Are there published IRS standards for determining reasonable (acceptable) salaries for the principals of a small non-profit religious organization (2-3 employees)? Is there an acceptable level of payroll as a percentage of Gross revenue? By what measure would the IRS determine whether or not an individual's salary is excessive?
You should review the IRS rules for determining compensation under the rules for excess benefit transactions. (See Ready Reference Page: "Charities Must Avoid Excess Benefit Transactions.") They focus on the process of determining comparability and don’t establish specific standards. There is no general limitation on the percentage of gross revenue that may go to salaries. Some nonprofits spend primarily for salaries, while others make grants or provide goods so that salaries are a much smaller percentage of total expenses.
The 2017 Tax Bill added a provision imposing a 21% excise tax on salaries of 501(c)(3) organizations in excess of $1 million, however.
Originally published 4.23.07