Let's go back to our founder from paying yourself as a founder, the one who spent two years working for free in the evenings and came close to burning out. Her organization has money now: grants came in, recurring donors showed up, and the board is unanimous that it's finally time to pay her. Everyone agrees.
And then the conversation stalls. What's the right number? Who's supposed to say it? She obviously can't name her own figure, everyone knows that. The board is ready to say yes, but yes to what, exactly? The question hanging in the room has no method attached to it, and out of sheer awkwardness, everyone moves on to the next item on the agenda. Another quarter of unpaid work.
This lesson is the method. The good news: it already exists, the IRS wrote it, and any organization, regardless of size, can follow it. paying yourself as a founder covered that you can and should pay yourself. This one covers how, and "how" matters more than "how much" here.
The IRS describes a procedure that, if followed, creates a presumption that your salary is reasonable: the decision is made by people with no personal stake in it, based on comparable data for similar roles, and documented in writing right away. Meet all three conditions, and the burden of proving otherwise shifts to whoever's auditing you, not the other way around.
There's a legal structure called the rebuttable presumption of reasonableness. In plain terms: if you set a salary through this procedure, the IRS treats it as reasonable by default, and it becomes the auditor's job to prove otherwise, not yours to prove you got it right. For a small organization, that's a genuine gift, and it's surprising how rarely people actually use it.
First condition: the decision is made in advance by people with no stake in it. The board or a committee, without you in the room, you disclose your interest, step out of the discussion and the vote, then come back for the next item. The decision happens before payments start, not after the fact.
Second condition: the decision rests on comparable data. Don't make up a number, look at what similar organizations pay for similar work. Small organizations get a break here: if your annual gross receipts are under a million dollars, data from three comparable organizations in your region is enough. Three data points, not a commissioned study. Pull them from public 990s of similar organizations on Candid, from sector salary surveys, from job postings for similar roles.
Third condition: the decision gets documented right away. The minutes record the amount, the date, who was present and voted, what data was used, how the conflict of interest was handled. The rule technically allows up to 60 days or your next board meeting, but in practice, write the minutes the same day, the habit from keeping minutes becomes legal protection here.
All three conditions together give you the presumption. Any two out of three give you good intentions with no protection.
Here's the core idea of this lesson. Instinct says the most important thing is guessing the right figure, not too high, so nobody objects. Instinct is wrong on both counts.
A modest salary set with no procedure is still vulnerable: you picked it yourself, no data, no record, and if it's ever questioned, you're arguing the merits with nothing but your own word. A market-rate salary set through all three conditions is nearly bulletproof: the argument, if there is one, isn't about the number anymore, it's about the procedure, and the procedure is airtight.
And the procedure protects people personally, not just the organization. Board members who approved compensation by the book are generally not held liable, even if someone challenges the decision later. That's real insurance for your directors, and experienced board candidates know to ask about it before they join.
What if the market number turns out to be more than the organization can afford? Then the board states it plainly: the market range is this, we're paying below it for budget reasons, the gap is acknowledged openly. Paying below market is always legal. The point of the document isn't to justify paying a lot, it's to give whatever number you land on a foundation.
Compensating an insider beyond what's reasonable is exactly the excess benefit transaction from private benefit and private inurement. The penalty is personal: the recipient pays a 25 percent excise tax on the excess amount and has to repay it. Don't correct it in time, and the tax climbs to 200 percent. Board members who approved the deal knowing the details: 10 percent of the excess each, capped at $20,000 per transaction. The organization itself usually keeps its status, the mechanism is built to hit individuals, not the mission.
Two things people often forget. Compensation counts as a whole: salary plus bonuses plus benefits, all of it together. A modest salary paired with generous benefits isn't a clever workaround, it's the same total number, just calculated by somebody else instead of you. And bonuses tied to the organization's revenue are a separate danger zone: "a percentage of donations raised" sounds motivating and looks like siphoning money out. Nothing like that gets set up without a conversation with legal counsel and your CPA first.
The compensation memo from the builder above: role, three or more comparable sources with a range, the full compensation package, the procedure plan. Send it to two places before the board meeting: the disinterested directors, as material for their decision, and your CPA, for review. File the minutes excerpt afterward. Put an annual review on your yearly calendar, even if the amount never changes.
If you're not paying yourself yet and don't plan to this year, put the memo together anyway, labeled "prepared in advance." On the day the board is ready, you'll have a method instead of an awkward pause.
What if it's hard to find three comparable organizations in my area?
Widen the geography to a region with a similar cost of living, or use sector-wide salary surveys instead of only local 990s.
Do I have to go through this procedure every year if the salary doesn't change?
Yes, an annual review is recommended even with no change, it confirms the decision is still well-founded.
Can the founder even be in the room when their salary is discussed?
They can be present to answer questions, but need to step out for the actual discussion and vote.
Our founder got her salary a month after a two-page memo landed on the board's table: three comparable organizations, a range, a proposed number inside that range, a clear procedure. The vote, without her in the room, took ten minutes, and nobody felt awkward, because they weren't agreeing with her, they were agreeing with the data.
That closes out the module on status health. You can calculate your own public support, tell related income apart from unrelated, and justify your own salary. One thing ties all three skills together: an organization that measures itself isn't afraid when someone else measures it too.
The material in this lesson is educational and drafted for review by your attorney and CPA. This course does not replace professional advice and makes no promise of outcomes.