One of the biggest misconceptions about nonprofits is that they’re run completely by volunteers. Thankfully, we know that’s not the case.
Nonprofits offer their employees compensation, benefits, and other perks just like other companies. However, this compensation may look different in some ways, including the different funding sources, types of nonprofit employee compensation, and more.
So, how does a nonprofit pay employees? Let’s dig in and find out.
Can Nonprofit Organizations Compensate Their Staff?
So, can nonprofit organizations pay employees? The answer is a resounding yes.
Nonprofits are businesses, and as such, if you are working as a full- or part-time staff member, you are entitled to compensation. It’s a misconception that nonprofits can’t or shouldn’t compensate their employees. Having paid employees is almost always necessary to successfully further your organization’s mission.
In general, to maintain tax-exempt status, nonprofits need to make sure their compensation is reasonable but not excessive, especially for executives.
However, “reasonable but not excessive” is not clearly defined and could mean different things for different organizations (we will talk more about some of these determining factors later on in the article).
At the end of the day, nonprofits should pay their staff on a salaried or hourly basis, depending on the position. Where the confusion may come in is that nonprofits do not need to pay volunteers since volunteering by nature is unpaid.
How Do Nonprofits Pay Their Employees?
Nonprofit organizations pay their employees much the same as for-profit companies.
Depending on how their organization is set up, nonprofit employees will be paid on a weekly or bi-weekly basis via check or direct deposit. Nonprofits should have their own nonprofit bank accounts to fund expenses.
However, just because someone works for a nonprofit organization doesn’t mean that their salary doesn’t get taxed.
Nonprofit employees are still subject to payroll taxes, including social security and medicare, federal tax withholding, and state unemployment taxes. If the organization is a 501c3, they may not have to pay federal unemployment taxes, but a tax specialist can help answer any questions you may have about tax regulations as they change frequently.
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So what are the different types of nonprofit compensation? Here’s how they break down.
One of the most common ways to compensate nonprofit employees is by paying them a salary. This is a standard amount of money they will be paid each week, regardless of the number of hours they work.
Unfortunately, salaries at nonprofits are often lower than at for-profit companies, which can lead to high turnover. Currently, the average nonprofit salary is about $51,566 a year, though this will vary based on the position, organization, location, and more.
Nonprofit organizations that prefer to pay their employees hourly must consider any wage laws that are in place in their state. They have to meet both the federal minimum wage, which is $7.25, as well as the state minimum wage—whichever is higher.
On average, nonprofit hourly workers receive about $25/hour, which is significantly higher than the minimum wage in most states. Hourly employees are also eligible to receive overtime, so any hours worked over 40 in a given week qualify employees for additional compensation, which is different from salaried employees.
Nonprofits are also able to award bonuses to employees, which can be used as an additional incentive to attract and retain qualified candidates. That said, bonuses are likely to be smaller than at for-profit companies.
Bonuses are offered on top of a regular salary and are completely discretionary, meaning that they can vary from year to year based on performance and budget limitations. These bonuses will be highly scrutinized by the IRS, so it’s important to have a reasonable justification for them.
Oftentimes, nonprofits will boast about their benefits and other perks of working there; however, these are often shared to disguise the fact that the salary is lower than the industry standard. These benefits could include typical health care and retirement packages, but some also include the feel-good benefits of helping others as a perk.
A nonprofit’s total rewards package is important, but it shouldn’t be used in place of fair and just compensation. Not paying nonprofit employees fair compensation will lead to job dissatisfaction and increased turnover rates.
Legal Regulations on Nonprofit Employee Compensation
Because of their tax-exempt status, nonprofit organizations need to follow specific rules and regulations. If they are caught violating them, they could be subject to fines or even lose their exempt status.
For example, if your nonprofit organization makes more than $50,000 in gross receipts, you must file either a Form 990 or a 990-EZ, which shares a nonprofit’s financial information publicly. This helps provide accountability, preventing organizations from taking advantage of their tax-exempt status.
