Nonprofits can pay their staff—IRS guidelines permit compensation for employees, including founders and executives, as long as it is reasonable. Salaries should be comparable to similar roles within the sector to avoid penalties for excessive compensation.
These organizations face unique challenges in funding and payroll management, making it essential to know exactly how nonprofits pay employees. The process is similar to paying regular employees of a for-profit company—with the crucial points of classifying employees correctly and ensuring compensation amounts are correct.
Key Takeaways:
- Ensure salaries are reasonable and align with strict budgets.
- Use multiple funding sources to secure sufficient income for payroll.
- Founders can be paid, but compensation should be board-approved and reasonable.
Step 1: Classify Compensation—Employee or Contractor?
Classifying compensation correctly is crucial for maintaining nonprofit status—if you understand the types of employees you have, you’ll know how to pay them.
Understanding the difference between employees and contractors helps determine how to pay workers properly. Misclassification of workers can have severe legal and tax implications. If employees are misclassified as contractors, the nonprofit could face back taxes, penalties, and interest.
Proper classification criteria include control over work hours, job duties, and the method of payment. Here are two major things to keep in mind:
- Employees receive regular wages and benefits, while contractors are paid per project without benefits.
- Employees often have set schedules and direct supervision, while contractors have more flexibility and independence.
Compliance Note: Volunteers are NOT considered as employees in payroll, and are also paid a bit differently. First off, the amount to be paid must be nominal—meaning insignificant and irregular. The DOL doesn’t consider payments over 20% of what you would pay a full-time employee to perform the same services to be nominal. Learn more about it in our ultimate guide to nonprofit payroll.
Step 2: Determine Amount Nonprofit Employees Will Be Paid
Apart from following federal and/or state minimum salary regulations, nonprofits can use salary surveys and industry reports to gauge competitive wages, ensuring they align with similar organizations. This approach clarifies how nonprofits pay employees fairly.
Job descriptions and roles play a crucial part in setting salaries. Clear, detailed job descriptions help define responsibilities and expectations, making it easier to justify compensation levels. Understanding specific roles is vital for how to pay employees in a nonprofit organization accurately.
Ensuring competitive but reasonable salaries is essential for attracting and retaining talent while maintaining fiscal responsibility. Nonprofits must balance offering attractive salaries with their budget constraints. Transparent and justified compensation practices demonstrate how does nonprofit pay employees appropriately.
Nonprofits are not exempt from paying minimum wages, so you’ll need to ensure you’re adhering to the minimum wage laws where your employees work.
How to Find Salary Benchmarks for Nonprofit Employees
To determine nonprofit employee salaries, you can start with public records and Form 990. Nonprofits must file Form 990 with the IRS, detailing organizational finances and executive compensation. These filings are public record.
Salary surveys and industry reports offer another valuable resource. Tools like the Nonprofit Times Salary Survey provide insights into salary standards across the sector.
Online databases and resources also prove helpful in finding salary information. Job board websites often collect anonymous salary data from employees, offering a broad view of compensation trends. Utilize these platforms to verify how to pay employees in a nonprofit organization competitively.
Document all compensation decisions thoroughly, including salary surveys and board approvals, to ensure compliance. Board oversight is crucial to prevent conflicts of interest and maintain ethical standards.
Step 3: Pay Nonprofit Employees
The simplest way to ensure payroll is correctly handled is to use structured payroll software. These systems manage all aspects of salary disbursement, including calculating wages, withholding taxes, and maintaining records. While there are a lot of payroll software available, it’s best to use a system that’s dedicated to nonprofits—check our best payroll services for nonprofits guide for some options.
While fairly straightforward, it’s important for employees to be paid properly and on time. Here are a few things to keep in mind.
Step 4: Pay Founders and Executives
Paying founders and executives—including yourself—in a nonprofit organization requires adherence to specific guidelines. You must ensure that their compensation is reasonable and justified. This practice is essential for how do nonprofits pay employees fairly and legally.
Clearly document all compensation decisions, including the rationale behind salary levels. This approach helps explain how to pay employees in a nonprofit organization while maintaining accountability.
The board of directors should review and approve executive compensation to avoid any conflicts of interest. This process ensures that how a nonprofit pays employees, especially its leaders, remains above board and within legal confines.
Factors Affecting Nonprofit Employee Compensation
Several factors influence how nonprofits determine employee compensation. Understanding these factors helps ensure fair and competitive salaries.
- Budget constraints: Nonprofits must balance mission-driven goals with limited resources. Prioritizing program funding over salaries makes prudent financial management essential.
- Market conditions: Offering competitive salaries is crucial for attracting and retaining talent. Understanding market rates helps nonprofits offer compensation that is competitive without overspending.
- Organizational size: Larger nonprofits with substantial funding can afford higher salaries. Smaller organizations may have more restricted salary structures. Operational scale dictates compensation based on available resources.
- Job function and responsibility: Higher-level positions with more responsibilities command higher salaries. Clear job descriptions ensure fair payment based on roles and duties. This is critical for understanding how nonprofit employees are compensated relative to their positions.
How Nonprofits Pay Employees Frequently Asked Questions (FAQs)
Nonprofits fund employee salaries through a mix of donations, grants, membership fees, service fees, and endowments. Effective financial management and diverse funding streams ensure they can meet payroll obligations while fulfilling their mission.
Yes, founders and executives of nonprofits can pay themselves a salary. However, the compensation must be reasonable and justified, with board approval and proper documentation to avoid conflicts of interest and ensure compliance with IRS guidelines.
No, nonprofit employees typically cannot accept tips. Accepting tips may conflict with the organization’s policies and could lead to ethical concerns or mismanagement of funds.
Nonprofits determine salaries based on budget constraints, market rates, job function, and organizational size. They conduct salary surveys and benchmark against similar roles in the sector to ensure competitive and fair compensation.
Yes, nonprofit salaries for key executives are public information. Nonprofits must disclose executive compensation on IRS Form 990, which is available to the public. This transparency ensures accountability and trust with donors and stakeholders.
Bottom Line
Nonprofits must pay their employees fairly while adhering to typically smaller nonprofit budgets. Proper classification, payroll software, and diverse funding sources are essential for sustainable nonprofit payroll management.
