Growth & Customers

Can nonprofits make a profit?

Can nonprofits make a profit? Learn how nonprofits make money, from donations and grants to earned income, and how they use surplus funds to support their mission.

Published July 30, 20261 min read Share

This article was originally published on November 27, 2024 but has been refreshed and re-published with new content on July 30, 2026.

Nonprofits are built around a mission, not a profit motive. But that doesn’t mean they operate without revenue—and understanding where that money comes from, how it’s used, and what rules govern it is essential for anyone running, funding, or working within a nonprofit organization.

Whether you’re a nonprofit leader looking to diversify your income streams, a donor curious about how your contributions are used, or someone considering starting a nonprofit for the first time, understanding nonprofit finances can help you make more informed decisions.

This includes how nonprofits generate revenue, what they do with the money they make, how much they can earn, and what compliance requirements apply along the way.

Key takeaways

• Nonprofits generate revenue from five main sources—donations, grants, earned income, fundraising events, and membership programs—but unlike for-profit businesses, none of it can be paid out to owners or shareholders.
• All revenue has to be reinvested into the organization, whether that’s funding programs, covering operating costs, building reserves, or supporting growth.
• 501(c)(3) status comes with conditions: nonprofits must file an annual Form 990, stay politically neutral, and keep compensation reasonable and transparent.
• There’s no legal cap on how much a nonprofit can earn—what matters is how diversified its revenue is and how that money is used, not the size of the number itself.

Here’s what we’ll cover

How do nonprofits make money?

Nonprofits make money the same way most organizations do: by earning it, asking for it, and being given it. What makes them different isn’t the revenue itself, it’s what happens to it afterward.

Every dollar a nonprofit brings in, whether from a donation, a grant, or a ticket sale, has to go back into the organization rather than out to an owner or shareholder, and the IRS enforces that through tax filings, spending rules, and compensation limits. So “making money” for a nonprofit isn’t really about the income side at all, but about earning revenue and channeling it toward a mission, under a set of rules that keep it there.

Where does nonprofit money come from?

Nonprofits generate revenue through five main sources: donations, grants, earned income from services or products, fundraising events, and membership programs.

Unlike for-profit businesses, all of this revenue must be reinvested into the organization’s mission rather than distributed to owners or shareholders.

Donations

Donations from individuals, corporations, and foundations are a primary source of income for many nonprofits.

They can be one-time contributions, recurring gifts, or in-kind donations such as goods and services.

Some nonprofits also use crowdfunding platforms to fund specific causes or projects.

Individual contributions in particular play a critical role in sustaining nonprofit activities and can take several forms:

• Online donations: contributions made through website donation links, social media fundraising, and mobile giving platforms.
• Corporate giving: contributions from businesses, often through employer gift-matching programs, corporate sponsorships of events or programs, or payroll giving schemes where employees opt to donate directly from their paycheck.
• Event contributions: donations made through specific events, such as charity auctions or community outreach events.
• In-kind contributions: non-cash gifts of goods, services, or expertise, such as donated equipment, pro bono professional services, or supplies, which must still be recorded and valued for accounting purposes.
• Stock donations: donors may choose to give appreciated stocks or securities, which can benefit both the nonprofit and the donor through tax advantages.
• Planned gifts: bequests or designations in a donor’s will, life insurance policies, or trusts, offering nonprofits a way to secure long-term funding.

Grants

Nonprofits can apply for grants from government entities, foundations, and corporations, often to fund specific projects or initiatives aligned with their mission.

Grant funding typically comes from a few key sources: government agencies at the federal, state and local level, private foundations established by individuals or families, corporate foundations tied to businesses, and community foundations that pool local donor funds for regional causes.

Unlike loans, grants do not need to be repaid, making them an attractive funding source.

In recent years, foundation funding alone accounted for approximately $105.21 billion, or 21% of total US charitable giving.

Successful grant applications require a clear alignment with the nonprofit’s mission, and grants typically come with strict guidelines on fund allocation, grant tracking, and reporting.

Grantors are typically evaluating three things when reviewing an application:

• Mission alignment: whether the nonprofit’s mission genuinely matches the grantor’s own funding priorities.
• Feasibility: whether the proposed project is realistic and achievable within the requested budget and timeline.
• Financial infrastructure: whether the organization has the systems in place to manage and report on the funds properly.

A well-prepared application addresses all three, since grantors are ultimately trying to protect their own funding decisions as much as fund good causes.

