Ask people what it means to be a non-profit business organization and you’re likely to get an array of answers, many of them incorrect. For people who aren’t familiar with the ins and outs of how non-profits work, it can be confusing to hear about executive and employee compensation and earnings.
But, guess what? It’s an actual thing!
Because non-profit organizations provide essential services, it’s important for the people who interact with non-profits to understand how they work and especially, how non-profit business owners get paid. Here’s what you need to know.
So, What Does It Mean to Operate as a Non-Profit Business?
Let’s start at the beginning with an explanation of what it means to be a charitable non-profit organization. According to the IRS, a non-profit charity is:
- In operation for one or more of the exempt purposes set forth in section 501(c)(3) of the tax code, including charitable, religious, educational, scientific, literary, testing for public safety, fostering natural or international amateur sports competition, or preventing cruelty to children or animals.
- Of a charitable nature, using the generally accepted legal sense of the word. Examples include relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
The IRS also states that “no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual.”
A non-profit charity takes in money from donations and other sources. The key part of the IRS definition is that the net earnings may not profit any shareholder or individual.
What’s Included in the Net Earnings of a Charitable Organization?
The area of the IRS definition that confuses people is the bit about net earnings. Let’s talk about what is included in net earnings.
For any business, net earnings (sometimes called net income) are calculated by subtracting operating expenses from revenue. Non-profit charities get revenue from donations, grants, and memberships. They may also get revenue from selling branded products.
A non-profit organization’s expenses may include:
- Rent or mortgage payments
- Purchase of necessary supplies
- Transportation/Gas
- Utilities
- Money for essential services
- Employee salaries and compensation
The last item is one that can cause a great deal of confusion, particularly when some charities are in the news for what seem to be unnecessarily high salaries paid to executives.
How Do Non-Profit Business Founders Earn Money?
The number one question people have about running a non-profit is how non-profit owners – who are usually referred to as founders – get paid. If the IRS rules say that the earnings of a non-profit may not “inure to the benefit of any shareholder or individual,”
…how is it possible that non-profit owners and employees can earn a salary for the work they do?
Let me try to break it down for you.
The IRS differentiates between a benefit and fair compensation for work that is done. 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. 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 1995.
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.
What is Considered Reasonable Compensation?
The primary guidelines for both executive compensation and employee compensation at non-profit organizations are that the wages paid must:
- Meet all local, state, and federal guidelines for the minimum wage; and
- Be reasonable, fair, and not excessive; and
- Include all benefits as part of the total compensation package.
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:
- Executive salaries must be disclosed to and approved by the non-profit’s executive board on an annual basis.
- The compensation voted upon must include all benefits.
In other words, a non-profit founder’s compensation package might include:
- An annual salary
- Medical benefits
- Paid time off
- A pre-approved bonus structure
Having the board vote on an executive’s compensation package is one of the best ways to ensure that the payment is not excessive and that it allows the bulk of the charity’s revenue to be put toward the organization’s mission.
How to Check on a Non-profit Business
When you interact with a charitable organization, whether it’s as a donor, member, or recipient of goods or services, it’s important to do some research to determine the charity’s status regarding its financial management, including employee compensation.
There are several organizations that track charities and grade them based on how they operate. They are:
These organizations track and rate charities based on criteria that may include:
- The charity’s classification
- Its descriptions of its activities and financial management
- In-depth review of financial statements
- In-depth review of tax returns
The goal with the ratings is to provide the public with a tangible way to measure a charity’s financial status and management of funds. The drawback is that in most cases, a charity must have at least seven years’ worth of financial reporting and tax returns to get a rating. That means that newer charities may not yet be rated as in the case with Blue Heart.
Although Blue Heart has been around for 10 years, it’s only been in the last 2-3 years that we have actually been receiving help from grant monies.
If a charity is not rated, there are still some ways to get a feeling for how a charity operates. One popular method is to examine the charity’s overhead percentage. On average, charities spend about 20% of their revenue on overhead.
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.
What’s The Point
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.
Together We Rise!
The Blue Heart Foundation
Our Mission
“Building community equity by providing an inclusive and secure path to higher education, emotional wellness, and personal development for underserved male youth.”
