Does the IRS regulate how much a nonprofit can pay its employees?
When you’re a nonprofit administrator or director setting salaries for your employees, you’re accountable to many parties, and the IRS is one of them. While the IRS doesn’t regulate specific compensation amounts, it does require that tax-exempt organizations limit the salaries and benefits of executives and staff to “reasonable compensation.” In fact, you’ll need to list compensation of officers, directors, trustees, key employees and others on your 990 federal tax return.
But what is “reasonable”? Simply put, “reasonable” means that the amount of compensation is approximate to what would be provided by a similar organization in similar circumstances. In other words, you’ll need to do some homework to understand the going rate for a particular position.
As a general guideline, all nonprofits should be prepared to justify how the amount of salary was determined for any staff or “significant” position. An annual salary of $50,000 in addition to fringe benefits is a useful benchmark to identify significant positions. In addition, if audited, your nonprofit organization will need to show comparables. To learn more, the Center for Nonprofit Management (www.cnmsocal.org) produces an annual Compensation & Benefits Survey that can be especially useful in determining appropriate compensation.