 501(c)(3) setting. For-profit companies can do this virtually without limitation. But for nonprofits, the IRS considers this a potential open door to unreasonable compensation.
For example, Charity, Inc. hires two employees, John and Jane, who will be in charge of managing fundraisers. Each will be paid a small base salary, plus a percentage of the money raised at the event. Sounds reasonable, but the IRS says, “Not so fast!”
The reason makes sense when you consider the possible outcomes. Let’s presume that reasonable compensation, if fixed, for John and Jane is $45,000 per year. Let’s further presume that instead, John has a base salary of $20,000, and receives 10% of all money raised. John goes on to raise $125,000 this year, and is paid a total pay package of $32,500. It’s less than what his fixed compensation would likely be, so what’s the harm? Both he and the nonprofit are assuming the risk of John doing a poor or mediocre job.
The problem isn’t with John’s outcome. It’s Jane’s that is the problem. Jane also has a $20,000 base salary. But Jane has a stellar year, and raised $800,000 for her employer. As a result of her success, Jane is awarded $80,000 in commission, for a total annual salary of $100,000. The problem is, Jane’s job doesn’t really square with a 6-figure salary. The IRS could determine this to be excessive, should they examine the organization’s books.
Employees should be paid according to the job description of the position. Not only is non-linear compensation often unreasonable by IRS standards, it also opens the door to potential fraud, or at least improper conduct, as the employees have everything to gain by pushing the limits on fundraising.
This discussion barely scratches the surface. There are so many other critical issues from workers’ compensation insurance to employee benefits to hiring practices. Using compliant employment and compensation practices goes a long way to eliminating one of the biggest areas of IRS concern.
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This Post Has 90 Comments
I run a non-profit youth swim club. Can we use fundraising money to pay our coaches or only the money from swimmer dues as they currently are. We would like to give them a raise but want to make sure we can.
As long as you haven’t restricted the fundraising money by telling donors a specific purpose, money from any source can be used to pay the coaches. Read this to make sure: https://www.501c3.org/kb/what-are-restricted-funds/
I have a daughter who is 23 and autistic. My friend told me that she could establish a non profit and legally take a salary and not pay taxes. He said she could use the non profit as a career. This does not sound right, can anyone help me out.
It doesn’t sound right because it isn’t. Tax-free compensation belongs in the same category as Bigfoot and the Loch Ness Monster. It makes for entertaining conversation, but that’s about it. Being an employee of a nonprofit is no different than being an employee of a commercial business. In fact, nonprofits employee about 11% of US workers nationwide, and such employees (and employers) are just as liable for payroll taxes as anyone (with the possible exception of federal unemployment tax for the employer). I don’t know where she’s getting her tax advice, but it’s way off base.
I’m a small art studio, we have always hired contractors but I want to switch to W2s. How much more expensive would it be for me to make my contractors employees?
The main expense will most likely be the employer’s portion of Social Security and Medicare, which will amount to 7.65%. You may have additional costs should you choose to outsource your payroll processing or offer any kind of employee benefits.
I recently started a job as the bookkeeper at a church. There are a few of people on the payroll receiving nominal amounts such as $100 each bi-montly pay period for jobs like the church organist or choir leader. There are a couple of other positions which also receive the same nominal amounts of $100 per pay period but also receive a $100 per event commission for selling & coordinating events (such as weddings or memorials). The caretaker also receives $100 amounts for grave digging, for marker placement, etc. and for selling burial plots or niches. The $100 per pay period has been paid through payroll as a W2 employee with taxes withheld, but the commission incentives have been paid by AP checks with no withholdings. Am I right in thinking that all amounts paid should be processed through payroll with withholdings? If so,, at what rates?Paying through AP would trigger 1099s while also being issued W-2s. I have heard the previous bookkeeper issued W-2s for all amounts instead of 1099s, but not processing through payroll, I believe the amounts paid were under-withheld. How should we be handling these payments to these people? Thanks!
Great question, and your instincts are correct. All these payments should be processed through payroll with proper withholding. The same person could theoretically receive both a W2 and a 1099 in the same year, but it’s going to be a rare situation. It would require someone who is an employee also contracting business services to the same company and invoicing for that service. A 1099 reporting situation implies self-employment, which this is definitely not.
