How Much Can Nonprofit Founders Pay Themselves?

Donors serve as the ultimate check on Pennsylvania nonprofits

By Doug Mentes, Esq.

For nonprofit visionaries that aspire to dedicate themselves full time to their cause, they may be asking themselves, “How much can I pay myself?” The law provides little guidance, only requiring that compensation be reasonable. But, even if your planned compensation is reasonable under the law, you may face a more subjective check: the opinions of your potential donors.

How much is too much?

Noel Fleming has practiced law in Pennsylvania for more than 15 years, much of that time advising nonprofit organizations. He notes that, in theory, it’s probably possible to pay a high percentage of your revenue towards a salary. “But,” he adds, “then that begs the question: What is the purpose of the organization if we are raising 100 X for charitable purposes and 90 X is going to me as CEO? Does that really then look like a charitable organization?”

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 employees and others who provide services to the nonprofit. Fleming cautions that “it’s not illegal, per se,” to pay even 90 percent of revenue toward compensation. But, he adds, “obviously, donors want as much money of their donations to go toward the charitable mission.”

Donors act as a check on compensation

Fleming explains there is a concept the IRS uses for public charities: “If my organization is relying on the good will of the public, they are going to do a little bit of homework before they give me their money. If [the public] sees that 90 percent of all revenue is going to my salary, they’re going to be a little more hesitant in donating to me. It should be self-policing, in some ways, if I’m totally dependent on the public for support.”

There are charity rating services that assist donors in making these decisions, often rating a charity based primarily on the percentage of revenue that goes toward administrative expenses. “It’s not completely fair … but some programs or services may be more labor intensive than others, and they may still be doing really wonderful work. Just using that number alone is not fair between organizations,” says Fleming.

He continues: “If you see 50 percent of all money coming in is going toward administrative expenses, you could fairly easily say that is too much. 20 percent might be OK. … My view—and people will differ with this—even if it’s above 20 percent, donors just need to ask more questions. This doesn’t mean the organization is bad in and of itself. There may be good reason why it’s spending more than 20 percent of its resources on administrative expenses.”

Find comparable data

Nonprofits that follow the rebuttable presumption procedure outlined by the IRS are presumed to pay reasonable compensation. Conducting an informal survey involves finding and documenting comparable salary data from similar organizations prior to determining compensation—a process Fleming is familiar with.

“If you give me a nonprofit, describe its operations and what geographic location it’s in, and all the rest, I might be able to come up with three or four similar organizations that I can get data on,” he says. “I can find out what their executive directors are getting paid, and I can say, based on that, it would be reasonable for the nonprofit to pay X because here’s three others we’re relying on.”

Nonprofit compensation is public information

Nonprofits file an exempt organization income tax return, IRS Form 990, annually. The returns contain significant information on a nonprofit’s revenues and expenses. These tax returns—and the original application for tax-exempt status, IRS Form 1023—are required to be made available to the public upon request. Also, the website Guidestar compiles these returns to provide easier access for donors.

With all this information readily available to the public, nonprofits must be cautious in determining their compensation, or risk losing out on funding. Before nonprofits make these decisions, those involved should consult with an experienced Pennsylvania nonprofit attorney and limit their risks of an under-funded nonprofit.

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