Compensation for Nonprofit Employees – National Council of Nonprofits
Bonuses are considered to be part of the overall compensation received by an employee. First, compensation based on incentives, including bonuses, is carefully scrutinized by the IRS to ensure that no prohibited private benefit results. Second, be sure to manage employees’ expectations so that they realize bonuses are a discretionary add-on to regular salary, dependent upon budget limitations, and often provided in recognition of an employee’s extra-efforts or exceptional performance – not automatic.
Bottom line, a bonus is permissible if the employee’s entire compensation package is reasonable, in line with organizational budget limitations, and in furtherance of the organization’s exempt purpose.
Awarding Employee Bonuses in a Nonprofit Organization – Association of Corporate Counsel details
Details applying the IRS 12-Factor Test of Compensation as an assessment in determining rationale of an employee bonus.