I am part of a very small 501(c)(3) organization that has been in operation for 17 years. There are only two of us who "work" full-time, although we do not get compensated throughout the year. Is it legal for us to take a bonus at the end of the year? If so, are there any restrictions on how much we can take?
It is permissible for a 501(c)(3) or other nonprofit organization to pay reasonable compensation for services actually rendered, so a year-end “bonus,” treated and reported as compensation, is not per se illegal.
I am a little concerned with your use of the word “take,” however. Do you mean that actively, as in writing yourselves a couple of checks, or passively, as in receiving checks that someone else approves and gives you?
I assume from your question that the organization has not traditionally paid for the kind of work that you and your colleague do. If that is the case, any compensation ought to be approved by the board of directors or other governing body. A switch from volunteers to paid staff is a significant policy decision that can permanently impact the program. For your own protection, you want to be sure that this idea is approved by those responsible for running the organization. You certainly don’t want to be accused of theft.
As to the amount, it cannot be more than “reasonable” or it could be considered an excess benefit since it sounds like you are a disqualified person under the rules. An independent group on the board should check around to see what others get paid for doing what you do for similar organizations. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions”) From the size of the organization and the lack of compensation in the past, it doesn’t sound like you will be “taking” enough to raise a specter of liability on this issue, but it is good to be sure.
BREAKING…. Our wonderful Congress last week passed legislation to extend 55 separate tax breaks for the calendar year of 2014. Included among them was the extension of the IRA rollover that allows individuals over 70 ½ to transfer funds from their individual retirement accounts directly to charities without having to take the distribution into income for the year. It can be an important benefit for some charities and they were given about two whole weeks to promote it.
If Congress had to authorize campaign contributions every year, does anyone think they would wait until two weeks before election to make them legal?
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I am an unpaid executive director of a very small non-profit. During the year I often spend personal funds on non-profit business, for which I am not reimbursed. When the board discussed paying me something, I asked that they pay my unreimbursed out of pocket expenses. This avoids having to turn unpaid staff into paid staff as well as not being taxable to me. If the amount under consideration is in line with the employees' out of pocket costs, that can be a simple way to do this.
This sounds like a good idea but be sure that you provide proper receipts for your expenses and otherwise meet the requirements for an "accountable plan" for expense reimbursement. The IRS has taken the position that it is an automatic excess benefit if a charity reimburses expenses without following the proper procedures. Even though you have not been compensated for serving as executive director, you have been in a position to exercise substantial influence within the organization and would be considered a disqualified person to whom the excess benefit rules apply —Don Kramer
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