Because grants are often restricted to a specific project or timeline, nonprofits need a reliable way to track how each grant is spent and ensure funds aren’t used outside their intended purpose.

Missing a grantor’s reporting deadline or misallocating restricted funds can jeopardize both the current grant and future funding relationships, which is why many organizations rely on dedicated systems to manage grant compliance and reporting schedules.

Earned income from services or products

Some nonprofits generate revenue by offering services or selling products related to their cause.

For instance, museums may charge admission fees, while environmental nonprofits may sell eco-friendly merchandise.

Earned income can take several forms depending on the nonprofit’s mission and resources, including:

• Program service fees: charges for services directly tied to the mission, such as a counseling nonprofit charging a sliding-scale fee for sessions, or an arts organization charging for workshops.
• Merchandise sales: branded or mission-related products sold online or on-site, from apparel to educational materials.
• Facility or space rental: renting out office space, event venues, or equipment when not in use by the organization.
• Licensing or consulting: sharing specialized expertise or intellectual property with other organizations for a fee.

As with other revenue streams, earned income needs to be considered in the context of the nonprofit’s tax-exempt status.

Revenue that’s closely tied to the mission is generally treated as related business income, while income from unrelated activities may count as Unrelated Business Income (UBI) and be subject to tax, which is covered in more detail below.

Fundraising events

Galas, auctions, and community fundraisers help nonprofits raise additional funds while engaging donors and raising awareness of their mission. Revenue is generated through ticket sales, auctions, and sponsorships.

Using fundraising software for nonprofits can enhance these efforts by streamlining event management, tracking donations, and maximizing donor engagement.

Membership programs

Membership programs are another way nonprofits generate income, offering supporters tiered access to exclusive benefits, such as events, publications, or specialist resources, in exchange for a regular contribution.

Membership income is often more predictable than donations or grants, making it a valuable source of recurring revenue for organizations looking to stabilize their finances.

How does the IRS classify nonprofit income?

The IRS classifies nonprofit income into two categories: related business income, which is directly tied to the organization’s mission and is not subject to federal tax, and unrelated business income, which comes from activities outside the mission and may be taxable.

Understanding the difference between these two income types is essential for managing tax obligations and maintaining tax-exempt status.

Related business income

Related business income is revenue generated from activities that directly support the nonprofit’s mission.

For example, a nonprofit environmental organization selling educational materials about conservation would classify that revenue as related business income.

 Because it directly supports the mission, it’s not subject to federal income tax.

Unrelated business income (UBI)

Unrelated business income refers to money earned from activities that are not directly related to the nonprofit’s mission.

The IRS considers income unrelated when it meets three criteria: it is a trade or business, it is regularly conducted, and it is not substantially related to the nonprofit’s exempt purpose.

UBI falls into two subcategories:

• Taxable UBI: income from regularly conducted activities that do not support the nonprofit’s mission, such as operating a retail shop or renting property to an unrelated business. This income is subject to federal income tax and must be reported annually to the IRS.
• Non-taxable UBI: certain types of unrelated income that may be exempt from tax, including activities that are infrequent, conducted primarily by volunteers, or involve selling donated goods.

Nonprofits that generate significant UBI should work with an accountant or use nonprofit accounting software to ensure accurate tracking and reporting.

Failure to report taxable UBI correctly can result in penalties or jeopardize tax-exempt status.

501(c)(3) status and tax exemption

Nonprofits recognized under Section 501(c)(3) of the Internal Revenue Code get federal tax-exempt status. In plain terms, they don’t pay federal income tax on revenue that supports their mission.

In exchange, the IRS expects them to play by a specific set of rules about how that money is used and reported.

To keep their tax-exempt status, nonprofits need to stick to four key rules:

• No distributing profits: nonprofits can’t pay out profits to owners or shareholders. Any money left over has to go back into programs, growth, or day-to-day running costs.
• File annual tax returns: nonprofits need to file an annual return with the IRS, usually Form 990, laying out what they earned and how they spent it that year.
• Stay out of politics: nonprofits can’t get involved in political campaigns. Doing so risks looking politically biased, which can cost them their tax-exempt status.
• Keep pay and contracts formal: nonprofits need clear, documented agreements for staff pay and contractor work, in line with IRS rules.

Worth noting: not every nonprofit is a 501(c)(3). There are key differences between nonprofit and not-for-profit organizations that affect how each is structured, funded, and taxed.

