Yes, you absolutely can make a living, even a very good one, from a nonprofit by earning a fair salary as staff or a founder, but it requires building a financially sustainable organization with diverse funding, as many small nonprofits struggle to pay competitive wages; large, successful nonprofits pay executive directors and skilled professionals six-figure salaries, similar to the for-profit sector, though it often takes time and significant effort to reach that level.
Yes, nonprofits can make money (revenue/profit) but cannot distribute it to individuals; instead, profits must be reinvested into the organization's mission, covering salaries (reasonable compensation), operating costs, and building reserves, with revenue generated through donations, grants, and earned income like fees, merchandise, or services related to their mission. The key distinction from for-profits is the "no private inurement" rule, meaning profits benefit the public, not private owners.
Myth: Nonprofits can't earn a profit
Reality: The term "nonprofit" is a bit of a misnomer. Nonprofits can make a profit (and should try to have some level of positive revenue to build a reserve fund to ensure sustainability.)
Under IRS rules, for 501(c)(3) organizations, revenue from the nonprofit cannot inure to the benefit of a shareholder or individual. There is an exception, however, that allows the nonprofit to pay reasonable compensation to staff members and others who provide services to the nonprofit.
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.
In fact, the median salary for chief executives at California nonprofits is only $88,005, according to a recent survey by the Center for Nonprofit Management, which I head. And nonprofit leaders are sharply underpaid compared to CEOs of forprofit businesses of similar size.
“Can I legally pay myself a salary from my nonprofit?” 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.
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.
Individual Donations
Of all donations made to nonprofits, over 80% come from individuals. For this reason, it's wise to focus on individual donors and make them a central focus of your funding model. Individual donors can make one-time or recurring donations.
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.
What should a nonprofit pay its chief executive? The board of directors is responsible for hiring and establishing compensation (salary and benefits) for the executive director/CEO that is “reasonable and not excessive,” but is also enough to attract and retain the best possible talent to lead the organization.
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.
While nonprofits are not limited in the amount of money they can keep in reserve, that doesn't mean that there aren't best practices and processes they should abide by. According to industry best practices nonprofit organizations should keep approximately 3 to 6 months' operating expenses in reserves.
What are the most common mistakes nonprofits make? Some of the most common mistakes include unclear missions, weak board engagement, poor donor communication, lack of financial transparency, and neglecting compliance requirements. Many of these issues are fixable with the right tools and support.
You'll need to think through how you will bring value to the public, obtain funds, attract staff and/or volunteers, build a board of directors, and comply with the various laws that regulate nonprofits. Your answers to these questions will determine whether you should start a nonprofit or consider alternatives.
They include: Organization Size and Budget—As you'd expect, larger nonprofit organizations in terms of size and budget can offer employees higher salaries compared to smaller ones. In other words, the difference between a $200,000 Executive Director job and a $70,000 one could boil down to the nonprofit's size.
💡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.