When a nonprofit organization is first formed, everyone may be willing to volunteer their time and expertise because they believe strongly in the mission. However, in terms of developing your budget, you should begin contemplating eventual staffing needs. It may be a year or two before there is movement to compensate anyone, but having a line in your budget to accommodate that possibility will place the group well ahead of the game. Start by looking at the board's assessment of where the group should go in the next few years and pick out instances where it is clear the group may need an “outside” person to assist. The first couple of years you may only need a compensated consultant to help with a board retreat or an accountant to review your books or prepare your Form 990.

A Word about Compensation

One of the common misunderstandings about nonprofits is the notion that no one can be paid. Nothing is further from the truth, but there are a few basic rules that need to be clearly reflected in both the current and projected budget.

First, anyone employed or contracted must do so at an agreed-upon fee for his or her services. A sliding-scale fee is not acceptable or legal, for it would allow that person to benefit personally from the organization. f this situation came up in a for-profit corporation, any type of negotiation between the organization and a potential employee would be acceptable as long as minimum wages were being met. Not so in a nonprofit.

Similarly, if it appears that someone is receiving a fee well above the community standards for a similar position, the organization runs the risk of being penalized for an excess benefit transaction. These fees will be reported on Form 990. Having to deal with excess benefit transactions can lead to increasingly severe penalties, up to and including a revocation of your tax-exempt stats.

In-Kind Labor

The time and expertise of people who volunteer with the organization have real monetary value that your budget needs to reflect. Although no money is changing hands, work is being done. If the people doing that work charged the organization market fees, it would represent a substantial sum.

It is therefore very appropriate to assign a monetary value to the tasks and determine the fair value of the donated labor needed. The monetary value of in-kind services should accurately reflect what that person would charge for doing the task. You can determine the real rate by calling a few people who do that exact work for a living.