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Earned Income for Nonprofits: What it is and How it Works

It was always a dream of mine to become the executive director of a nonprofit organization. After developing the right relationships and building a career in marketing, that dream became a reality.

My goal from there was to disrupt the nonprofit world and look at it through the lens of a business person. What I’m focused on is making a sector-wide shift from simply surviving to absolutely thriving. And part of that comes from looking at other ways you can bring in money to further your mission.

I’m not going to tell you that we will be able to run the nonprofit sector on earned income. The reason why nonprofits exist is to address the failings that aren’t being overcome by market forces. But having the option of earned income gives nonprofits more freedom to focus on their mission when they’re not worrying about how they’re going to pay their rent bill next month. I like to stress that you can finance your nonprofit, not just fundraise for it.

As nonprofits, we’re afraid to say what we’re worth. We feel because we’re a nonprofit that we have to give away our services. If we make a practice of putting a price on our services—including our time—we at least know how much we’re giving away when we have to. And can charge appropriately when we can.

Just because your organization is “not for profit” doesn’t mean you aren’t profitable. We need to develop a model to sustain ourselves for the long run, and earned income can become part of that.

Defining earned income

By definition, earned income is “any income that a person or company receives for work they have done.” For nonprofits, types of earned income can be from mission-related sales or from services sold.

My favorite classic example is that of the Girl Scouts. Part of the organization’s mission is to teach young women business practices. When your neighbor’s 12-year-old comes to your door to sell you a box of Thin Mints, not only is she learning skills that will help her in her future endeavors, but she’s also making money for her organization. That’s a pretty cool way to earn some extra dough while staying focused on your mission.

Now, I know where it feels questionable—should a nonprofit be selling anything at all? I’d argue yes, especially to keep it running when it comes to things like operational costs. As I’ve talked about before, “overhead” is just a part of achieving the mission. Also note that it’s best to stay on-mission when you’re thinking about earned income opportunities, as “unrelated business expenses” are taxable.

Start off by doing some primary research and asking your donor base what products or services they think could work. After that, narrow it down to one that is tailored to your mission. Once you have that, it’s time to put in the time and money to develop something that will add something more to your nonprofit.

“Is that allowed?”

I can’t tell you how many times I’ve heard this question during consultation sessions with nonprofit professionals. And it’s a fine question—the last thing a strapped-for-cash organization needs is a tax scandal. Not only is earned income completely legal, it’s completely ethical, too.

The IRS differentiates your organization’s income into two categories: business income and unrelated business income. If you’re organization is tax exempt under a 501(c)(3) classification, the income you earn must be in line with your mission in order to avoid paying taxes on it. For example, if your nonprofit organization’s goal is to create more bilingual citizens, you could charge for tutoring sessions and classes, tax free. However, if that same organization decided to sell pizza by the slice, that would be considered unrelated business income and would be subject to an income tax.

It’s not always this cut-and-dry, but as long as your products and/or services are somehow related to your mission, earned income is a great way to supplement traditional fundraising methods.

The takeaway

Earned income falls into the picture when you’re trying to diversify your funds. For a lot of the time, your nonprofit can garner financial support from grants, donations or major gifts. But don’t exclude the idea of earned income to help supplement those as well.

Originally published 08.02.2017—Updated 05.17.2018

The post Earned Income for Nonprofits: What it is and How it Works appeared first on Nonprofit Hub.

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1 Comment

  1. Gigi says:

    If my 501c3 has a group home for disabled individuals with community day habilitation included with services and I collect earned income is that staying within the guidelines? I would also like to fund raise and sell merchandise that is also in line with the group home. I’m just getting started so its so much to learn.

    Thank you, great article!

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