Can a Nonprofit Pay Commission-Based Compensation to Grant Writers?

Generally speaking, commission-based fundraising and grant writing assistance is considered unethical by the major professional fundraising societies (e.g., Association of Fundraising Professionals, Grant Professionals Association), but it is not illegal and will not result in a nonprofit organization losing its tax-exempt status.  There is a specific IRS prohibition on compensation based on a percentage of profit.  Compensation based on incentives, including bonuses, is carefully scrutinized by the IRS to ensure that no prohibited private benefit results. The IRS tends to be skeptical of such compensation structures as they might incentivize the charity to focus on cutting costs (and charitable services) in order to generate private benefit for those employees or contractors paid a percentage of the profits.  The IRS does NOT have a specific prohibition on compensation based on percentages of gross income.

Another compliance-related issue for nonprofit organizations to keep in mind is to ensure that any professional grant writer it works with  is properly registered as fundraising counsel in those states that require charitable solicitation registration (e.g., Virginia).  Reach out if we can be of assistance with your nonprofit questions or compliance issues.