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:
Form 1023, Part V (5), line 1a) List the names, titles, and mailing addresses of all of your officers, directors, and trustees. For each person listed, state their total annual compensation, or proposed compensation, for all services to the organization, whether as an officer, employee, or other position. Use actual figures, if available. Enter “none” if no compensation is or will be paid. If additional space is needed, attach a separate sheet. Refer to the instructions for information on what to include as compensation.
There is no minimum number for directors in a nonprofit organization set by the Federal Government, but the IRS wants to see that the organization is managed by a qualified and diverse board of directors. A good nonprofit board of directors should at least have four or five directors and preferably from both sexes. If you have two directors that are on the board who are related to each other, you need to count them as only one (1), and up the umber of directors to 6 or 7.
The more caring your board is, the better the outcome of your nonprofit organization will be. Distribution of power is what the IRS has in mind, and a two or three member board of directors does not guarantee that. Directors of a nonprofit organization CAN NOT be compensated for their board duties.
Form 1023, Part V (5), line 1b and c) List the names, titles, and mailing addresses of each of your five highest compensated employees who receive or will receive compensation of more than $50,000 per year. Use the actual figure, if available. Refer to the instructions for information on what to include as compensation. Do not include officers, directors, or trustees listed in line 1a.
| Name | Title | Mailing Address | Avg. Hours | Annual Compensation |
| John Smith | Incorporator & Director | 755 Smith Field St. Smith Field , SF 99601 |
40/week |
$0 |
| John Doe | President | 755 Smith Field St. Smith Field , SF 99601 |
15/week |
$0 |
| John Johnson | Vice president | 755 Smith Field St. Smith Field , SF 99601 |
15/week |
$0 |
| John Peterson | Treasurer, CFO | 755 Smith Field St. Smith Field , SF 99601 |
15/week |
$0 |
| John Jackson | Secretary | 755 Smith Field St. Smith Field , SF 99601 |
15/week |
$0 |
Form 1023, Part V (5), line 2a) Are any of your officers, directors, or trustees related to each other through family or business relationships?
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. Lines 2a through 3b go back and forth to make sure you’re giving honest answers and you understand that running a nonprofit entity is more than saving snails.
On line 4, you should answer YES to all of them and actually practice them. These practices are not mandatory but they should be.
Form 1023, Part V (5), line 5a) Have you adopted a conflict of interest policy consistent with the sample policy in Appendix A?
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.” Click here to see a sample Nonprofit Conflict of Interest Policy.
Form 1023, Part V (5), line 6a and b) Do you or will you compensate any of your officers, directors, trustees, highest compensated employees, and highest compensated independent contractors listed in lines 1a, 1b, or 1c through non-fixed payments, such as discretionary bonuses or revenue-based payments?
The answer to both is a big HELL 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.
Form 1023, Part V, line 7a and b) 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 listed in lines 1a, 1b, or 1c?
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.
Form 1023, Part V (5), line 8 and 9 brush on the same subject again 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 – Members, Individuals, And Organizations
(Previous Step) Form 1023 Part IV – Narrative Description Of Activity & Sample
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.