What do nonprofits do with the money they make?

Nonprofits must reinvest all revenue back into the organization by funding programs, covering operational costs, building reserves, and supporting future growth. As covered above, distributing profits to owners, founders, or shareholders is prohibited under IRS rules and would put a nonprofit’s tax-exempt status at risk.

This is the fundamental distinction between a nonprofit and a for-profit business. A nonprofit can generate significant revenue and still be financially healthy, as long as that money is spent on its programs, staff, and operations rather than paid out to owners or individuals.

In practice, nonprofits allocate their revenue across several areas:

• Program delivery: the largest share of revenue typically goes toward delivering the programs and services the organization exists to provide.
• Operational costs: staff salaries, facilities, technology, and administration are legitimate expenses that keep the organization functioning.
• Fundraising: investing in donor outreach, events, and campaigns to generate future revenue.
• Reserves: building a financial cushion to protect the organization against unexpected shortfalls or economic downturns. Some nonprofits grow their reserves further by investing surplus funds, often through an endowment, where the principal stays invested and the nonprofit draws on the returns as a steady, long-term income source.
• Growth and development: expanding programs, hiring staff, upgrading technology, or entering new communities.

Tracking where revenue goes across these areas isn’t just good practice, it’s what makes a nonprofit’s finances legible to the people relying on them. Maintaining clear nonprofit financial statements that show how funds are allocated is essential for transparency with donors, funders, and the IRS.

How much money do nonprofits make?

There is no legal limit on how much money nonprofits make. What matters is not the amount of revenue generated but how it is used.

Large nonprofits like the American Red Cross generate billions of dollars in annual revenue, whereas smaller community organizations may operate on budgets of just a few thousand dollars.

How much a nonprofit makes depends on several factors:

• The size and reach of its mission.
• The diversity of its revenue streams.
• Its fundraising capacity.
• The strength of its donor and grant relationships.

Nonprofits that rely on a single income source are more vulnerable to funding shocks.

If a major grant isn’t renewed, a corporate donor cuts its giving budget, or a key fundraising event underperforms, an organization with one primary revenue stream can face an immediate funding gap, sometimes forcing it to cut programs or staff with little warning.

Nonprofits with several revenue streams can better absorb a decline in any single one, since a downturn in donations, for example, doesn’t have to mean a downturn in overall funding if grants or earned income remain steady. That’s why building multiple income streams is considered one of the most important financial strategies for a nonprofit’s long-term stability.

Tracking financial KPIs for nonprofits is one of the most effective ways to monitor financial health, identify revenue trends, and ensure the organization is generating enough income to sustain and grow its programs over time.

Reviewing a nonprofit statement of activities each period is one practical way to see this in action, since it shows exactly how revenue and expenses compare over time.

Nonprofit salaries and compensation

Nonprofits can and should pay their employees competitive, fair wages. While nonprofits do not distribute profits to owners or shareholders, they can use revenue to cover the costs of running the organization, including staff compensation.

The IRS does not prohibit nonprofit salaries, but it does require that compensation is reasonable, documented, and reported transparently in annual filings.

Attracting and retaining skilled professionals is essential for any nonprofit to function effectively and fulfill its mission.

The misconception that nonprofit staff should work for free or below-market rates can actually harm organizations by driving away talent and reducing operational effectiveness.

Here are some common types of compensation in nonprofits:

• Executive compensation: executives in nonprofits are often highly qualified professionals, but their compensation must align with IRS guidelines to prevent excessive pay. Compensation that exceeds reasonable limits can result in penalties or jeopardize the nonprofit’s tax-exempt status.
• Staff salaries: employees are generally paid competitive, fair wages based on industry standards and the organization’s budget. To ensure transparency and accountability, nonprofits are required to disclose salary information in their annual tax filings.
• Compensation to volunteers: although volunteers usually work without pay, some nonprofits may offer stipends, reimbursements, or small benefits to cover out-of-pocket expenses related to their services.

Creating a formal compensation policy is a valuable strategy for determining fair and consistent pay across the organization.

It promotes transparency, supports responsible financial stewardship, and helps show donors and funders that the nonprofit is using its resources appropriately to support its mission.

What are the most common nonprofit accounting mistakes?

