Can You Pay Yourself With Grant Money? Here’s What to Know

Grant funding can be a valuable resource for nonprofits, researchers, and small business owners, but strict rules often govern how the money can be used. A common question is whether grant recipients can pay themselves from awarded funds. The answer depends on the type of grant, its terms, and how compensation is structured in the budget.

Understanding these factors ensures compliance and helps avoid legal or financial issues.

Grant Funding Criteria for Personal Compensation

Grant providers set clear rules on fund usage, particularly regarding compensation. Many grants allow salaries if they align with the project’s goals and are explicitly included in the approved budget. Federal grants follow 2 CFR Part 200 guidelines, which permit salaries and wages as long as they are reasonable and necessary.

Private and foundation grants vary in restrictions. Some prohibit salary payments, while others allow them with justification. The Ford Foundation and Rockefeller Foundation, for example, permit compensation but require grantees to demonstrate how it supports the project. Research grants often require pay to be proportional to time spent on the project rather than a fixed salary.

Nonprofits must also comply with IRS regulations, which mandate that salaries be reasonable and not excessive. If a nonprofit executive overpays themselves, they may face penalties, including a 25% excise tax on the excess amount.

Budgeting for Salaries in Grant Proposals

To secure funding for salaries, grant proposals must justify compensation and follow the funder’s guidelines. The budget should break down salaries based on the percentage of time dedicated to the project. For example, if a project director spends 50% of their time on grant-funded work, their salary request should reflect that proportion.

Salaries typically fall under personnel expenses and may require job descriptions explaining how each role contributes to the project. Funders often compare requested salaries to industry standards to ensure they are reasonable. The Bureau of Labor Statistics and nonprofit salary surveys provide benchmarks to support salary requests. Some grants impose salary caps, such as the National Institutes of Health salary limitation, which restricts the amount that can be charged to an award.

Fringe benefits, including health insurance, retirement contributions, and payroll taxes, should be included in the budget. These costs are often calculated as a percentage of salaries and must be itemized separately. Overlooking these expenses can lead to budget shortfalls. Some grants also allow indirect costs, which may include administrative salaries, but these are typically subject to a negotiated indirect cost rate agreement.

Tracking and Documenting Owner Payroll

Accurate payroll records are essential for compliance with grant requirements and financial regulations. Proper documentation substantiates salary expenditures and protects against audits or funding clawbacks. Granting agencies and auditors often require payroll records that show compensation aligns with approved budgets and project deliverables. This includes timesheets, employment agreements, and payroll registers detailing time spent on grant-related work.

Timesheets should distinguish between grant-funded activities and other business operations. Many grants require timekeeping systems that track hours worked on specific projects to ensure correct salary allocation. If an owner splits time between multiple grants or revenue-generating activities, payroll records must reflect the proportion of time spent on each. Federal grant recipients must maintain personnel activity reports or equivalent documentation to verify payroll distributions.

Payroll disbursements should be processed through formal payroll systems rather than informal transfers. Using payroll software like QuickBooks, Gusto, or ADP helps automate record-keeping and ensures compliance with labor and grant regulations. Payments must include appropriate withholdings for income tax, Social Security, and Medicare. Failing to withhold payroll taxes can result in IRS penalties.

Tax Implications of Receiving Compensation

Receiving compensation from grant funds has tax consequences depending on the recipient’s business structure and how the payment is classified. Sole proprietors and single-member LLCs typically report salaries from grant funds as self-employment income, subject to both income tax and a 15.3% self-employment tax. Unlike employees, who split payroll taxes with their employers, self-employed individuals must pay the full amount, though they can deduct half of the tax on their personal return.

Employees of nonprofits, research institutions, or businesses receive wages reported on a W-2, with standard payroll withholdings for federal and state income taxes, Social Security, and Medicare. Employers must comply with Federal Insurance Contributions Act requirements, withholding 7.65% from wages and matching this amount. Failing to properly withhold and remit payroll taxes can result in penalties, which may hold responsible parties personally liable for unpaid employment taxes.