Compensation is included in this form, so it’s best to ensure your employee compensation is reasonable but not excessive. One way to do this is to have the Board of Directors set the Executive Director’s salary. While not required, it is a best practice to provide this oversight.
You may want to consult an HR or executive compensation specialist for additional guidance on industry-standard pay scales. Lawyers and tax professionals can also make sure that you’re up-to-date on the latest regulations.
Funding Sources for Nonprofit Employee Compensation
Unlike for-profit companies, the goal of nonprofit organizations is to advance their mission—not to make a profit. Because of this, nonprofits rely on external funding to operate and pay their employees.
Let’s take a look at some of the most common funding sources for nonprofit employee compensation.
Nonprofit grants are external sources of funding that you don’t have to pay back. You apply for them from outside sources, and if you receive one, they can be used to support new initiates, fund new campaigns, or even for general operating expenses like employee compensation.
Grants can be used to fund payroll as long as there are no stipulations in the grant itself that prevent it. Make sure to check the fine print to make sure you allocate the grant funds appropriately to avoid penalties.
If you are planning to apply for a grant, check out these 11 things to know about grant writing to help you increase your chances of success. Grants are often one-offs, so while they can be used to pay staff members, they usually shouldn’t be relied on as the main source of funding given you can’t count on them year after year.
Donations are often the largest funding source for nonprofit organizations. People donate because they are passionate about your mission, and you can’t fulfill your mission without your employees.
Donations can be used to help fund your organization’s payroll. As a 501c3, nonprofits actually have to get a percentage of their income from donations, so it’s a win-win when donations can fund employees’ salaries.
To get donations, you can hold fundraising events, annual drives, send solicitations, and more—just make sure you don’t overwhelm your donor base with asks.
Another way some nonprofits get revenue to pay their staff is through the sales of various goods and services.
This could be merchandise for your nonprofit, which not only raises funds for your organization but also helps increase visibility. The Susan G Komen Foundation does a great job of this, selling shirts and accessories to spread its mission.
You could also auction off tickets to various events, sell donated items, and more. You could even have people buy memberships to be a part of your organization at different levels. These membership dues could be a great way to fund payroll, helping you allocate donations and grants in other ways.
Don’t be afraid to try something new. The more revenue you get, the bigger the difference you can make—both in paying your staff and advancing your mission.
Factors Affecting Nonprofit Employee Compensation
Even within nonprofits, there are variations in how nonprofit employees are compensated. The same role could be compensated at different levels depending on the specific organization and other important factors.
Some of these factors include:
Organization Size: The size and number of employees can impact compensation levels.
Organization Type: Additionally, compensation will vary by organization type. Higher education institutes are nonprofits, and they may compensate their employees differently than a food bank because they’re bigger and have more revenue streams.
Budget: Each role carries a salary range, and it needs to fit within the organization’s budget.
Background: Nonprofit employees with more experience and advanced degrees are compensated at higher levels than employees who are just starting out.
Job Responsibilities and Role: Executive Directors and other leadership roles are paid more than entry-level staff.
Location: Where the nonprofit is located also plays a huge role in compensation. If it is in an urban area, its base compensation will likely be higher than in rural areas.
Federal, State, and Local Regulations: There are wage laws in place to protect both the employees and the business, so make sure that you meet them. These can include the minimum wage, overtime, insurance requirements, and more.
There is no true salary standardization within the nonprofit sector, so while organizations may benchmark peers to ensure they remain competitive, it’s up to them how they want to compensate their staff.
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Wrapping Up: Next Steps to Take
While there are no industry standards when it comes to nonprofit compensation, it's still important to offer fair and competitive rates.
Making sure you're paying competitively will help you attract and retain qualified candidates. When you land that perfect, high-performing staff member, it can completely transform your organization from the inside out.
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