How Do You Make Money Running a Nonprofit: Salary, Taxes, Filings

You make money running a nonprofit the same way anyone else earns a living: by drawing a salary and benefits from the organization that employs you. The rule people get wrong is that nonprofits can’t pay their founders or staff. They can, and most do. What federal law forbids is using the organization’s money to enrich insiders beyond what their work is actually worth. If your pay reflects the market rate for the job you’re doing, you can take a paycheck like any other employee.

Paying Yourself a Salary

The person who cannot set your salary is you. The board of directors has to approve it, and the members voting have to be people with no financial stake in the decision. In practice, that means you leave the room, the disinterested board members review pay data from comparable organizations, and they vote. The decision and the reasoning behind it get written into the minutes. Skipping this process is not a technicality; it opens the door to excise taxes that can hit both you and the board members who approved the pay.

A typical compensation package at a 501(c)(3) looks a lot like one at a for-profit employer: base salary, health insurance, paid time off, and retirement contributions. Most tax-exempt organizations offer 403(b) plans, which function similarly to 401(k) plans and let employees defer part of their pay into tax-advantaged accounts.¹ Performance bonuses are allowed if they’re tied to mission-related goals rather than revenue targets.

Board members are a different case. Most serve as unpaid volunteers. Federal law doesn’t forbid paying directors, but most nonprofit bylaws restrict it, and director pay raises conflict-of-interest issues that can complicate the organization’s exempt status.

Setting a Salary the IRS Won’t Challenge

The IRS defines reasonable compensation as the amount that would ordinarily be paid for similar services by similar organizations in similar circumstances.² That standard is deliberately flexible because nonprofits range from small food pantries to hospital systems. Factors include organization size and revenue, complexity of the role, the leader’s qualifications, geographic location, and what peer groups pay for equivalent work.

Boards get strong legal protection when they follow a specific three-step process known as the rebuttable presumption of reasonableness. If all three steps are done, the IRS presumes the pay is reasonable and has to prove otherwise:

Approval by a board or committee made up entirely of people with no financial interest in the outcome.
Reliance on comparability data showing what similar organizations pay for similar roles, obtained before the decision is made.
Concurrent documentation of the basis for the decision at the time it’s made, not written up later.

All three have to be present.³ Approving a salary without documented comparable data loses the safe harbor.

Comparability data is easier to gather than most new founders assume. Every tax-exempt organization has to make its Form 990 available for public inspection, and those returns disclose compensation for officers, directors, and key employees.⁴ Aggregator sites pull those filings together, so a board can look up salary figures from organizations with similar budgets, missions, and locations.

The IRS also encourages every nonprofit to adopt a written conflict of interest policy. When the board is setting pay for someone in a position of authority, that person should disclose the relevant facts and recuse from the vote. Paying excessive compensation to an insider is treated as serving a private interest, which conflicts with the organization’s charitable purpose and can threaten its exempt status.⁵

What Nonprofit Leaders Actually Earn

Pay varies widely with budget, mission area, and geography. As a rough framework:

Executive directors at small nonprofits with annual revenue under $1 million typically earn between $45,000 and $70,000.
Mid-sized organizations with budgets between $1 million and $10 million generally pay in the $70,000 to $110,000 range.
Large nonprofits with revenue over $10 million often pay $100,000 to $250,000 or more, particularly in healthcare, research, or higher education.

Median compensation for nonprofit CEOs nationally was roughly $132,000 as of the most recent comprehensive data, though that number covers a wide spread. Science, technology, and health organizations tend to pay above the median; arts, animal welfare, and religious groups fall well below it. These are total compensation figures reported on Form 990, including salary, bonuses, retirement contributions, and other benefits, so benchmark against the full package rather than base salary alone.

Where the Money to Pay You Comes From

Salaries come out of the organization’s revenue, and most nonprofits pull from several streams rather than one.

Fee-for-service income is the backbone in healthcare, education, and social services. Museums charge admission, hospitals bill for treatment, and universities collect tuition. Grants from government agencies and private foundations fund specific projects or capital work, usually with reporting requirements attached. Membership dues create a predictable base for trade associations and professional groups. Fundraising rounds out the picture through galas, direct mail, digital campaigns, and major donor work; donations can be cash, publicly traded stock, real estate, or other property.

Selling merchandise related to the mission is fine and gets the same tax-exempt treatment as other activities. When a nonprofit sells goods or services that are not substantially related to its mission, the net income is subject to unrelated business income tax and must be reported on Form 990-T at corporate rates once gross unrelated income hits $1,000.⁶⁷ The fact that the profits fund the mission does not save them from tax; the IRS looks at the activity itself.

