Nonprofits often turn to outside fundraising professionals to help with activities such as direct mail campaigns, grant writing, or donor outreach. While this support can be vital, large payments to fundraisers may raise concerns with the IRS, watchdog groups, and even potential donors—especially when fees seem disproportionate to the funds raised.
To stay compliant and maintain trust, nonprofits must ensure that professional fundraising arrangements are clearly justified, carefully documented, and properly reported on Form 990 and Schedule G, if applicable.
Key Considerations Before Hiring a Professional Fundraiser
Your board should approach the decision to hire an outside fundraising firm with the same level of diligence you would apply to hiring a key staff member. Here are several important factors to weigh:
✔ Reputation
Research the firm’s background and ask for references. Remember: their actions will reflect on your organization. Seek input from other nonprofits that have worked with them.
✔ Compensation Structure
The IRS prefers a fixed fee model over commission-based payment structures, which can appear exploitative or self-serving. The board should review and approve the fee arrangement as part of the contract.
⚠ Caution: If the fundraiser is a disqualified person (such as a former insider), additional steps are needed to ensure the compensation is reasonable.
✔ Legal and Regulatory Compliance
- Confirm the firm is registered as a professional fundraiser in all applicable states.
- Define operating guidelines for donor interactions.
- Ensure the contract includes necessary permits, insurance, and IP ownership clauses.
What the Fundraising Contract Should Include
A well-drafted fundraising contract can prevent future disputes and help the organization meet its compliance obligations. It should clearly outline:
- Duration and termination clauses
- Scope of services (what the fundraiser and the nonprofit will each provide)
- Payment structure and reimbursement terms
- Fee payment schedules
- Who handles permits, insurance, and state registrations
- Who owns materials created
- Confidentiality and liability terms
- Dispute resolution procedures
✅ Pro Tip: Get detailed invoices from fundraisers to separate service fees from reimbursed expenses—this improves reporting accuracy and 1099-NEC filing.
Form 990 and Schedule G: What You Must Report
Form 990 – Part IX (Statement of Functional Expenses)
Use line 11e to report all payments to non-employee fundraising professionals. This includes fees for direct solicitation, grant writing, campaign planning, and other consulting services.
- Clearly separate fees for services from reimbursed expenses
- Do not report work done by employees or vendors performing ministerial tasks (like banks processing donations)
Form 990 – Schedule G – Part I
Complete this section if professional fundraising expenses exceed $15,000 annually. You’ll need to disclose:
- Top 10 highest-paid fundraisers receiving $5,000+
- Fundraising methods used (mail, online, in-person, etc.)
- Custody of funds (organization or fundraiser)
- Gross receipts, fees paid to fundraiser, and net retained by your organization
- Existence of written or oral agreements
Year-Round Recordkeeping Essentials
To ensure accurate Form 990 reporting, track the following throughout the year:
- Description of fundraising campaigns and solicitation methods
- Names and addresses of all professional fundraisers used
- Details of agreements (written or oral)
- Custody and control of funds raised
- Total receipts raised and fees paid
- Separation of service fees vs. expense reimbursements
- Net revenue retained by your nonprofit
📄 Resource: Refer to Practice Aid PA-56 in the Nonprofit Tax and Governance section for a ready-to-use tool that helps track these requirements.
Final Thoughts
Working with a professional fundraiser can elevate your nonprofit’s impact, but only if approached with due diligence, transparency, and a clear understanding of regulatory obligations. From vetting vendors to filing accurate reports, your board’s decisions in this area will directly affect your organization’s reputation and compliance standing.