You have provided a wealth of information on this website. I have a question regarding a 501(c)(6). I have worked for a 501(c)(3) in the past for several years but I have been asked to help start a (c)(6). Funding for the association will primarily come from membership dues. Are salaries able to be paid out of the membership dues and will we need a board to determine salaries like a (c)(3)? Thank you in advance!
Yes and yes! To even qualify under 501c6, it is assumed that virtually all revenue is from members. And, the board’s responsibilities and accountability works pretty much the same regardless of particular “C” code section.
I think I know the answer to my question but would like some confirmation. I have a situation where the director of a local hospital foundation is an employee of the local hospital (not the foundation). The hospital provides compensation and benefits to the employee and doesn’t charge the foundation for that cost. The employee is additionally compensated by the foundation a “consulting” fee for services as well. A 1099 is issued for this. My feeling is the consulting fee is really additional compensation and should be treated as wages. Thus muddying the waters between employment and independent contractor. There is no contract for these consulting services either. Would like to hear your thoughts on this situation.
Without knowing more, I would tend to agree. I don’t see a valid 1099 situation with your description.
Thank you for all of your advisement and insightful responses. I recently started a NPO (six months) that focuses on collaboration and shared support services. I have been approached by a mission aligned NPO that would like my assistance on organizational development and partnership on a long term project. They prefer not to hire staff (until the project is more secure) and would like to “write the check” to my NPO interim. How would I distribute those funds to my salary and what if that is nearing the entire amount of my NPO revenue?
Facilitation and assistance given to other nonprofits can be a charitable purpose sometimes, but you need to careful here. If it is nearly all the NPO revenue and winds up as salary to you, it could be seen as your personal consulting business masquerading as a charity. This is especially true if your NPO has a rate schedule for its services. This is way too complicated a question for this forum. You would do well to seek professional counsel on this to avoid some nasty surprises.
We have a NPO for our sports team. How can we pay our coaches from the NPO?
Nonprofits can have paid employees. You just have to follow all the state and IRS tax rules regarding tax withholdings and everything else that goes with it. I recommend checking with your state department of labor and a payroll service like ADP for more specifics on the technicalities.
Hi Greg, I stumbled onto this awesome site at the perfect time. I am in the process of starting a non-profit 501(c)(3) organization that will address the performance gap in science and mathematics that exists between underrepresented students during middle and high school years. It is a residential program in the summer and an after school program during the academic year. I am looking to launch this summer (2016). I have a pretty good handle on how to pay teachers, tutors and resident advisors. However, I am struggling with how much to pay myself and an Administrative Coordinator: two full-time positions. I plan to appoint a Board, but I was going to wait. Until then, I thought it would be wise to receive a low salary 25k for me and 30k for my Administrative Coordinator. Do I need a Board of Directors before the program begins in order to determine these salaries, amongst other things?
Thank you in advance for your time and attention.
You need a board, stat. Both state corporate law and the IRS consider the board members to be individually and collectively responsible for the organization’s governance. In most states, you cannot incorporate without one (and you need to incorporate first thing) and the IRS will not allow you to apply for 501(c)(3) status without one.
As for compensation, you cannot set your own. The board must do this. If you will be on the board also, you will need to recuse yourself from votes that impact you. The amount of your salary should be based on comparable job requirements, tempered by the ability of the organization to afford it.
Hope this helps. Welcome to the site! Setting up new orgs is our bread and butter…if you need help, call us!
Thank you for your prompt response. I will call for sure.
I have a question! I have a 501c3 and looking to hire a college student for a summer internship where I pay her minimum wage. What is the proper way to set this up (e.g. tax forms, that I need to file, any withholding taxes i should pay, etc.)?
Second part of this is that she will be helping with fundraising and I was considering giving her a bonus at the end of the internship (at the org’s discretion) as an incentive but not sure if this kosher? Any other ways to incentivize an intern that’s legal?
