Board members of a non-profit organization can be paid under some circumstances. However, the practice of paying such board members has come under increasing scrutiny since the passage of the 2002 American Competitiveness and Corporate Accountability Act, commonly called Sarbanes-Oxley. Strict reporting rules and government guidelines determine whether paying board members is ethical and legal. Compensation can create many potential conflicts for board members and non-profit organizations alike.
Conflicts of Interest
A board member cannot realize financial gain from decisions made for a non-profit organization. This amounts to compensation without the permission of the board of directors. Examples can include holding a celebration at a board member's restaurant, a decision to fund an activity that pays for services from a business owned by a board member's family member or doing consulting work in the same field the non-profit works in. The board of directors of any non-profit organization must approve compensation for a board member, and financial gain resulting from the organization's activities qualify as compensation. Because non-profits depend on public support, any appearance of a conflict of interest, whether real or not, can create bad press and hamper the efforts of the organization.
Distribution of Profit
The term "non-profit" does not mean an organization can't engage in profit-making activities. It means that organizations must use those profits for the charitable work it does. Profits cannot be distributed to board members. Anyone who participates in the profit-making opportunity is prohibited from realizing a financial gain from that opportunity. "Participation" includes voting and decision-making as well as working directly on the tasks required for the activity.
A board of directors may approve a salary for a board member. The salary must come from the operating budget and not from any profit-making activities. In practice, non-profits use an independent committee with outside consultation to determine whether a salary is to be paid and how much compensation to offer. The Internal Revenue Service scrutinizes non-profit salaries to make sure they are comparable to similar positions. An exorbitant salary could result in tax penalties.
Any non-profit with an income over $25,000 must file Form 990 with the IRS. This form asks for details about the organization's compensation policy, along with information about any possible conflicts of interest. Note that reimbursement of expenses qualifies as compensation for a board member, so the board must have a clear set of guidelines on such reimbursement.
An official designation as a "volunteer" means that person cannot be compensated under the Federal Volunteer Protection Act of 1997. However, a volunteer can be reimbursed for actual expenses incurred while doing work for the non-profit organization.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.