Email
support@theblueheartfoundation.org
Location
San Diego CA 92154
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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. Thanks.
Yes I totally agree. It truly answered all of my questions and in details and in the way in which anyone can understand it. It made u finally feel as if you have found many if not all of your answers in a very clear manner and finally in one place and without having to fill out 3 forms, purchase 2 items, give all of your personal information & then pay a small 1x fee to get the information lmbo (I’m over exaggerating but you get the point) It was very informative & refreshing.
I agree. I found this article very useful.
I am wondering if my Facebook support group would be considered a non profit. Anyone know? I am the administer of a private group. We treat with medications via a on profit and I have over 450 members. New one eaxmch day asking to come in.
I started a non profit for Homelessness disabled mental and or abused. Rental assistance resources utility and Internet transitional housing let’s work something so we both can get donations and start an event for holiday youths in christ.
I totally agree! I’m here looking for information to start a non profit. I spend most nights just driving around looking to share the love of Christ. Anything form food, rides in the rain, blankets and coats to simple prayers gas money (alot of people sleeping in cars these days). I really don’t know what direction to go. I was hoping to start a group Called the Sleepless Nights only because that’s normally when I’m out. Pin pointing the best way to help is hard.. well not really because God’s word and salvation does it all but the world is a hard thing to let go of especially when you have very little. Convincing them they are half way there seems like crazy talk at times. I pray you get up and running and share the word on the way!
I am haveing a difficult time finding any amount or resources to be able and get my non profit programs going for our youth..somone, anyone help me out
I need help with a program to help felony not to go back to jail but don’t know who to talk to get it started
I’m interested in seeing what if anything that you have come up with.
Great idea!
Anything that I can do to help.
I’m good at research.
Anxiously Awaiting to hear from you Latasha R Allen.
As the founder of a nonprofit I find that you must have A 💜 Funding is not easy to come bye but if you love what you do You will do it anyway for the love of seeing people move forward.
Cecilia Brumfield here I have transitional housing placement for cons as well as transitional housing for pedophiles to be set in one area. Away from children with their own job placement. No one needs to be repeat offender. We want to help these folks stay out safe alive and well. Everyone makes mistakes. Up to them to move on and make up with their inner selves
Hi Cecilia! Is your transitional housing a nonprofit? I’m extremely interested in starting a transitional house of my own. Any help will be GREATLY appreciated:)
Fair compensation? Ive seen CEO’s making $2 million a year from their so called nonprofit. While their for-profit competitors are going out of business because they can’t compete with the nonprofits.
This was very informative. Thank you I’m considering starting a non profit for seniors. I was let go from my job after running it for four years. I was forced to leave behind so man seniors., I’m in the development stages now.
I just want to thank you for all your advice it really helped put in perspective some things for me and my nonprofit And thank you for your kind heart and taking the time to help others
I’m not a rich person that can effort joining nonprofit and wait for 7 years to get something back and waste my time on my phone for charity I create fb account for to earn some earning but it goes otherway as charity account join Google llc toto earn from youtube its also goes wrong as none profit account joint to guide star I check with irs no information about my details how can this happen I don’t understand but donation collected by noneprofit org 6 years ready by now but I’m not a US resident excepted account as nonprofit for US with guidestar how can I solve this matter I don’t mind to become as charity if I can also earn for my self how to help someone if you got nothing that’s the main thing irs or nonprofit never thought of The person who really can bring good value to org big profits to irs my real name not the same which I fill down here
Step number 1: Go to school and learn how to spell and write
@John
Making fun of people in such a manner just shows how immature amd unintelligent you are.
I know how to spell and, it was a typo. So come at me if you feel the need to empower yourself…
Yes John, you are absolutely correct! No pun intended.
Fully agree
I work for a non profit hospital and am the lowest paid in my field. The company has a ridiculous salary cap. I’ll never make any more money. I don’t know how much the COO makes but he seems pretty clueless. I wonder if he is even qualified for the job. I’m not impressed with this “faith based” hospital.