Paying staff fairly and reporting income correctly both come down to the same thing: sound financial management. But even well-intentioned nonprofits can slip up in how they track and document their finances. The most common nonprofit accounting mistakes include mismanaging donor restrictions, failing to track unrelated business income, and maintaining poor financial documentation.

Each of these errors can lead to compliance issues, financial penalties, or the loss of tax-exempt status.

Setting up a nonprofit comes with unique accounting challenges, and mistakes can have serious consequences. Here’s what to watch out for:

Mismanagement of donor restrictions

Nonprofits often receive restricted funds from grants or donations that must be used for specific purposes.

Many grants come with detailed limitations from the grantor, outlining the funds’ allowable use, timing, and scope. Proper tracking, allocation, and reporting of these funds are essential to avoid financial mismanagement and ensure compliance with donor requirements.

Understanding fund accounting principles and nonprofit accounting standards is key to managing restricted funds effectively. Nonprofit accounting software enables finance teams to track restrictions accurately and automatically record when funds become available for use.

Not tracking unrelated business income

UBI is taxable and must be reported to the IRS. Nonprofits that fail to track and report UBI accurately may face penalties and, in serious cases, risk losing their tax-exempt status entirely.

Poor financial documentation

Nonprofits must maintain thorough documentation of their income and expenses, including receipts for donations and records of how funds are spent. Poor documentation can result in compliance issues during audits and undermine donor confidence in the organization.

Building a consistent process, such as a regular budget review cycle, a documented approval chain, or working with a nonprofit accountant, makes financial documentation significantly easier to manage and reduces the risk of costly errors accumulating over time.

What happens when a nonprofit fails to comply with regulations?

Failing to comply with IRS regulations can result in financial penalties, loss of tax-exempt status, legal action, and, in extreme cases, dissolution of the nonprofit organization.

Mismanaging funds, engaging in excessive lobbying, or failing to report UBI can force a nonprofit to pay federal taxes and significantly hinder its ability to fulfill its mission.

There aren’t only legal risks, either.

Beyond the immediate financial and legal consequences, noncompliance also erodes donor trust and can permanently damage a nonprofit’s reputation.

In practice, this means donors may stop giving, funders may decline future grant applications, and negative media coverage or public scrutiny can make it harder to attract new supporters, volunteers, or partners, even years after the original issue is resolved.

Effective nonprofit financial management is about demonstrating responsible stewardship to the donors, funders, and board members who expect proper resource handling in line with the organization’s mission.

To protect your nonprofit from these risks:

• Maintain strong internal controls.
• Use nonprofit accounting software to track income, expenses, and restricted funds.
• Conduct regular audits or internal financial reviews.
• Ensure staff are trained in compliance and financial best practices.

By staying transparent and adhering to IRS guidelines, nonprofits can safeguard their financial health and continue focusing on what matters most—their mission.

What are the biggest myths about nonprofit finances?

Some of the most persistent misconceptions about nonprofits relate to whether they can make money or pay staff and how they’re structured. Here are five myths and the facts that dispel them.

Myth 1: Nonprofits can’t make money

Nonprofits absolutely can make money—and they need to. Without revenue, no mission gets funded.

Myth 2: Nonprofits don’t pay staff

Nonprofits can and should pay competitive salaries. Skilled people power effective missions.

Myth 3: Nonprofits rely solely on donations

Donations are important for nonprofits, but most organizations also rely on grants, earned income, events, and memberships.

Myth 4: Nonprofits don’t pay taxes

While 501(c)(3) organizations are exempt from federal income tax on mission-related income, payroll taxes, property taxes, and unrelated business income tax can still apply to nonprofits.

Myth 5: All nonprofits are large organizations

Many nonprofits are small, community-based, and volunteer-led. Size has nothing to do with legitimacy or impact of the organization.

Take control of your nonprofit’s finances

Making money is only half the story for a nonprofit—what matters just as much is how that revenue is earned, reported, and reinvested in line with IRS rules.

Running a nonprofit requires careful financial management to keep your mission on track and your organization compliant with regulations.

The good news is that with the right systems in place, managing nonprofit finances doesn’t have to be complicated.

From tracking restricted grants and donor contributions to producing accurate nonprofit financial statements and filing Form 990, the right tools make every part of the process more manageable.

Explore our nonprofit accounting and management software to simplify your accounting, manage donations, track grants, and ensure your operations align with IRS requirements.

Frequently asked questions about how nonprofits make money

Browse more topics from this article

• Business strategy
• Growing a business