What Happens to Money Left Over

When a nonprofit brings in more than it spends, the surplus stays in the organization. No one gets a dividend. That is the defining difference between a nonprofit and a for-profit business. Extra revenue goes into operating reserves, expanded programs, new technology, or facility repairs. Reserves matter especially because they keep payroll running through funding gaps and between grant cycles.

Penalties for Overpaying Yourself

The prohibition against private inurement is the single most important restriction on nonprofit compensation. No part of a 501(c)(3) organization’s net earnings may benefit any private shareholder or individual with a personal financial interest in the organization.⁸ Violating this rule can cost the organization its tax-exempt status.⁹

Before revoking exemption, the IRS can impose intermediate sanctions in the form of excise taxes on excess benefit transactions. An excess benefit transaction happens when a disqualified person receives compensation or another economic benefit greater than the value of what they provided. Disqualified persons include anyone who was in a position to exercise substantial influence over the organization during the five years leading up to the transaction, plus their family members.¹⁰

The penalties hit several parties at once:

The recipient owes a tax equal to 25% of the excess benefit.
Any officer, director, or trustee who knowingly approved the transaction owes 10% of the excess benefit, capped at $20,000 per transaction.
If the recipient does not return the excess amount within the taxable period, an additional 200% tax on the excess benefit applies.

The numbers add up quickly. If an executive director takes $80,000 more than reasonable compensation and the board knowingly approved it, the director owes $20,000 right away, each participating board member owes up to $8,000, and if the overpayment is not returned, the director faces an additional $160,000.¹⁰ Running the three-step rebuttable presumption process is what protects everyone from this outcome.

Payroll Taxes You Still Owe

Nonprofits are employers, and employers owe payroll taxes. A 501(c)(3) has to withhold federal income tax from employee wages and both withhold and match Social Security and Medicare (FICA) taxes, reported quarterly on Form 941.¹¹

One difference matters: 501(c)(3) organizations are exempt from the Federal Unemployment Tax (FUTA), automatically and without the option to waive it. Other tax-exempt types, such as 501(c)(4) social welfare groups and 501(c)(6) trade associations, do not get this break and pay FUTA like any other employer.¹¹ State unemployment tax rules vary and need to be checked locally.

Annual Filings That Keep the Exemption Alive

Nearly every tax-exempt organization files an annual return with the IRS. Which one depends on size:

Form 990-N (e-Postcard) for organizations with gross receipts of $50,000 or less.
Form 990-EZ for organizations with gross receipts under $200,000 and total assets under $500,000.
Form 990 for organizations with gross receipts of $200,000 or more, or total assets of $500,000 or more.
Form 990-PF for private foundations, regardless of size.¹²

Missing the filing has a hard consequence. An organization that fails to file for three consecutive years automatically loses its tax-exempt status, with no warning and no discretion. The revocation takes effect on the original due date of the third missed return. Once revoked, the organization owes federal income tax on its revenue and can no longer receive tax-deductible contributions; getting reinstated means filing a new exemption application and paying the fee.¹³

Form 990 returns are public. The organization has to provide copies on request, and the compensation sections show what officers, directors, and key employees are paid.⁴ That transparency is what makes 990 data useful for benchmarking, and it means your own compensation will eventually be visible to donors, journalists, and anyone else who cares to look.

State Fundraising Registration

Before soliciting donations from the public, most nonprofits have to register with the state. Roughly 40 states have charitable solicitation laws that require registration before an organization asks residents for contributions.¹⁴ Online fundraising or direct mail can trigger registration requirements in every state a solicitation reaches, not just your home state.

Registration fees and renewal schedules vary. Some states charge nothing, others charge several hundred dollars on a sliding scale tied to revenue, and many require annual renewals. Exemptions exist in most states, often for religious organizations and small nonprofits, but the criteria differ enough that each state has to be checked individually. Soliciting without proper registration can bring fines, injunctions, and in some states criminal penalties.

1
Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans
2
Internal Revenue Service. Meaning of Reasonable Compensation
3
eCFR. 26 CFR 53.4958-6 – Rebuttable Presumption That a Transaction Is Not an Excess Benefit Transaction
4
Internal Revenue Service. Exempt Organization Public Disclosure and Availability Requirements
5
Internal Revenue Service. Form 1023 – Purpose of Conflict of Interest Policy
6
Internal Revenue Service. Unrelated Business Income Tax
7
Internal Revenue Service. Instructions for Form 990-T
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Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations
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Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
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Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions
11
Internal Revenue Service. Exempt Organizations – What Are Employment Taxes
12
Internal Revenue Service. Form 990 Series – Which Forms Do Exempt Organizations File
13
Internal Revenue Service. Automatic Revocation of Exemption
14
Internal Revenue Service. Charitable Solicitation – Initial State Registration