Should you pay board members?

by Carol A. DiLuzio, CPA, CGMA, Principal

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Contrary to what many believe, it’s legal — and in some cases, necessary — to compensate nonprofit board members. For example, paying compensation can help attract well-known business leaders or people with specialized expertise. It might also be appropriate if board members are expected to invest significant time and effort in the role, or if your nonprofit competes with for-profit businesses, as nonprofit hospitals commonly do.

On the other hand, paying board members can create negative public perceptions. Donors may object to their contributions being used for this purpose, and legal complications are possible. Some states protect voluntary nonprofit board members from legal liability, but not compensated members.

Also, compensation arrangements must comply with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS’s reasonable compensation rules. Failure to adhere to these rules can result in hefty excise taxes, penalties and even the loss of your organization’s tax-exempt status.

To learn more about these rules and regulations, please contact me at (302) 254-8240.

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