How to Legally Pay Yourself a Salary From Your Nonprofit (Founder & Board Guide)
Understanding IRS rules, reasonable compensation, and the steps to get paid as a nonprofit founder
Many new nonprofit founders ask the same question:
“Can I legally pay myself a salary from my nonprofit?”
Yes, founders, board members, and nonprofit employees can earn a salary. But the IRS has strict rules on how much you can be paid, how the salary must be approved, and how to avoid private inurement or loss of tax-exempt status.
This guide explains:
- IRS rules for founder/employee compensation
- What “reasonable salary” means
- How to structure compensation legally
- Four steps to begin paying yourself
- Common mistakes that get nonprofits penalized
- Examples of compliant vs. non-compliant salaries
Why This Matters
If you pay yourself incorrectly, the IRS can:
- revoke your 501(c)(3) status
- impose “intermediate sanctions”
- deem payments as “private inurement”
- personally fine you or your board
This article ensures you avoid those risks.
IRS Rules on Paying Yourself From a Nonprofit
Before paying yourself, you must understand these key concepts:
1. Reasonable Compensation
The IRS requires that all nonprofit salaries be “reasonable and not excessive compared to similar organizations.”
That means your salary must be aligned with:
- local nonprofit benchmarks
- your experience / qualifications
- job responsibilities
- organization size, revenue, and budget
- comparable salaries in your sector
If your salary is higher than what is typical, the IRS considers it private inurement.
2. No Private Inurement
Private inurement is when nonprofit leaders unfairly benefit from the organization.
Examples:
- founder sets their own salary
- salary is far above industry standards
- bonuses unrelated to performance
- loans to founders
- personal use of nonprofit assets
This is a major IRS violation.
3. Independent Board Approval
You cannot approve your own salary.
The IRS requires:
- a disinterested board (you step out)
- documented deliberation
- comparable salary data
- written approval in minutes
This builds a “rebuttable presumption of reasonableness” as required by the IRS.
4. Salary Must Match Actual Services
You must perform legitimate work that furthers the mission.
Examples:
- Executive Director duties
- Program management
- Finance & operations
- Fundraising
- Compliance
If you’re not doing real work, you cannot be paid.
4 Steps to Legally Pay Yourself a Salary From Your Nonprofit
Step 1 — Determine a Reasonable Salary Using IRS Guidelines
Use regional nonprofit salary data from:
- Guidestar/Candid
- Bureau of Labor Statistics
- Charity Navigator
- State nonprofit comp reports
Your board should gather 3–5 comparable salaries and use them to set a range.
Step 2 — Have an Independent Board Review and Approve Your Compensation
Best practices:
- Founder recuses themself from the salary discussion
- A minimum of 3 independent directors set the compensation
- Document the data and reasoning
- Approve final number in a board meeting
- Record everything in the corporate minutes
This protects the nonprofit legally and satisfies IRS compliance.
Step 3 — Add Your Salary to Proper Governing Documents
The nonprofit must update:
- Annual budget
- Payroll records
- Employee / Executive Director contract
- Conflict-of-interest disclosures
- Bylaws (if required)
Failing to document can raise red flags during an audit.
Step 4 — Set Up Payroll and Withhold Taxes Correctly
Even nonprofits must comply with tax and employment laws. This includes:
- registering for payroll
- withholding federal & state taxes
- issuing W-2 forms
- following wage/hour laws
- filing Form 941 quarterly
You cannot simply “pay yourself” from donations without proper payroll setup.
Examples of Compliant Salary Scenarios
Example 1 — Compliant
A founder runs a youth-development nonprofit with $250k revenue. Comparable Executive Director salaries range from $48k–$60k. The board approves $52k based on experience and responsibilities.
- Compliant with IRS rules
- Reasonable
- Independently approved
Example 2 — Non-Compliant
The founder pays themselves $90k when the nonprofit brings in $120k. Founder also approved their own salary.
- Excessive
- Private inurement
- Fraudulent governance
This can trigger IRS penalties.
Common Mistakes That Get Nonprofits in Trouble
Avoid:
- board members approving their own pay
- taking compensation before tax-exempt status is approved
- receiving “under-the-table” payments
- using grants for unapproved compensation
- failing to maintain minutes or salary justification
FAQ: Nonprofit Salary Rules
- Can a founder take a salary? Yes, if approved by independent board members.
- Can a 501(c)(3) pay employees? Absolutely. Nonprofits hire staff like any employer.
- How much can a nonprofit founder be paid? Only what is reasonable based on comparables.
- Do you need 501(c)(3) status before paying yourself? Yes, you must be an IRS-approved charity unless paying yourself from unrestricted startup capital under proper governance.
- Can a nonprofit pay bonuses? Yes, if they are performance-based and reasonable.
- Can a nonprofit founder be both board chairman and executive director? It is legal but discouraged; governance should be separated for compensation decisions.
When You Should Hire an Attorney
You should speak with a nonprofit attorney if:
- You’re unsure what a reasonable salary is
- Your board is small or related
- You need help drafting compensation policies
- Your nonprofit wants to avoid IRS sanctions
Start and Grow Your Nonprofit Right
Chisholm Law is a law firm dedicated to helping nonprofit founders and leaders establish and grow their mission. From planning and formation to gaining tax-exempt status and ongoing fundraising consulting, our team can do it all. Schedule your free consultation today!