Nonprofit organizations rely on volunteer board members to provide oversight and strategic direction. These individuals hold a fiduciary duty to the organization, ensuring its assets are used to advance the public mission. While board service is generally voluntary, exceptions exist where a board member may legitimately receive payment for work performed. Improper compensation can jeopardize a nonprofit’s standing and incur severe financial penalties.
The Presumption Against Compensating Board Members
The traditional model holds that board members serve without pay for their governance duties. This volunteer structure reinforces the organization’s public benefit purpose and helps prevent conflicts of interest. The board’s primary role is to protect assets and ensure resources are directed toward the mission, not toward personal financial gain.
This norm reflects the ethical standard that those who oversee charitable funds should not profit from their position. Federal tax law does not prohibit all compensation, but the presumption of volunteerism guards against self-dealing. State laws or organizational bylaws may further restrict paying directors for standard board responsibilities.
The Critical Distinction: Payment for Services Rendered
A board member can receive compensation for specific services performed outside of their regular governance role. This applies when a board member possesses a unique professional skill, such as legal, accounting, or specialized consulting expertise, that the organization needs. The compensation must be treated as an arm’s-length transaction, handled exactly as if the nonprofit were hiring an unrelated third-party vendor.
The payment must be for the fair market value of the services and cannot be excessive. This “reasonable compensation” is determined by what similar organizations pay for comparable services from similarly qualified professionals. Documentation must clearly delineate the scope of work, the rate of pay, and the necessity of hiring the board member over an outside professional. The board member receiving payment should not participate in the discussion or vote to approve their own contract.
Navigating Private Inurement and Intermediate Sanctions
Improper or excessive compensation poses a significant legal risk involving private inurement and excess benefit transactions. The prohibition against private inurement dictates that no part of a 501(c)(3) organization’s net earnings can benefit any private individual, particularly “insiders” who have a close relationship with the organization. A violation of this rule can result in the revocation of the nonprofit’s tax-exempt status.
To address less severe infractions, the Internal Revenue Service (IRS) imposes financial penalties known as Intermediate Sanctions. These sanctions apply to “excess benefit transactions,” which occur when a “disqualified person,” such as a board member, receives a benefit exceeding the fair market value of the services provided. The penalty is an excise tax levied directly against the disqualified person, initially at 25% of the excess amount. An additional 10% tax may be imposed on any board member who knowingly approved the transaction.
Compensating Board Members Who Also Serve as Officers or Staff
It is common for a nonprofit’s executive officer (e.g., CEO or Executive Director) to also hold a seat on the board of directors. This individual is compensated for their full-time management duties as a staff member, not for their service as a director. The payment is for the operational execution of the mission, which is distinct from the board’s function of oversight.
In this scenario, the individual receives a salary for their staff role and typically no additional compensation for their governance role. When staff members serve as directors, the majority of the board must remain independent, consisting of individuals who are not employees and receive no compensation beyond expense reimbursement. This independence helps maintain objective oversight of management and finances.
Essential Governance Practices for Board Compensation
When a nonprofit pays a board member for specific services, the board must follow a clear process to demonstrate the compensation is reasonable. This process begins with adopting a Conflict of Interest Policy that dictates how such arrangements are handled.
Establishing the Rebuttable Presumption
Before approval, the independent members of the board must conduct a comparability study to establish the fair market value for the work. The board must thoroughly document the entire decision-making process in the meeting minutes, including the comparable data reviewed and the rationale for the final compensation amount. This documentation establishes the “rebuttable presumption of reasonableness,” which is the organization’s best defense if the compensation is scrutinized by the IRS. The independent board members must approve the transaction without the interested director being present for the discussion or the vote.
Handling Expense Reimbursement for Board Members
Expense reimbursement is permissible for board members and is fundamentally different from compensation. This practice covers out-of-pocket costs incurred while performing duties related to the organization’s mission, such as travel to meetings or necessary training expenses. Reimbursement covers a director’s costs and is not considered payment for service.
For reimbursement to be excluded from taxable income, the organization must operate under an “accountable plan.” This plan requires that the expenses have a direct business connection to the nonprofit, that the recipient adequately substantiates the expenses with documentation, and that any excess funds advanced are returned in a timely manner. Establishing a clear reimbursement policy ensures compliance.