Yes, you can pay yourself a salary if you run a nonprofit organization, provided the compensation is reasonable, not excessive, and approved by a board of directors. As a founder or employee, you must perform necessary work for the organization, and salaries must align with market rates for similar positions at comparable organizations to avoid tax penalties.
💡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.
Yes, founders, board members, and nonprofit employees can earn a salary. But the IRS has strict rules on how much you can be paid, how the salary must be approved, and how to avoid private inurement or loss of tax-exempt status. This guide explains: IRS rules for founder/employee compensation.
The "33 rule" for nonprofits usually refers to the IRS Public Support Test, requiring 501(c)(3) public charities to show they receive at least one-third (33 1/3%) of their support from the general public or other public charities over a five-year rolling period, distinguishing them from private foundations by ensuring broad community reliance. This is crucial for maintaining public charity status, involves reporting on Form 990 Schedule A, and can be passed through meeting the 10% "facts and circumstances" test if the main test is missed.
A non-profit founder may pay themselves a fair salary for the work they do running the organization. Likewise, they can compensate full-time and part-time employees for the work they do. Non-profit founders earn money for running the organizations they founded.
Yes, it's possible to make a living running a nonprofit organization that you started from the ground up—but keep in mind these important considerations before taking the leap.
The 80/20 rule (Pareto Principle) for nonprofits suggests that roughly 80% of results come from 20% of causes, most commonly meaning 20% of donors provide 80% of donations, but it also applies to programs, volunteers, and marketing efforts, guiding organizations to focus resources on high-impact areas like major donors or effective programs for greater efficiency and fundraising success. It emphasizes donor stewardship, program evaluation, and targeted communications to maximize impact, though some argue for diversifying away from over-reliance on a small donor base.
No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
Absolutely! Donating to your own nonprofit shows your commitment and can inspire others to give. It can also be a tax-deductible contribution, which is a bonus. Just be sure to keep clear records and follow all the rules to ensure everything is above board.
Con: Salary
Tight budgets often result in smaller salaries for employees. But for many nonprofit employees, it's not all about the money. “Although your salary doesn't always match that of a for-profit, the family environment is worth it,” says Doreen Graves, chief of staff at Bountiful Blessings.
In most cases you would keep your salary lower and pay yourself dividends as it is more tax efficient. It is important to note that dividends can only be paid if a company has made a profit, so past losses could mean the only way to take more money out of the business is via salary not dividends.
To qualify for 501(c)(3) status, a nonprofit limited liability company has to elect to be treated like a corporation for tax purposes. Then it can file for tax-exempt status. Even then, not all LLCs can qualify (all the members have to be qualifying nonprofit organizations).
Initial and Ongoing Costs
Creating a nonprofit organization takes time, effort, and money. Fees are required to apply for incorporation and tax exemption with state and federal entities, as well as maintaining such status through annual renewals.
The "33 rule" for nonprofits usually refers to the IRS Public Support Test, requiring 501(c)(3) public charities to show they receive at least one-third (33 1/3%) of their support from the general public or other public charities over a five-year rolling period, distinguishing them from private foundations by ensuring broad community reliance. This is crucial for maintaining public charity status, involves reporting on Form 990 Schedule A, and can be passed through meeting the 10% "facts and circumstances" test if the main test is missed.
If the nonprofit is sued and lacks the proper planning and protection, you could lose your savings, your home and other assets. Nearly two out of three nonprofits reported a Directors & Officers liability claim within the past 10 years.
The IRS permits nonprofits to generate surplus funds, as long as those funds are then reinvested into activities that support the mission of the organization. The IRS has no issue with profit - rather they have an issue with that profit benefiting individuals, such as your staff or nonprofit board of directors.
So how much money can nonprofits keep? The short answer is that there is no limit to the amount of money nonprofits can keep in reserves. As long as it can be proved that funds are being used to advance the nonprofits' mission, then the money can be directed as the nonprofit wishes.