Second question first: Don’t use a commission-type system to compensate your fundraiser. That practice is highly frowned on by both the IRS and fundraising professionals. A paycheck and the satisfaction of a job well done is really how internal fundraising is supposed to work.
With regard to question 1, the answer has a lot to do with where you are. States labor laws differ. I suggest a call to your state’s Department of Labor. Good luck, Monica!
Hi Greg. Thanks so much for responding. You answered my question perfectly! The other for-profit entities generate UBI, and those entities file 990-T’s. We’ll keep running the Founder’s salary as an employee. Thanks!
Love the information on this site. My question is we have a Board of 5 people that are not related but all work for the same for-profit company. Can the Executive Director of the 501c3 also be one of these staff from the for-profit? I think it’s a conflict.
It IS potentially a conflict, but not necessarily one that rises to the level of “can’t do”. Where you encounter “can’t do” is when co-owners of more than 35% of a for-profit company are on a nonprofit board together. The IRS considers them related.
My husband worked for a large 501 (c)(3) religious missions organization until recently. He raised his own funds(solicited contributions) and those contributions went to the organization and were then dispersed into his staff account, which he had some access to. His pay checks came out of that account. He left the organization recently and we asked them to return the funds in his staff account to us, as they were designated to him specifically. They are claiming that he has no right to them since they were given to the organization. This seems fishy to me. Do they have the right to withhold those contributions? Isn’t that misappropriating funds? Thanks in advance!
Maybe. It really depends on how the solicitation was communicated. If there was any disclaimer included that gives the organization final discretion as to use of funds, then they can withhold the money. It may not be fair, but it would be legal. If there was no disclaimer and the donor had every reason to believe the gift was exclusively for the salary benefit of your husband, then that does give you a position to claim less-than-fair treatment. The organization could claim that more money was raised for his benefit than he had currently earned. But that wouldn’t hold water unless he had been assigned a fixed annual salary, which I’m guessing he didn’t have.
My husband and I along with a very close friend are starting a non-profit basketball league in Alabama. I’ve recently filled out the Articles of Incorporation form but decided to research bylaws and compensations before submitting it. What I found was very confusing. We will be a small organization without members, and roughly ‘all’ the work will fall on me. I don’t mind doing so uncompensated but I couldn’t possibly dedicate the hours required and still pull night shifts at the hospital. My question is, could I serve on the BoD and still be compensated? If so, how do I distinguish both roles in the bylaws so as not to violate any governing rules for non-profits in my state?
Thanks in advance.
There is nothing unusual about a board member of a small organization also being a paid employee. You just have to remember that they are two different roles. A majority of your board should be volunteers (not employed or compensated). They can vote to hire you as an employee and assign a job description and salary. Make sure you are recusing yourself from any board votes that directly impacts your employment with the nonprofit, however.
I work for a non-profit organization that has several for-profit entities under the umbrella of the non-profit. Also under this umbrella, is another ‘entity,’ that we track differently via Classes, but it uses the non-profit’s tax ID. The founder of the non-profit receives a salary, but he also receives some amounts from the other ‘entity.’ Can he receive a salary (W2), and a 1099 at the year end? Would it be better to run all amounts as salary?
Sounds very messy, Nathan. Are these for-profits owned by the nonprofit? Are they separate entities? Is the revenue being generated considered Unrelated Business Income (UBI)? For-profits coming out from under a nonprofit is often a recipe for headaches of huge proportion. As for the founder, it’s best that he is paid strictly as an employee. That would be true no matter the questions to the above.
I started a nonprofit organization in October 2011 and tracked my hours working to develop it, assemble a board, incorporate, draft articles, by-laws, a website, etc. We incorporated in March of this year. I will not be taking an actual salary until we have enough funding to sustain it. Once funding becomes available, can I back-pay myself for the 563 hours I logged since October 2011? Thanks.
It is possible to defer compensation, but that is not your decision to make. You have a conflict of interest. Only the board can approve this and you must recuse yourself completely in order for it to satisfy rules of arms-length dealing.
Very well written and informitive. And I do believe employers have the right to control behaviors of the employee during working hours.
I’m so grateful for your answering all of these questions. It is quite helpful and you are a great resource!
