While nonprofits are mission-driven and dedicated to raising funds (and/or distributing funds) to a specific cause, that doesn’t mean that they don’t have expenses. Growing a nonprofit costs capital and the bigger your nonprofit is, the faster you can grow your business. But you can’t grow alone. 1 in 10 jobs in the United States are in the nonprofit industry, and (like for-profit businesses) nonprofits typically pay those employees' reasonable wages to entice qualified skilled workers to show up at their doors.
If you’re thinking about opening a nonprofit, you may wonder, “how do I pay my employees?”
Let’s talk about it!
How Do You Determine Pay?
Determining pay as a for-profit company is all about being competitive. You look at your past payment histories, study industry averages, and try to offer a hyper-competitive option. And... that’s exactly how nonprofits work too! Believe it or not, nonprofits often pay more (~$7 per hour more!) than their for-profit counterparts.
So, offer enough money to get the best possible people for the positions you’re looking to fill. Just... don’t pay too much. Not only are staff salaries probably coming straight out of your donation pile, but paying people too much can lead to significant fines. Plus, it can cost you your nonprofit tax-exempt status. This typically happens with CEOs and execs. But it’s a good idea to not offer too far above industry averages.
Should you pay a salary or hourly?
This completely depends upon the position. Low-level positions are often hourly, and high-level positions are often salary. But, this is entirely up to you, and it should fit into your overall compensation strategy.
Should you offer benefits?
Probably. In today’s incredibly competitive labor environment, finding ways to attract client goes far beyond base pay. 72% of employees say good benefits increase their job satisfaction, and 32% of workers are looking to switch jobs due to benefits alone. If you can't afford major benefits, maybe offer a monthly medical stipend, gym memberships and other perks where you can.
Do you need staff or just volunteers?
Your nonprofit will have both staff and volunteers. You need staff to run the day-to-day operations and help grow your nonprofit. But you should leverage volunteers to help you expand rapidly and give you scale when it comes to hosting events and doing nonprofit work. Here are a few ways you can score some volunteers and here are some software options that can help you manage them.
What About Taxes?
All nonprofits still need to get an Employer Identification Number (EIN). And you will still have to pay federal, local, and state taxes for employees as well as withhold money from employee paychecks to cover certain taxes.
According to IRS.gov, nonprofits should determine the amount of taxes to withhold from employees based on:
“The employee’s Form W-4 (PDF) and the methods described in Publication 15, (Circular E), Employer’s Tax Guide (PDF) and Publication 15-A, Employer’s Supplemental Tax Guide (PDF).”
Understand the Laws
While nonprofits may pay more nationwide, they definitely don’t always pay more. In fact, the turnover rate in the nonprofit sector may sit somewhere over 20% due to some of the wage inconsistencies that exist in the sector. The nonprofit sector is notorious for wage frictions between frontline employees and C-level.
You can set up your pay structure however you want. We heavily recommend leveraging competitive wages and fair pay structures that reflect effort and capabilities. But, at the very least, you need to follow minimum wage laws and avoid being targeted for excessive compensation — both of which can land your nonprofit in hot water.
Where are your employee wages coming from? If they’re coming from donations, make it clear. Not only does this help foster a better nonprofit culture, but it may help align your employees to your cause. After all, not only does spreading your mission help you reach your goals, but it ensures that they get paid.
Donors also want to know what their money is going towards. If their funds are helping cover the cost of staff, let them know, don't hide it. It shouldn't be an issue because your team is helping keep your nonprofit afloat and doing work for the community or cause.
Remember to Have Net Earnings!
To pay employees, you have to have net earnings. In other words, you have to have money left over annually for employee expenses. You should work with your bookkeeper or accountant for this part. You want to create a budget that clearly reflects your needs and definitely includes staff pay as a column. Nonprofits have enough to worry about. Don’t let budgeting be your downfall!