August 17, 2006 | Read Time: 4 minutes
Q. I started a charity, which I registered with the Internal Revenue Service and which I run as a volunteer. I am being overwhelmed by the hours I’m putting in. I want to continue my organization, but I need an income. How do I go about getting compensated? What paperwork do I need to complete?
A. The founder of any charity, much like the founder of a business, is an entrepreneur, and entrepreneurs do often sacrifice compensation while getting their ventures off the ground.
“Many great entrepreneurs have to hold part-time jobs on the side so they can support themselves while still dedicating time to their nonprofits — kind of like starving artists,” says Farhana Huq, founder of CEO (Creating Economic Opportunities for) Women, a nonprofit organization in Oakland, Calif., that helps female immigrants to the United States become economically self-sufficient. “Until your charity starts raising money, this is sometimes the only way.”
So, if you haven’t put a lot of effort into fund raising, now is the time to do so. Consider hiring a consultant to help. Both the Association of Fundraising Professionals, in Alexandria, Va., and the Alliance for Nonprofit Management, in Washington, allow you to search their Web sites so you can find a fund-raising specialist in your area.
Assuming, however, that you do have sufficient money coming in, there is no reason you shouldn’t be compensated, says Shannon Nash, a tax lawyer and accountant in Sherman Oaks, Calif., who works with nonprofit organizations. Pay for your services should be part of your budget, she says.
The paperwork requirements you have to deal with will depend on whether you choose to set up your compensation as an employee or as an independent contractor.
As an employee, keep in mind that the charity will need to withhold money for Medicare and Social Security taxes from your paycheck and pay an equivalent amount from its own coffers to the Internal Revenue Service.
If you are an independent contractor, you will have to pay those employment taxes yourself and will be expected to make quarterly tax payments to the IRS.
As a self-employed worker, you will be able to deduct on your income-tax returns the costs of phone, travel, meals, supplies, and other items that are not reimbursed by the charity. If your compensation is more than your expenses, however, you will also need to pay self-employment taxes.
Basic information, as well as the forms you will need, to be paid as a charity employee or an independent contractor are available on the Web site of the Internal Revenue Service.
Because it sounds as though your charity is relatively new, Ms. Huq recommends setting up your payment structure as an independent contractor.
The flow of funds into a new charity can often be inconsistent, she says, and as an independent contractor you can keep track of the number of hours you spend working and then submit invoices to the charity for payment when it has money available.
“I worked for no or very little pay for almost three years before getting a salary because there was just no money to pay me,” says Ms. Huq. “I convinced the board to pay me back wages, and they are now paid out periodically as the organization grows and becomes stronger.”
As soon as the charity’s cash flow becomes more consistent, Ms. Huq recommends, you should move to an online payroll system that can help you manage all the paperwork.
Once you decide how you are going to be compensated, you must next determine how much is “reasonable compensation,” says Ms. Nash.
“Your payment should be in line with what similarly situated individuals would make for doing the same type of activities,” she says.
Sources of salary information to conduct such comparisons are available on The Chronicle’s Philanthropy Careers Web site.
Ms. Nash notes that the IRS will want you to prove that your board set your salary, and you were not in the room when your compensation was discussed. In addition, the board will have to show that it examined comparable organizations to make sure your pay was in line with the sums paid by other groups.
The organization should document all of this in the board meeting’s minutes and have it signed by the board’s secretary, says Ms. Nash. This should be done on the same day or soon after the actual meeting, and copies must be kept in the organization’s official corporate minute and record book.