I am chairman of the board for a 501(c)(3) and we are hiring our first employees effective as of 3/1/12 (tomorrow!). Based on my research, it appears that we need not pay FUTA, but will have to withhold federal income tax as well as Social Security and Medicare. Further, because our quarterly tax liability in the aggregate will be < $2,500, it appears that we need not make monthly electronic tax payments, but can pay such amount with Form 941 on a quarterly basis.
Do I have all of this right?
Anything else that I should be aware of??
First, sorry for the delay in answering what appears to be a time-sensitive question. Second, you are right about FUTA, but watch out for SUTA. Many states have odd requirements concerning SUTA. While they may say that nonprofits are exempt up to a certain number of employees, many consider noncompensated board members to be “employees” for purposes of calculating SUTA liability. Watch this for same thing for workers’ comp.
Hey Greg, Thanks for the article. I have a question regarding interest earned by non-profit bank holdings. Say the NPO has 100,000 in the bank and earns 5,000 in interest by years end, what sort of limitations are there with how that 5,000 is handled? Does it count the same as revenue, or can it be spent freely?
There should be no limitations on how the interest earned is spent. It will be reported on Form 990 as interest income.
We have a small non-profit (under 2 years) that currently supports a charter school in the Washington DC area. The school offers a 20/hr stipend for a few hours every other weekend as part of an afterschool/out of school program. I saw an opportunity to help staff with friends I know in the Arts. Our organization is currently teaching DSLR photography, Theater, Photoshop as well as other facets of the Arts and my organization pays the teachers 25/hr plus the purchase of cameras, supplies and field trips for the kids.
My question is, one of my arts instructors recently asked me if they were supposed to get a 1099 form from me? I want to make sure that I’m doing the right thing. Do I provide her with this form? I know it’s involves reporting the income. I believe we paid her just short of $600 over a 4 month span for work she was doing plus an additional $275 for additional supplies and such.
Please help. thank you
Assuming these payments are made directly to the individuals and are for services rendered…and the teachers are not freelancers who bill for their services…the proper treatment is as employees on Form W2. 1099-MISC is reserved for independent contractors in business for themselves.
My wife has been working for a nonprofit organization for over a month now. She started out on the phones but was promoted to Office Manager all within the same week. The board stated to her, her starting salary was $22,000 a yr plus $25% off all donations she brought into the office. The CEO told her they get paid every 3rd of the month ($1833.00). Its time for the CEO to pay my wife and now the CEO is saying she can only pay $300. This is after 40hr per week of work, having an alarm code and getting a key to the office. Also her salary has been dropped to $100 per week, which she has to raise herself in donations.
We have just learned that CEO just put out a grant saying that my wife is being paid $35,000 a yr. Also there was a two day fundraising event that was sold out this past weekend. All proceeds total $4500. The CEO told my wife she would pay her after this event was over. Hasn’t happened yet
I told my wife to call EEOC and see what they could do. Who can she call besides a lawyer? What proof will she need when talking to someone?
The EEOC won’t get involved in this mess. Why complicate your own life by getting pulled further into the chaos? Just move on and call it a lesson learned. If the organization is run this way, it won’t last long anyway.
Hello, Greg. I am starting a non-profit tutoring co for home schoolers. We are still in the process of filing for incorporation and non profit status, tax exempt status. My church has agreed to house us, but I plan to have separate non profit status and keep the funds totally separate. I plan to pay the tutors, who may only teach a course for a small period of time. (A week or two at a single time, or one day a week) but it will only depend on money if we have it available. There may be core classes taught on a regular basis, which will require a full time tutor. (3 days a week) I will need to be compensated regularly, and so will the assistant director as we will be full time as well. What is the best way for us to file taxes to pay ourselves and to pay our employees? Or should I call them volunteers?Could I pay them part time as a gift and full time with as “self employed” status. I do not even know if I will be able to have a consistent hourly/salary rate. I do not expect it to be a huge organization, but I will still need to pay people. I plan to tell them up front that it is volunteer. I just need to know if there are funds to pay them/myself, how should I file taxes?
