Hello ! Today, let's talk about an issue that comes up often: Whether it is okay for a nonprofit to compensate board members.
This is a tricky question. Federal law does not prohibit board members from being paid (though some states prohibit this). That being said, a majority of nonprofits consider board participation a voluntary activity and do not pay their members.
There might be reasons you desire to pay your members. Perhaps you are having a hard time recruiting, and feel you will be more successful by offering payment. Or maybe you believe that your board members will work harder for the nonprofit if they are paid. If you are considering paying your board members, there are some important things to keep in mind:
The IRS only allows for "reasonable" compensation
While the IRS doesn't define what "reasonable" means, nonprofits should be especially careful in setting compensation rates. Donors want to be assured that their money is going towards the cause they desire to support and are likely to become suspicious if they discover a majority of a nonprofit's budget is going towards compensation. For that reason, we strongly suggest hiring an independent third party to make recommendations about compensation and/or researching what similar nonprofits pay their board members. It's also very important to provide clear written documentation about why a nonprofit has decided to compensate its board.
Compensation over $600 must be reported to the IRS
If a board member is paid more than $600 in any given year, the nonprofit is required to report this amount to the IRS. This may increase IRS oversight of the nonprofit as it will want to make sure the nonprofit is using funds for the primary purpose of achieving its mission (and not lining the pockets of board members).
Nonprofits who pay board members should be VERY clear about expectations
If you do decide to pay your board, it is important to be very clear about expectations. What does your nonprofit expect to receive in return? Requirements should go beyond simply attending board meetings. Paid board members should be actively involved in the nonprofit's success including: (1) playing a key role in fundraising, (2) ensuring that the nonprofit is successful at achieving its mission, and (3) actively recruiting volunteers and supporters of the organization.
If you are interested in exploring board compensation for your nonprofit, feel free to get in touch with us for a complimentary consultation. We are an email away at firstname.lastname@example.org.
Believing in your mission!
Erica & Bea