There are no hard and fast rules about when a not-for-profit organization may or may not pay commissions. The only guidance is the general consensus that it is ethically questionable for a not-for-profit organization to pay commissions to anyone in a fundraising capacity. It would be hard to justify paying a fundraiser (employee or contracted) a percentage of the funds they raise for your organization. Can you imagine explaining that to your donors? Or to the general public?
Other than relating to fundraising, there may be other situations where commissions are justified, as there are some organizations where commissions are an industry practice. Loan providers often pay their loan officers a commission based on the amounts of loans approved. Tourism support groups, such as visitors’ bureaus might pay commissions on the funds received from groups holding conferences in their area. Perhaps the biggest difference here (as opposed to commissions relating to reaching fundraising goals) is that employees of a for-profit in the same capacity are paid commissions, so doing so in a not-for-profit may just be adhering to industry standards.
If you do have the type of business activity that could justify paying commissions, there are several things to keep in mind. First, it is important to maintain documentation. Have a written agreement that clearly details exactly what the commissions will be based on, who will be eligible to earn commissions, when earned commissions will be paid, as well as if there is a maximum per year. Each employee who will be eligible to earn commissions should sign off on this agreement, either as part of their employment agreement, or separately, and this should be maintained as part of their employee file. Then be sure to follow your documented process for paying commissions. The other thing to keep in mind is that commissions paid must be disclosed separately on your Form 990, and must also include a description of the commission arrangement. Bearing in mind that the Form 990 is a public document, you must consider if you are comfortable disclosing to the general public your commission-paying activity. If not, you may need to re-evaluate.
Katie Thomas, CPA