Alice…They MUST be paid as employees if you pay them at all. They are not contractors, nor volunteers. You will have to withhold and match taxes just like any employer. I realize this gets really tough when pay is expected to be irregular, but you risk state and IRS misery if you treat them as anything other than paid staff. You may wish to consider a payroll service to help you keep this straight. We have a business partnership with ADP and can help if you need it. Good luck!
Can officers be paid a salary or hourly wage? I am VP and Secretary of my nonprofit and my fiance is President and Treasurer. We have three other people on the board. My fiance and I will be doing absolutely all the work in the company. Fundraising, administrative, day to day everything. I’m completely confused on what role we are supposed to be or call ourselves to be paid.
You can’t be paid for board and/or officer duties, but you could be hired as an employee if you are responsible for actual activities. Keep in mind the conflict-of-interest. A majority of your board must not be employed by the organization…and, the non-employee board members would be solely responsible for determining compensation of the employed board members.
I am the executive director of a new faith-based 501(c)3 nonprofit. Prior to this, I was a pastor. My denomination has allowed me to maintain my ministerial license as I am serving in what the consider to be a ministry capacity, though the organization is unaffiliated with the denomination.
I am wondering if my salary can be structured to include a housing allowance as ministers serving in churches can. Additionally, I have opted out of social security under the ministerial exception. Would my salary in this capacity be required to pay social security taxes or would this still fall under the exempt category?
Great questions, Corey. The answer is “maybe”…the devil is in the details on this one. In order to qualify for ministerial tax status, the significant majority of your job function would have to be ministerial in nature. It’s possible, but a much more narrow window than what you had as pastor. Since this has substantial impact on your finances, you may wish to contact us for a paid tax consultation. It’s critical to get this right.
I am one of several incorporators forming a 501c3 not for profit corporation in partnership as an Advisory Team with our neighborhood community center for the benefit of the public (youth, parents and seniors). Is is lawful to hire staff in these types of organizations or hire any of the incorporators as paid staff? I am currently taking on many administrative tasks as V.P. and wanted to know if I could receive a reasonable compensation (although this is not a great issue–I enjoy what I do)? I am l looking forward to your reply back.
Great question. It is OK for a board member to also be a paid employee, but it is not a best practice due to the conflict of interest. If it is absolutely necessary, make sure all compensation decisions are made by the non-employed board members. It is NOT OK to be paid for your service as a board member. I have to say, though, that the administrative duties that come with being VP is part of the gig. You shouldn’t expect to get paid for it. As someone who sits on 3 boards right now, I understand the time it takes as a volunteer…it just goes with the territory. If the administrative duties you mention are really that of a staff member and not part of the VP role, then a paid staff position may be appropriate.
I highly recommend checking out our 501(c)(3) University webinar series. There are several sessions on boards and governance that would be very helpful to you.
I am currently paid as a salaried exempt employee, though I should be a non-exempt. I am often times working over 40 a week, sometimes close to 60. I am taking my first vacation in 4 years and they are trying to decide if I “deserve” to get a check. I love this place and I don’t want to ruffle any feathers but I also feel slighted about them considering to not pay me. I suppose I am interested in advise on how to approach them about their payroll practices withough coming across as greedy. That being said, if we do make the switch to non-exempt how does one get paid for on-call services?
My friend, I wouldn’t worry about sounding greedy. It sounds like you are being taken advantage of and they are happy to oblige your silence. By saying “exempt” employee, I assume you mean exempt from OT rules. I’m not an expert in all-things-HR, but I know there are a number of strategies to being paid OT if your on-call time actually results in you having to go to work. I gotta say, if this is your first vacation in 4 years, your services are taken for granted, not valued. Big difference.
Many of my questions about compensation and serving the dual role have been answered by previous inquiries above, however, is there a certain point to where an NPO (501(c)(3) specifically) must have sufficient funds to pay a salary to an employee? Obviously there would need to be enough funds to cover a salary, but is there a point to where it is not legal? For instance, if an NPO raised $80k annually, could the E.D. legally make $60k if a majority of the NPO’s work is service based (if that even matters), or is there something preventing NPO’s from using a majority of their funds towards salaries? Additionally, if the E.D. is also a board member, does there need to be a written contract formed by the majority Board members or is a verbal contract ok?
