I was recently reviewing the bylaws for a homeschool organization that stated,
Members of the Board of Directors may receive reasonable compensation for their services and may be reimbursed for actual expenses incurred in the maintenance of their duties
The board decided to pay its members for serving on the board. This board also selected its own members. There was no election or vote by the general membership on who served on the board.
It seems like a nice thing pay board members, right? They probably put in a lot of time and effort to run this homeschool group. What not pay them a bit for serving?
The IRS doesn’t like it.
A homeschool organization can compensate your board for their service, but compensation to officers is taxable income and the board members must be paid as employees. Other board members who are not officers can be paid as independent contractors and given a 1099-MISC.
Did you catch that? If board members are compensated, the IRS laws say they must be paid as employees. That means creating paychecks, paying payroll taxes (Social Security and Medicare), preparing W-2s, quarterly filings with the IRS and your state, and may mean Unemployment and Workers Comp taxes!
Does your homeschool group prepared to manage payroll? My new book Paying Workers in a Homeschool Organization can help with that!
Also because this board appoints itself, it is self-dealing to vote itself compensation. This is what the IRS calls private benefit or inurement and it is forbidden by the IRS. Your organization could lose its tax exempt status if you practice inurement or too much private benefit. The IRS is serious about this!!
What counts as compensation? Here’s some guidance from the IRS
Look at 4) payment of personal expenses, such as paying a hired teacher on behalf of the board member, is taxable compensation.
Reimbursement of expenses is OK, but compensation of board members for their service is taxable compensation.
My advice to this homeschool group was to stop paying board members compensation for serving on the board. Paying board members is complicated, requires they be paid as employees, and is probably illegal for this self-appointed board.
Carol Topp, CPA
Paying Workers in a Homeschool Organization-2nd edition
The policy for our homeschool group used to be that board members received free membership while they served on the board. However, a CPA advised us that it was not a good practice, that it would be considered an inurement. Do you agree?
I think its a pretty common practice for nonprofit boards to give free memberships (or free tickets to an event) to hard working volunteer board members.
But it can turn into self-dealing and inurement, so here are some guidelines:
1. Have a Conflict of Interest policy. I have samples here:
2. Have the membership at large vote to approve these discounts for board members. Put that into your bylaws.
3. Keep the discount “reasonable.” Keep it so low that no one is being influenced to forget that their first loyalty is to the group, not their individual benefit. In other words, if someone joins the board just to get the discount (!), they are not a good candidate for board member. Typically homeschool groups give a discount of $25-$35, so I don’t think that has a huge influence on anyone’s loyalty. If the discount gets much larger, put it to a vote of the members at large, so it’s not self-dealing.
Our by-laws specifically allow for Board members to receive a stipend. Weren’t our by-laws approved by the IRS as part of application process when we were granted 501c3 status?
Technically, the IRS didn’t “approve” your bylaws; they just want to be sure that your organization has bylaws and that you do not allow for anything prohibited to 501c3 organizations.
You CAN pay your board members. It’s allowed. But they must be compensated as employees. You can call it a “stipend”, if you like, but your organization still needs to be paying payroll taxes (SS/Medicare), filing the quarterly employer tax returns (IRS Form 941), giving them a W-2, and maybe pay unemployment and workers comp too.
Carol Topp, CPA