How do nonprofits pay employees

The administration can run reports to see payroll expenses allocated to the grant, and those expenses can then flow to a designated general ledger account in their accounting system.

Officers and directors of nonprofit organizations must meet the IRS requirements of reasonable compensation. According to the IRS, reasonable compensation is "the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonable compensation takes into account total compensation, including wages, fringe benefits, PTO, professional development costs, bonuses, health insurance, and more.

While many nonprofits operate with very small payroll budgets, those with highly compensated employees should regularly review salaries to ensure compliance with IRS rules. For religious organizations, a specific type of nonprofit charity, minister pay is handled differently than pay for other employees.

Ministers are typically set up as employees of the tax-exempt organization, though in some cases, ministers may be considered self-employed if certain requirements are satisfied. Like other employees, ministers are paid a salary that is subject to income tax, however, there are some differences. There is a way c 3 religious organizations can request exemption from the employer portion of Social Security and Medicare taxes on all employee wages.

If they are granted that exemption, all employees of the organization will be responsible for self-employment taxes, paying the employee and employer portions of the tax. Recruiting and retaining employees is challenging when you are working with a limited budget. As a result, employees at nonprofits often end up performing more than one job function.

Unlike larger corporations that can hire dedicated HR and payroll staff, nonprofits might have payroll managed by someone who has another role within the organization. That shouldn't be a problem unless the individual managing payroll does not have the proper experience and training. Payroll can be complicated and put your organization at risk if you do not comply with federal, state, and local tax laws.

For security reasons, you also want to be sure that no one individual can enter, approve, and process payroll for your organization. You should always have a second individual verify all payroll data prior to processing and issuing checks or direct deposits.

Most nonprofits recognized as tax-exempt are obligated to file an annual information return with the IRS. There are exceptions for certain religious organizations, schools, and political organizations. The purpose of this reporting is to allow the IRS and the general public to audit nonprofit operations and to maintain tax-exempt status.

Form , Return of Organization Exempt From Income Tax , requires a considerable amount of data, including payroll taxes, number of employees, and executive compensation. Forms for smaller organizations require less information. 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.

Tax-free compensation belongs in the same category as Bigfoot and the Loch Ness Monster. Being an employee of a nonprofit is no different than being an employee of a commercial business. How much more expensive would it be for me to make my contractors employees?

You may have additional costs should you choose to outsource your payroll processing or offer any kind of employee benefits. Hi Greg! I recently started a job as the bookkeeper at a church. 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 s while also being issued W-2s. I have heard the previous bookkeeper issued W-2s for all amounts instead of s, but not processing through payroll, I believe the amounts paid were under-withheld. How should we be handling these payments to these people?

Great question, and your instincts are correct. All these payments should be processed through payroll with proper withholding. It would require someone who is an employee also contracting business services to the same company and invoicing for that service. A 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 c 6. I have worked for a 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 c6, it is assumed that virtually all revenue is from members. 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. A 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.

Hi Greg, 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. 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. 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 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 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? You need a board, stat. 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 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! I have a question! I have a c3 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. 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. Good luck, Monica! Hi Greg. Thanks so much for responding. You answered my question perfectly! 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 c3 also be one of these staff from the for-profit? The IRS considers them related. My husband worked for a large 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? Thanks in advance! 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. My husband and I along with a very close friend are starting a non-profit basketball league in Alabama.

What I found was very confusing. 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? 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. Hi Greg, I work for a non-profit organization that has several for-profit entities under the umbrella of the non-profit. 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? For-profits coming out from under a nonprofit is often a recipe for headaches of huge proportion. That would be true no matter the questions to the above. I started a nonprofit organization in October 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 hours I logged since October ? 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. It is quite helpful and you are a great resource!

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. Do I have all of this right? Anything else that I should be aware of?? Much thanks!! First, sorry for the delay in answering what appears to be a time-sensitive question. Many states have odd requirements concerning SUTA. Hey Greg, Thanks for the article. I have a question regarding interest earned by non-profit bank holdings.

Say the NPO has , in the bank and earns 5, in interest by years end, what sort of limitations are there with how that 5, 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 as interest income. We have a small non-profit under 2 years that currently supports a charter school in the Washington DC area. I saw an opportunity to help staff with friends I know in the Arts.

My question is, one of my arts instructors recently asked me if they were supposed to get a form from me? Do I provide her with this form? 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.

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. They often put in long work hours and make far less money than executives at for-profit organizations. When running a non-profit is their sole employment, it is reasonable for them to draw a salary for the work they do. One of the things that can lead to confusion around the issue of compensation for non-profit owners is that there is no hard-and-fast rule about how much they may be paid.

However, the IRS can and does penalize organizations that overpay executives or employees. You may have seen stories in the news about unscrupulous non-profit charities and their mismanagement of money. One of the most infamous cases was the one involving the United Way, whose former CEO was convicted of fraud in The bottom line is that non-profit founders and employees are paid from the gross revenues of the organization.

These salaries are considered part of the operating costs of the organization. The primary guidelines for both executive compensation and employee compensation at non-profit organizations are that the wages paid must:.

Non-profit charities must walk a fine line between keeping their operating expenses low and competing with the for-profit sector for qualified employees; not an easy task.

It is the responsibility of every charity to navigate the process of determining fair salaries that also manage to be competitive enough to attract the employees they need.

For executives, the road can be very difficult to travel. The recommended best practices from the Council of Non-Profits says that:. There are several organizations that track charities and grade them based on how they operate.

They are:. That means that newer charities may not yet be rated as in the case with Blue Heart. If a charity is not rated, there are still some ways to get a feeling for how a charity operates. However, the percentage of overhead being high is not necessarily an indication that the charity is misusing funds or even overspending.

In fact, charities that skimp on overhead may not operate as efficiently as they could — and that inefficiency can have a negative impact on their ability to deliver services to the people who need them. Before you start coming up with speculative assumptions about how a Non-profit business should get paid, understand that both executives and employees of charitable organization must receive fair compensation for the work they do.

Volunteers play a role as well, but people who are employed by non-profit organizations in an official capacity are paid according to their experience and responsibilities. That includes executives and owners, many of whom put in long hours to ensure that the charities they work for meet their obligations to the communities they serve.

The Blue Heart Foundation is a nonprofit c3 organization. We serve underserved African American male youth ages in the greater San Diego County community. We offer a solid holistic mentoring program through adult and peer mentorship, that facilitates positive interactions, education, empowerment and emotional well being which is a critical part of their lives. Support Us Here. I have to say this was one of the better websites that I came up on and looking for information regarding compensation founders of nonprofit charities.

I am in the process of deciding whether to start a business or a nonprofit charity. And my main concern is the compensation structure for myself and for employees.

Yes I totally agree. It truly answered all of my questions and in details and in the way in which anyone can understand it. Blue Foundation. Got it.

I make lists of people or organizations that help me so that I may return the favor in the future. Thank you.

Thanks and keep on giving. It was a blessing to read and gave me not only the information that I was looking for but at almost 80 years old I am going ahead with my non profit project. Thank you so much and may others who have read and considered this for yourself, go ahead. Believe like I fo that if. Blessings be upon everyone who has the courage to start. Thank you for your wonderful and most inspirational message.