You’re always on thinner ice when payroll makes up that much of a nonprofit’s budget. That being said, this can often happen in small service-based NPOs. Make sure the contract is in writing and that the ED has no role in determining compensation. All HR decisions regarding his employment should be with his recusal.
I have a question. I am a volunteer bookkeeper at our non-profit church. The elders and Pastor decided that they wanted to give me a Christmas bonus. I’m thinking that it’s not legal for them to do that. Am I correct?
The reality is, even if you were not a volunteer, a bonus is still wages for tax purposes. It would be fine for them to give you a token appreciation gift, like a gift card or something…even cash. But, the general cutoff point for such gifts (or “bonuses”) is about $75 before it has to be considered taxable income to you.
I am getting ready to go onto payroll as of 1/1/12. Would it be acceptable to just start my payroll start date a few weeks early and run it through payroll now? Or, would the IRS look at that as just a way to get around the cash gift giving. By the way, it’s $200 and was given to me in cash.
Not sure I understand the question, but if you’ve been paid by the organization for services rendered, it should be considered payroll as of the date paid. Hope that helps.
First of all great website! My question is as follows…I work with some music recording artist that have their own label and they are interested in starting their own foundation or charity. Is this the same thing as starting a non-profit? They have many opportunities to receive funds donated to a charity, organization or foundation of their choice and I thought it would be of benefit to have a foundation in their name.
In addition to donating some of those funds wouldn’t they then be able to pay contractors from those donated funds? I say contractors because their singers, band member and administrive staff very. (they work with other people & companies as well) I’m trying to find out how else those funds could be used for their business if they had their own foundation.
Thank you for the time and help.
Yes…when someone talks about setting up a charity or foundation, they are talking about setting up a nonprofit. Any donations given to such a nonprofit, however, could not be used to pay the normal expenses associated with the artist’s work. The nonprofit could pay for its own, legitimate overhead, but not the artist’s.
I am looking to start a non-profit organization for youth sports as well as enrichment classes such as computer classes and photography classes. I have my fiance as well as someone who would like to be in charge of a specific sport. Can just us 3 start this and be the board members as well? Or do we need to ask people to be on the board? We would be the only 3 running everything as well as getting paid.
It's OK to have one or more of your board members also be paid employees, but they must be in the minority. A majority of the board cannot have a financial stake in the organization. That's the only way you can avoid having an obvious conflict-of-interest situation become prohibited private benefit.
In our 501(c)(3), members of our board are also employees of our organization. They are not being paid as board members, but as positions in the company. We have a law student, telling us this is a problem, but legal counsel says it is not. Thoughts?
Let me add that neither of these employees are paid. They are compensated for being in the positions they hold within the company not on the board.
Your follow up confuses me a bit. I'm not sure how you can have unpaid employees, but I'll try to answer what I think you are asking. Both your law student and attorney could be correct. It is OK if a few board members also serve as paid employees of the organization, though this is not necessarily a best practice. Just make sure a majority of your voting board are not employees…and each one that is must recuse themselves from any discussion and votes regarding their own compensation. As the organization grows and matures, you should strive for as few board members as possible operating in both roles. In no event should board members be paid for board service. Hope that helps.
When a 501(c)(3) hires staff are they compelled to advertise the position first or can the CEO just hire whoever he wants to?
If a 501(c)(3) "runs out of money" can they terminate a paid staff member's employment immediately ?
Nonprofit hiring and firing decisions are mostly the same as in a for-profit. If the board authorizes the CEO to have exclusive hiring and firing authority (with the exception of putting a board member on paid staff), then it should be fine. There is no more requirement to advertise an job opening in a nonprofit than in a private business. Firing someone should be about the same as well.
I work for a 501(c)(3). I raised my own "support" in order to live. The organization has never taken any moneny from my wife & me. Right now they are upset with me for some unexplained reason (I could guess why but let's not speculate). Do they have the right to withhold my support, which I raised from private donors?
