We have the privilege to work with many nonprofit founders. In the beginning, it is typical for founders not to receive any compensation for their work or to accept compensation that is far less than reasonable for the work they perform.
However, we find that even when the nonprofit starts to have some fundraising success, founders are often reluctant to be paid for their work.
Many nonprofit founders skip pay to protect program dollars.They worry about losing grants if they4 take a salary. They search for clear rules, and ask, How Does The Founder Of A Nonprofit Get Paid.
The IRS will judge pay as reasonable and fair to protect tax-exempt status under section 501(c)(3). Boards of directors must approve pay and the group must report it on Form 990. This post will explain reasonable compensation, show how to use a nonprofit compensation report, and tell you how to work with your board.
Read on.
Key Takeaways
- The IRS requires founder pay to be reasonable, approved by the board, and reported on Form 990 to avoid intermediate sanctions.
- Boards should use independent compensation committees and market comparables (Candid, Guidestar) when setting founder salaries per Form 1023 guidance.
- Skipping pay risks founder burnout, poor retirement savings, and operational instability that can harm long-term sustainability and donor trust.
- Pay founders from earned income, grants, or fundraising while following bylaws, conflict-of-interest rules, and CPA advice to protect tax-exempt status.
Understanding Nonprofit Founder Compensation
Founders must set fair executive compensation that fits the nonprofit mission and wins approval from the board of directors and follows IRS rules. They should report pay on IRS Form 990, talk with a CPA, and balance salaries with grant funding and operating expenses.
Why do nonprofit founders often avoid taking a salary?
Many nonprofit founders take little or no pay in the early years. This often stems from deep passion for the nonprofit mission and a desire to spend grant funding and operating expenses on programs.
Boards of directors and donors track executive compensation on IRS Form 990 and on sites like Guidestar and Charity Navigator, which makes some leaders uneasy about any salary. Many founders also feel guilt about accepting reasonable pay, even after strong fundraising or support from groups such as United Way and the Council of Nonprofits.
This mindset can harm nonprofit governance and long term viability. Unpaid leaders face burnout and retirement challenges that can destabilize a mission-driven organization. Firms like JFW Accounting Services and advisors such as Noel A.
Fleming and Jo-Anne Williams Barnes urge clear compensation packages and compliance with IRS rules to protect net earnings and donor trust. CharityWatch, GiveWell, AICPA members, and Super Lawyers often recommend a rebuttable presumption procedure and independent board review to set fair executive compensation.
How does passion for the cause affect fund allocation?
Founders often funnel most donations straight into program work. This choice leaves little for administrative expenses and overhead costs. Limited pay for an executive director and staff harms nonprofit operations.
Grant-makers often skip groups run only by volunteers or underpaid leaders. The Council of Non-Profits and certified public accountant advisors warn that underfunded management drains sustainability.
Donors and boards see the risk and demand clearer revenue streams. Boards should set a fair salary for nonprofit founders that follows IRS Form 1023 guidance and market data. Paid leaders build stronger teams and improve program delivery.
Funders note that adequate compensation improves long-term capacity and protects the charitable mission.
What challenges do nonprofit founders face without compensation?
Founders who skip pay often face money stress, missed benefits, and a hard time saving for retirement at a nonprofit foundation. They risk burnout and legal trouble if their nonprofit organization breaks labor laws or pays below minimum wage, so a nonprofit strategy session with a blue heart can map fair pay options.
How can nonprofit founders prevent burnout?
Set clear pay policies with your governing board and HR processes. Ask the board to approve reasonable compensation that follows labor laws and respects minimum wage standards. Hire staff so the nonprofit organization shares operational duties and reduces excess demands on non-profit founders.
Data shows burnout risk rises when founders work without support or pay, and long stretches of underpayment can cause exhaustion that threatens organizational continuity.
Pay yourself enough to last and build a team that lasts with you.
Run regular nonprofit strategy sessions and use payroll tools to track fair wages. Use the blue heart symbol in fundraising to signal that the nonprofit foundation funds staff and founder pay.
Audits and clear reporting keep compensation ethical and protect the charity.
What are the retirement challenges for unpaid nonprofit founders?
Many unpaid nonprofit founders accept below-market pay for years or decades, and this limits their ability to save for retirement. Lack of fair, ongoing compensation often means small 401(k) contributions and low Social Security benefits.
Board of directors sometimes ask whether a large retirement bonus could fix the gap. The IRS may view a big, unjustified payout to an insider as grounds for intermediate sanctions.
Founders at charitable non-profit organizations can face serious financial insecurity in retirement due to limited personal savings. A nonprofit organization cannot give equity or dividends, so cash pay and retirement plan access matter most.
Trustees must set reasonable compensation that avoids IRS penalties and protects the founder. Sound action helps protect the organization, the founder, and public trust.
Legal and Ethical Guidelines for Paying Nonprofit Founders
Paying a founder means following rules from the IRS and your governing board, and you must show the logic in your bylaws and conflict of interest policy. Use a pay committee, market comparables, and the annual information return to set fair pay that fits nonprofit organizations and keeps donors and regulators calm.
Why can’t nonprofit founders receive equity or dividends?
Nonprofit organizations do not have owners or shareholders. This means founders cannot receive profits, sell equity, or collect dividends.
The IRS and state laws set the legal structure and bar profit distribution to insiders. Founders may receive a reasonable salary or contract payments for services, and any attempt to give equity or dividends could cause loss of tax-exempt status for the non-profit business.
What is considered
The Internal Revenue Service requires founder pay to be fair and reasonable. Compensation must match similar roles using comparables like the Candid Nonprofit Compensation Report. An independent compensation committee must review the founder’s qualifications and relevant market data before any salary approval.
The founder must not vote on pay, and the governing board must approve the compensation.
Paying an insider above what comparables justify can trigger intermediate sanctions. Founder’s salary counts as an operating or administrative expense in budgets. Organizations may draw that pay from fundraising, grants, or earned income.
FAQs
1. Can nonprofit founders get a salary?
Yes. Compensating nonprofit founders is allowed under nonprofit law when the pay is reasonable. The board of directors must approve pay, document the process, and follow tax agency rules and local rules. I once helped a small group set clear steps and avoid trouble.
2. How do we decide what is a fair pay level?
Use comparable data from similar groups and market rates. The board should vote, keep minutes, and use a conflict of interest policy. This shows the group used a fair method when compensating nonprofit founders.
3. What steps protect the nonprofit when paying a founder?
Have an independent board review, use written comparables, sign a clear contract, and review pay each year. Keep records for tax filings. These steps follow nonprofit law and build donor trust.
4. What can go wrong if founder pay is handled badly?
The tax agency can impose penalties, donors can lose trust, and the group can face legal trouble. Stay transparent, get legal help when needed, and read resources like Charity Lawyer Blog, Nonprofit Law Simplified, for plain guidance.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or reach out using our contact form.