Ive had an idea to start a charitable organization that advocate for the boy child, i don’t know how and where to start, necessities, input and also my return,.in investing in the idea.
Wow. This information was very beneficial. It is much appreciated.🙏🏽
Helpful information indeed. Thank you🤝
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.
Informative, would like to grow our business and develop our community ,that’s the way to go.
Thanks and keep on giving.
Yes thank you it is difficult as a founder to figure out compensation fairly .. how do I find out more info on how to benchmark salaries packages and what rules help to be sure it is fair
Yes, this article was very helpful.
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.i can do it at my age and health situation so can you. Blessings be upon everyone who has the courage to start.
Thank you for your wonderful and most inspirational message. I have been considering whether or not to make my new business a for profit or non for profit business.
Thanks for wonderful work. Am founder NPO khula Nathi community org, our object agriculture, education, sports infrastructure. It possible to help us to find department who’s willing to pay our volunteers members
HIV prevention facility and awareness program for this local area.
Blessings to you and may the Lord bless you with good health. May you succeed in your in your non profit project
I’m part of organization of best buddies that can bring younger kids with disabilities and downsyndrom for there help to support them on a write path and I believe community service
Thanks so much for this information. I’m restarting my nonprofit. I quit my job before to run the company when I founded it but couldn’t sustain myself. I’m working again but want to position myself to run the company full time when I retire from teaching. And truth be told, I really need to get paid to do it. IJS
Great article!! Very helpful! I would love to create a non profit that operates like a crowd funded lottery. As far as I know, there is a lot of laws in place that prevent it but I think it’s one of the single best ways to empower a community by giving someone within it the financial resources to develop effective habits and achieve their dreams
I’m not sure what a crowd funded lottery is but it sounds interesting.
To God be the Glory may the Lord bless the work of your hands in Jesus Name amen amen
Thank you I will take that blessing as I begin my journey in creating my non profit organization.
Great read, very informative. Am also in the process of obtaining my 501 3c and gathering solid board members to launch. This was very useful info. @80 that is a miracle. Keep on being awesome and express yourself with your NPO. May God bless you.
Thank you
That was exactly what I was looking for
What the pay as a social media Director in non profit.?
Excellent content. I love the image in your logo “He ain’t heavy” by Gilbert Young.
I’m looking to start a non-profit.
Very resourceful and well written. Thank you for taking time to share this information!
Thank you for this information. It’s very helpful and greatly appreciated.
Very informative and helpful article re: compensation for founders and employees of non-profit organizations.
Content is exactly what I was looking for!
Will share article with founder and fellow employees of our new non-profit organization in the Lowcountry of South Carolina.
Thank you!
Thank you so much this was very much so informative. God bless
Thank you Blue Heart Foundation for this Outstanding article about maintaining a non-profit organization the right way. I am the Founder of a 501c3 in Louisiana that I started in 2004 and there is still a lot to learn about being a public charity. Amen.
Very good information. Lucky me I recently found your blog by accident (stumbleupon). I’ve saved it for later!
Yes the same here. My husband founded a non-profit 30 years ago and I was always the behind the scene wife. He now suffers from Dementia and I’m front and center. It’s a lot to take on but I am determined to keep his legacy alive.
That’s an incredibly touching story. Best of luck to you.
How do you start a non profit? Are they considered/labelled an LLC or INC or does it really matter? How does one get started if they have the desire to found a NPO? TIA & Sincerely, Carla Louise (Williams) aka Carly Black 🙂
Thank you for the information, it was very helpful and I hope to connect with you at some point on my venture with my 501(c)(3) nonprofit business.
Yes, I have to agree, thank you for the information provide. Very well detailed!
I am the CEO/Founder of a company. It is a non-profit 501(C)3 organization. Can my husband receive a % from the company that I am the founder of .
I need an answer to this question also. We are founders. I am compensated. I need my husbands continual expertise and time in our 501c3 non profit. Can we both be compensated legally.
I am the CEO/Founder of a company. It is a non-profit 501(C)3 organization. Can my husband receive a % from the company that I am the founder of .
Your husband can be a paid employee of your nonprofit. If you are on the board, then your husband cannot legally be on the board with you.