Probably not. If the organization employs you and allows you to raise your support, they have sanctioned your solicitation of funds. These funds are then restricted to the use for which they were solicited…your compensation. Hopefully you can get this worked out.
I have been working for a 501(c)3 museum now for about a year and a half, and there is no medical plan here- is there any organizations or anyone who offers health insurance to employees of a non profit? We don't make enough money to get the employees insurance but several of us need it.
Don't know of any. Since health insurance tends to be a state-by-state issue, you may wish to direct this question to your state's insurance commission.
I am aware of a nonprofit org that is abusing its status. The CEO has a board of directors that are supposedly his check and balances. However, that BoDs are put in place by the CEO. They will never ever go against the CEOs wishes. The CEO takes donated items such as cars and keeps them for himself saying he made a cash donation to the org. The CEO has a small group of followers that are rewarded with unreal salaries and benefits while workers are scolded for asking for a voucher for repayment of small items. All vacation time is use or lose for all office workers. However the "click" banks there vacation to the tune of years of banked vacation pay to recoup upon retirement. Lavish parties, golf outings, leased vehicles, huge bonuses and salary increases are all unjustified. I would never donate to the NP knowing these things are going on. My question is, how do I move to get this NP audited and still be able to stay out of the limelight. I cant afford to be dragged into this mess in this small community.
That's a tough situation. While complaints can be made with the IRS's Exempt Organizations division, you may get more traction by contacting your state's charitable solicitations department. Just make sure your complaints have merit. Don't open a can of worms without due cause.
I'm working for a nonprofit right now that teaches workshops & does performances to raise money for three different charities, we are only 2 years old & working on getting our 501(c)3 certification now. Our staff is entirely volunteer, but it's becoming difficult for some of the people who do the more extensive work to balance that with their full time paying jobs, so we'd like to start paying our core staff. The problem is, we're really just a community of artist that started doing this out of a friends apartment for with no money, & we have no real clue when it comes to the laws & money & business aspect of things, so I'm wondering really how we would even begin to go about building a structure to pay people.
The decision to start paying staff is a big one. But, it works the same as any business paying people. In your case, it sounds like you need help raising money first. I highly recommend you become familiar with our friend, Sandy Rees, and her website. She is an expert in organizational funding and her writing and materials will help you.
Greg – Our private golf club is classified as a 501 (c) – I would think we should be classified as a 501(c) (7). Is there a difference between the two classifications? Also, what are the specific benefits of being classified as a 501 (c) (7)- is there a site I can go to that lists the benefits? thanks tom
Hi, Tom – There is no generic classification of 501(c)…you must be something. Given that you say you are a private golf club, the most likely case is that you are categorized as a 501c7 already. Go to <a href="https://www.guidestar.org” target=”_blank”>www.guidestar.org and look up your organization to see how you are classified. As to information on 501c7 status, you can learn a lot by checking out IRS Publication 557, which is downloadable from the IRS website.
I am on the board of a small non-profit in my community. We are thinking about hiring a full time employee but are a little afraid of this step. The only way we could would be by receiving regular donations from local donors. It's kind of a merry go round, we can't research and get these donors without someone working on it full time. We can't afford to pay an employee without regular donations coming in. What do you suggest for us to do?
The merry-go-round analogy is a good one, Robin. Yours is not the first organization to find itself in such a place. Money has to be available to meet a payroll, so you may find the only thing you can do is burn the candle at both ends to raise enough money to make your hire. It's tough work, for sure. Good luck!
Are there grants to assist with paying an employee? I have been looking and can't seem to find one. I have heard these grants exist. I am trying to find the funds to pay an employee for our nonprofit.
Extremely unlikely, Robin. Grants are typically given to help an established nonprofit further an already existing, successful program. Some of that money could be used to pay essential employees, of course. New organizations have a very hard time seeking grants…and I've never heard of a grant solely for the purpose of hiring staff.
Is it reasonable for the founder of a charity organization to pay himself as Executive Director $198,000 annually for a forty hour week? Also, is it required under a 501c(3) classification to report the number of clients (in this case amputee Veterans) that are being helped by the charity, either on their homepage or tax return or make it public record in some manner?
