Instructions for Form 1023 Part V (5), Compensation & Arrangements

How to compensate nonprofit organization board members, directors, officers or trustees

Form 1023 Part V (5) is where you explain the numbers and compensations of your directors, officers and trustees. Form 1023 Part V (5) is a very important section and should not to be taken lightly. These questions repeat over and over for the hope that you have been lying and you provide contradicting answers.

To IRS’s credit, they are looking for abusers of the tax exemption process which are many, so get familiar with the laws quickly.

  • You are about to start a nonprofit organization and the nature of it comes with the name. Contrary to the nonprofit criminals who like to say that compensations equivalent to for-profit sector is normal or justified, I advise you to not listen to this garbage. You are about to start something meaningful, to help others, to do good – not to make yourself rich.

Those who take out large sums out of trusting donor contributions are nothing but criminal and abusers of the system, and if you are looking for your American Dream in the nonprofit sector, you should be hanged too. You don’t like my attitude towards this subject? Get the hell out and stop using this site.

Here’s an article I wrote on nonprofit executive compensations which you should read before deciding on how much to pay yourself. Knowing that, let’s get to work.

Instructions For Form 1023 Part V (5), Compensation & Arrangements

Do you or will you compensate officers, directors, or trustees, or do or will you have highest compensated employees, or highest compensated independent contractors?

I have written many pages in detail about compensation and payments made to nonprofit workers which can be found under the Nonprofit IRS Compliance menu at the top of this website. Directors of a nonprofit organization CAN NOT be compensated for their board duties.

One important classification that you should understand fully before answering this question is the difference between employees and independent contractors. Considering that, the IRS is asking you the question again in another way hoping that you list some of your board members on the form 1023.

In my experience, organizations that don’t compensate their officers and employees have 90% more chance of getting accepted than others. Compensation is not a bad thing; everyone should eat, but there’s eating and then there is indulging.

Before you ask me, a highest compensated employee or an independent contractor is a person that would be making $100,000 or more.

Are any of your officers, directors, or trustees related to each other through family or business relationships?

This question is from the old Form 1023 but I’ve left it here as it’s an important issue. They are not asking this question anymore but they do look at the names and addresses to establish this fact. Many nonprofit organizations start as mom and pop organizations, and while there’s nothing wrong with the idea itself, there’s something fundamentally wrong about this practice. If your nonprofit board of directors is consisting of your family members, don’t be surprised when the IRS gives you a hard smack down. You are about to run a (hopefully) charitable organization, and dynasty-style of the government body has no place in this business.

Elect your nonprofit board members from qualified, non-related individuals who share the same passion for the mission. If you must include your spouse or uncle on the board (which you shouldn’t), the voting power should be cut to half to ensure proper distribution of power. These practices are not mandatory but they should be.

Have you adopted a conflict of interest policy?

Your answer should be Yes.  Then refer to the attached policy. And clarify it like “This was adopted by resolution of the board of directors on such and such date.” See the Sample Nonprofit Conflict of Interest Policy and prepare your own.

Do you or will you compensate any of your officers, directors, trustees, highest compensated employees, and highest compensated independent contractors through non-fixed payments, such as discretionary bonuses or revenue-based payments?

The answer to both of these questions should be NO. You can NOT compensate your employees on a commission basis. The compensation should be a fixed payment ,and clear to the public. I repeat this again:

If your employee, John Doe is earning $35,000 a year, his compensation is $35,000 a year period, and it should not depends on how much revenue the organization had in that year. That includes discretionary bonuses. Answer yes to these questions and hell will break loose.

Do you or will you purchase any goods, services, or assets from any of your officers, directors, trustees, highest compensated employees, or highest compensated independent contractors?

The answer is no again. Remember, you are doing this to help others, not your officers and employees. Insider nonprofit transactions are sure ways of corruption, and the IRS has sharp eyes for these kinds of transactions. Doing so is opening yourself to a world of pain.

They are hoping that you understand that doing business with your directors, officers, and employees are frowned upon, and in most cases illegal. A nonprofit organization is formed to benefit the public, not its members -where a for-profit entity is formed to benefit its members. Please understand these best practices and put them to good use.


(Next Step) Form 1023 Part VI – Financial Data & Budgeting
(Previous Step) Form 1023 Part IV – Narrative Description & Your Activities

Nonprofit Bylaws - Nonprofit Articles of Incorporation - Nonprofit Conflict of Interest Policy

NOTE: If you’d like to receive the following organizing documents:

  • Nonprofit Articles of Incorporation,
  • Nonprofit Bylaws,
  • Nonprofit Conflict of Interest Policy,
  • Conflict of Interest Policy Acknowledgment,
  • Form 1023 Attachment with all the answers,
  • Form 1023 Expedite Letter template,
  • and Donor Contribution Form

in Microsoft Word Document format, please consider making a donation and you’ll get to download them immediately. Not only they're worth well over $1000 in value, they will save you weeks of copy pasting and formatting as they are ready to go templates which only need changing names and addresses.

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IRS Form 1023 Application Review