I am one of the people who are interested to come up with something new different in my community, by creating a non profit organization. My problem is that I am very young and I do not have enough knowledge to where can I start. For example, what is the first step to take my plans into action since I want to build a NPO in my village.
It’s awesome with the kind of information published here.
I had the opportunity to learn more than I expected.
This was a great article and one of only a few that break down such a tricky topic. I finally feel comfortable with the decision to pay myself fairly once we start bringing in revenue. Thank you!
I am wishing to establish an NGO in entrepreneurship development program. How do I go about doing it?
This article was very enlightened and understandable. I’m happy I was lead to read this one.
This was very helpful..
Thank You…..
Thanks
Great Information! This is what I was seeking. Thanks!
Thank you for the information, it was greatly appreciated. Just what I needed
Wonderful insight received. Much appreciated.
Non-profit organizations use mobile apps to do a lot of different things. From fundraising to awareness-raising, mobile apps are a powerful tool for nonprofits. Much more knowledge about how to make money through mobile apps for your nonprofit. Keep writing this type of blogs.
Is a non-profit founder or director obliged to pay tax on its income from the stipend it gets?
There are no nonprofit business owners. Nonprofit organizations are governed by a board of directors who are legally and financially responsible for the organization. The title of the article gives people the impression that they can own a nonprofit, something we as an association are working very hard to debunk that myth.
Very informative and easy to understand. Please continue with this great work that you are doing.
Love from South Africa
The article is very appropriate, interested in stepping into the world of charity and this was an informative article. Will be passing website/information on.
I agree with some of the previous comments in that the topic is clear, thorough, and concise. Many people are knowledgeable about a topic but they lack the talent for imparting knowledge to others. That said, we live in a culture where people learn how things work, acquire subject matter experitse, then continue to walk the well-worn path without ever questioning the way the system works.
As I was in the process of trying to get a nonprofit advocacy org off the ground, I learned how the sysem works and concluded that the way the system works is defective. IRS policies that have the force of law are problematic and wrong. I think the notion of what a nonprofit is and how it should be structured and governed is sterotyped and outdated. For example, a handful of states permit a nonprofit to form as a standalone LLC. The IRS does not recognize that type of entiry (the Members must be a 501c3) and they regulate beyond their vested authority (there was a great book written about how the IRS lacks both the jurisdiction and authority in connection with nonprofit governance). The IRS dictating entity form and governance creates a preposterous situation in which a founder can lose control of their mission and be discharged altogether. They are also fixated on “control” creating risk of noncompliance. These are ideas, notions, presumptions, biases, and at worse, the mechanics of agendas – not based on the real world where out-of-the-box solutions and tight mission control are needed to effect change.
Yet, A NPLLC with an owner, with an operating agreement that creates airtight controls, essentially conscribing “ownership” to stewardship and prohibiting a drawing acct but permitting compensation is beyond to grasp and imagination of the IRS. Consider an LLC owner compensation of 50K vs a NP Corp Board approved 6-figure or even 7-figure compensation pkg for a founder. It may not be inurement tehcnically, but it sure does take effect of inurement. There needs to be a coalition of stakeholders to press for reform. I think a lean structured and managed Nonprofit LLC is superior to a Board Governed NP Corp that the IRS dictates. The status quo is backward, inflexible, irrational, counterproductive, and has spawned an industry of parasitic fiscal sponsors that have exploited the destructive policies of the IRS into a revenue-producing model.
I find myself ensconced within the realms of your blog, where intellectual exploration unfolds like an enchanting ballet, with each pirouette of thought and cadaence of expression enthralling the mind and stirring the depths of the intellect.
Thank you for sharing your unique gifts and talents with the world through your blog.
Thank you very much for sharing your knowledge. I have worked for non profits as a volunteer for years then created one recently and want to ensure I develop it legitimately. Your article helped me feel confident I am on the correct path. Appreciatively!
I’ve been building a website to aid in the learning of all computer science related subjects. I don’t plan on charging, everyone has full free access to the site.
I’ve been wondering if it qualifies as a non-profit.
I’m not sure what a crowd funded lottery is but it sounds interesting.