I'm very leery of answering these types of questions, because invariably my answer is taken back and used as a weapon. Forgive me for being a cynic, Craig…once bitten, twice shy. Let me try to answer your question generally.
First of all, I have no other information than what you provided above, which is not much. $198,000 may be quite reasonable, depending upon the size of the nonprofit, the scope of the programs, the executive experience required for the job and even where the nonprofit is located. It is not unusual for a larger organization to have to pay amounts of that size in order to get the talent needed. It IS unusual overall, but mainly because most 501(c)(3)s are not that big. In your case, you say the E.D. is the founder and he's paying himself. Technically, the organization is paying him. The problem comes in if this person established their own salary. It's up to the board of directors to hire this person and establish a fair rate of compensation. If this person is also a board member, they should abstain from any self-dealing. Otherwise, you've got a case of inurement going on that could get some folks in hot water potentially.
Reporting in the manner you mention is done by filing Form 990 with the IRS. That annual information return should contain most, if not all, of the information listed. These returns become public record and can be accessed at <a href="https://www.guidestar.org” target=”_blank”>www.guidestar.org . In order to see the Form 990, you must register for a free account.
PLEASE…do not go to this person or the board and say, "Greg McRay from Foundation Group says you guys are in big trouble". My answer is a gross generalization based on very limited details. But, I hope you get the general idea…and, that you find what you're looking for.
I actually have two questions regarding non-profit and payroll.If a non-profit chooses to pay their hourly rate employees only bi-monthly shouldn't there be at least twice a year that a 3 week pay is received? When you add it up – several employees are being cheated out of four weeks of work. Also, is it average for a non-profit to pay it's executive director a salary of $40,000 + as well as bonuses.
When you are paid bi-monthly that means twice per month, or 24 pay periods per year. Bi-weekly pay means every other week, or 26 pay periods per year. In either case, employees paid by the hour should be paid the same on an annual basis. I'm not understanding how anyone is getting cheated. For example, if an hourly employee makes $10 per hour, they would make roughly $20,800 per year (assuming a 40 hour week). If they are paid bi-monthly, then each paycheck should be $866.67 ($20,800 / 24). Likewise, a bi-weekly employee would receive $800 per paycheck ($20,800 / 26). Either way, it should work out the same. Often the confusion comes in when hours vary and people are paid according to time sheets. But even then, as long as the paycheck reflects the proper pay for hours worked in that pay period, there should not be any problem.
As to the executive director question, everything is relative. There is no average. If the organization is large and the job description considerable, $100,000 may be low. Likewise, for a small, struggling charity, $40,000 may be quite excessive.
Is it OK for IRS that our npo contracts an employee for four month to do some specific works on fundraiser activities, by only one payment?
Your question is short on details, but generally it should be fine. The IRS has no specific requirements regarding frequency of pay periods. Hope that helps.
Is it out of the ordinary to have the Executive Director of a nonprofit be the only executive receiving a salary? I'm interested in developing a nonprofit program that promotes educational achievement, community service and the performing arts in under developed communities in both rural and urban environments by awarding scholarships in said areas for students to attend private high schools and to attend college. I would be the only person managing the process, with the assistance of administrative tasks, accounting tasks and lawyer fees paid on an as-needed basis and not as employees of the organization. Can I be the only staff member receiving a salary? Naturally, as the organization grows, I would consider bring on permanent, paid staff.
Not unusual at all. I assume from your comments that you are the founder…and will likely be a board member. That's OK, so long as it is the rest of the board who hires you and establishes your compensation package. Remember that the position of Executive Director is usually a hired management position, not a board position. So, if you are both a board member and prospective employee, make sure you observe arms-length requirements. See our prior article on Nonprofit Executive Compensation.
I work for a non-profit organization and the board that is responsible for our paycheck claims that no law forces them to pay the employees if they dont have enough money. i just want to know if thats true?
Wow! That's pretty bold…and stupid. While there is no law forcing an employer to not layoff employees, there certainly is a law about refusing to pay those who have already earned the money. That sounds like a good way for a nonprofit to find itself facing a lawsuit.
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