How to Determine Compensation for Key Nonprofit Employees

Has your charitable organization reached a point where it is ready to begin compensating its key employees? If so, you should know that the process of determining an individual’s salary isn’t as simple as just negotiating a deal and signing on the bottom line.

That’s because IRS regulations state that top-level employee compensation at nonprofits should be “reasonable” and not “excessive.” Charities that pay their managers or officers too much may lose their tax-exempt status.

So, how should you determine a reasonable wage for your most important employees? Well, the IRS says you should consider the amount that would ordinarily be paid:

  • For comparable services
  • By comparable enterprises
  • Under comparable circumstances

In other words, you need to figure out how much organizations that are similar in size and scope to yours pay people to carry out similar jobs.

As part of your analysis, you should also consider factors such as:

  • The cost of living in your area
  • The individual’s performance history
  • The individual’s compensation history
  • The individual’s skills and education, and
  • Whether the individual has a competing offer from another organization

This process can be highly subjective and typically involves analyzing a great deal of data. So, if you need some help along the way, don’t be afraid to reach out to your lawyer or accountant.

Compensation Nonprofit Employees – Other Considerations

In addition to ensuring compensation is “reasonable,” there are some other factors you will need to keep in mind when hiring people to work at your nonprofit, including:

Minimum Wage Laws

The amount you pay your employees has to be above the minimum wage for your area. Though the federal minimum wage is currently $7.25 per hour, the rate is likely much higher in your city.

As of the writing of this, the minimum wage in California in 2023 is $15.50 per hour. In San Diego, it is $16.30 per hour.

Reporting Requirements

If your nonprofit files IRS Form 990 or Form 990-EZ every year, you’ll need to report the amount of compensation you provide to your officers, directors, and other key employees.

These forms require you to outline their total compensation package – not just their salary.

Board Approval

It’s almost never a good idea to determine key employee compensation on your own. If you wish to avoid the appearance of impropriety, it’s best to involve your board of directors in the process.

Generally, this means providing them with the data you used to arrive at your figure – and asking them to approve the package.

Your Knowledgeable San Diego Nonprofit Attorney 

The complex world of nonprofit compensation isn’t easy to navigate. If you need an experienced California charity lawyer to guide you through it, please don’t hesitate to reach out to the team at the Semanchik Law Group. We are familiar with all the state and federal regulations, and we are ready to use our expertise to help your organization stay on the right side of the law.

To set up a consultation all you have to do is give us a call at (619) 535-1811 or fill out our online contact form. We look forward to working with you!