Tax-exempt charitable nonprofits, like all other employers, are required to follow federal and state wage and hour laws that control compensation and working conditions. At the upper end, compensation must be “reasonable” and not “excessive,” which is a fundamental requirement of maintaining tax-exempt status. NCN provides guidance on setting an appropriate and fair level of compensation in attracting and retaining nonprofit employees while adhering to labor law. Includes practice pointers and additional resources.
Bonuses for Staff
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.
NCN says that 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.
Related Resource
Awarding Employee Bonuses in a Nonprofit – Association of Corporate Counsel
Details applying the IRS 12-Factor Test of Compensation as an assessment in determining bonus rationale.