Nonprofit GPS

Your Personal Navigation System Through Not-for-Profit Accounting Issues

Can Not-for-Profits Pay Commissions?

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

Comments

  1. jeff johnson says:

    starting a youth football touch league – i want to pay the directors in each state a percentage of the registration. They would act as employees of the non profit with the non profit paying taxes on any funds.
    Should I list them as an employee even though there will be a foreign entity filed in their state?

    • admin says:

      Jeff,

      Thanks for your comment. I’m not sure I fully understand your question, but it sounds like you are asking if the directors are going to be employees of the organization? If so, it honestly depends on how you structure the agreement with them, but it is always the most conservative to treat them as employees (which includes paying employment tax and filing a W-2 for them).

      Sincerely,

      Katie L. Thomas, CPA

  2. admin says:

    Michael,

    Without knowing the specifics of your situation, I am unable to speculate on the appropriate treatment. Please consider consulting an attorney or an accountant who can get into the details of your specific situation.

    Katie Thomas, CPA

  3. admin says:

    There are numerous organizations that have questioned the ethics of paying commissions, including the US Supreme Court, the Philanthropy Journal, the Association of Fundraising Professionals, and the Council for Advancement and Support of Education (CASE). If you would like to see any of these please just google “commissions fundraising” or check out CASE’s Statements on Compensation for Fundraising Performance” – http://www.case.org/Samples_Research_and_Tools/Principles_of_Practice/CASE_Statements_on_Compensation_for_Fundraising_Performance.html. In the article they say “CASE discourages commission-based compensation for all fundraising employees” and goes on to explain why that is a bad idea.

    Katie Thomas, CPA

  4. Rich Raines says:

    Can you provide a specific reference source(s) which questions the ethics of paying commission to a fund raising person?

  5. Michael says:

    I would like to have my 501 3c theatre company (one that puts on plays), to start an internal affiliate program. Our whole industry has a problem of getting people to attend performances. So we almost always have tickets to sell that don’t get sold. What we would like to implement is sort of an affiliate sales program with the actors we hire. In short this means we would like to let our actors go out and solicit sales from the general public, and for each sale they generate, we would pay them a commission. Would this jeopardize out 501 3c status?

  6. Tammy says:

    Hello Katie,
    Thank you for your helpful article.
    I work with a Churhc organization and they are considering to go online to increase Mission Income by selling their DVD religious-based lectures. Online marketers have suggested to go with affiliates. For example, if they have a $100 dvd course, they can pay the affiliate a small percentage commission for bringing their email list to our website. The Church’s email list is quite small, so affiliate marketing will help spread their message / dvd.

    Does this kind of affiliate online marketing affect the non profits 501(c)3 status? How is it reported? Is it looked down upon?

    (Donations are minimal and the Church is struggling to stay afloat in this economy.)

    Thanks for your advice and direction.

  7. admin says:

    Bob,

    I’m not sure I entirely understand, but it sounds to me like you are not paying commissions. Instead, you have an agreement with the consultant for $X ($70 using the numbers from your example). In essence, your gross income would be the $100, expenses of $70, net income (at least from just this transaction) of $30. Regardless of the amount, it is important to have a written agreement with the consultant.

    My biggest concern is how this fits in with your organization’s mission. I do not have enough details to fully understand, but it sounds like there could be an issue with Unrelated Business Income, which would subject you to UBIT. If you have any other questions, or would like more information, please let me know.

    Katie Thomas, CPA

  8. Bob Gearhart says:

    501 c 3 Foundation would like to solicit advertising (maybe $500 per year) from nonprofit consultants to appear on a site. Consultant’s would submit articles on varied npo subjects, and participate in a consultant-on-call format on the site…maybe we’d charge the npo $100 for a half hour…we’d keep 30% for maintaining the site, pay the consultant 70% for providing advise and counsel.

    We view this as promoting traffic to the site and providing a service for small non profits that they might otherwise not be able to access.

    When npo’s come to the site and search for a nonprofit specialist, the consultant’s name would appear by geo area or area of specialty. npo may elect to contact consultant or not

    As soon as npo contacts consultant, foundation is out of the equation..no commission, no other revenue.

    Does this sound appropriate?

    Thanks,

    Bob

  9. admin says:

    The IRS asks about commissions on Schedule J, specifically lines 5 – 9. Technically, if you are not compensating anyone over $150,000 you would never have to disclose this. However, if the IRS is asking about it at all, you can be that they think it is important information.

    Thanks for the comment!

    Katie Thomas, CPA

  10. Bill Warren says:

    This is a very interesting topic and helpful information to have. One question for you — can you point me to specific language or references in the Form 990 instructions that stipulate this commission disclosure? I am having trouble locating it.