Community organizations often rely on a mix of grants, contracts, donations, public funding, and other resources. In some situations, an organization may also be able to generate revenue by charging individuals, businesses, public agencies, schools, nonprofit organizations, or other purchasers for useful services.
This approach is commonly described as fee-for-service and is one form of earned revenue.
Fee-for-service can strengthen financial sustainability when the services advance the organization's mission, sufficient demand exists, pricing covers the true cost of delivery, and the organization has the capacity to administer the work.
It is not automatically unrestricted, dependable, or profitable, however. Organizations should evaluate tax, legal, contractual, financial, accessibility, staffing, and mission implications before relying on earned revenue as a major funding source.
What is fee-for-service?
Fee-for-service means receiving payment in exchange for providing a defined service.
Services might include:
- Education or training
- Consultation
- Facilitation
- Evaluation
- Technical assistance
- Community or human services
- Workforce-development services
- Health or behavioral-health services
- Childcare
- Transportation
- Other services consistent with the organization's mission and capacity
Fee structures may take several forms.
An organization might:
- Charge a participant for a class or service
- Charge an employer for workforce training
- Contract with another nonprofit to provide specialized services
- Contract with a school system or public agency
- Charge for professional consulting or technical assistance
- License appropriate organizational materials or intellectual property
Third-party insurance or public-program reimbursement is another form of service-based revenue, but it has additional enrollment, credentialing, coding, billing, documentation, and compliance requirements and is addressed separately in the Community Tool Box.
Fee-for-service does not make a nonprofit simply another small business
Nonprofit organizations can engage in revenue-generating activities, but they remain responsible for their charitable or other exempt purposes, governance obligations, funding restrictions, tax requirements, and accountability to the communities they work with.
The purpose of earned revenue should be to strengthen sustainable mission delivery - not to make revenue generation the organization's primary purpose.
Tax considerations for tax-exempt organizations
Charging a fee does not automatically make income taxable.
For a tax-exempt organization, an income-producing activity may be substantially related to the organization's exempt purpose.
For example, an organization created to advance adult education may charge reasonable fees for educational programs that contribute importantly to that educational purpose.
For most tax-exempt organizations, an activity generally may produce unrelated business income when all three of the following apply:
- It is a trade or business.
- It is regularly carried on.
- It is not substantially related to furthering the organization's exempt purpose.
The fact that profits from an unrelated activity are later used to support charitable programs does not by itself make the revenue-generating activity related to the exempt purpose.
A section 501(c)(3) organization also should not allow unrelated commercial activities to become substantial compared with its exempt-purpose activities.
Before launching a significant new earned-income activity, obtain appropriate tax or legal guidance when the relationship to the organization's exempt purpose is uncertain.
A taxable subsidiary is not a routine solution
In some circumstances, an organization may consider conducting a commercial activity through a separate taxable entity.
This can involve significant questions concerning:
- Governance
- Tax
- Capitalization
- Contracts
- Liability
- Intellectual property
- Transactions between the nonprofit and taxable entity
Do not create a for-profit subsidiary simply because an activity may generate substantial revenue. Compare the costs, risks, and alternatives with qualified legal and tax advisors.
What are the potential advantages of fee-for-service?
Revenue diversification
Earned revenue can reduce dependence on a single grant, donor, contract, or public funding source.
Diversification can improve financial resilience when revenue sources have different risks and funding cycles.
Greater flexibility in some circumstances
Revenue earned directly from mission-related services may be less restricted than many grants.
It may therefore help support:
- Staff
- Administration
- Technology
- Evaluation
- Facilities
- Reserves
- Other mission-related organizational needs
Greater flexibility does not mean that the organization may spend revenue without limits. Contracts, representations to purchasers, tax-exempt purpose, organizational policies, board oversight, licensing rules, and other obligations still apply.
Better understanding of program costs
Developing a responsible fee structure requires organizations to understand what services actually cost.
This can improve budgeting for both earned-income activities and grant-funded programs.
Opportunities to share expertise
An organization may develop specialized knowledge that other organizations, schools, agencies, or businesses value.
Training, consultation, evaluation, facilitation, and technical assistance can extend the organization's expertise beyond its direct programs while generating revenue.
Potential for recurring demand
A well-designed service may generate repeat business or longer-term contracts.
Recurring revenue can improve predictability, but demand can change and should never be treated as guaranteed.
What are the potential disadvantages and risks?
The activity may not cover its full cost
Revenue alone does not establish financial success.
Include the full cost of:
- Salaries and benefits
- Supervision
- Preparation time
- Travel
- Facilities
- Technology
- Materials
- Marketing and business development
- Billing
- Collection
- Insurance
- Administration
- Indirect costs
A service generating $40,000 in revenue may still be financially unsuccessful if it requires $45,000 in direct and indirect organizational resources.
Administrative complexity
A fee-based activity may require additional systems for:
- Contracts
- Invoicing
- Accounts receivable
- Payment processing
- Cash handling
- Financial reporting
- Sales or other applicable taxes
- Customer support
- Refunds
- Collections
Mission drift
A service may become financially attractive even though it contributes little to the organization's mission.
Regularly ask:
- Does the activity still advance our mission?
- Are we creating programs mainly because purchasers will pay for them?
- Is earned-income work consuming staff capacity needed for higher-priority community work?
Financial barriers for participants
Charging individuals directly can reduce access, especially when the people most likely to benefit from a service have limited financial resources.
Do not assume that willingness or ability to pay reflects how much someone values a program.
Consider whether:
- Fees should be waived for some participants
- A sliding-fee or discount policy is appropriate
- Scholarships or subsidies are available
- Another payer could cover some services
- Grants or donations should subsidize access
Collection and cash-flow risk
Providing a service does not guarantee immediate payment.
Organizations may experience:
- Late invoices
- Contract disputes
- Participant balances
- Uncollectible accounts
- Long payment cycles
Establish respectful billing and collection procedures and monitor accounts receivable.
Conflict with other funding
Grants and contracts may restrict:
- Charging participants
- Charging another payer for the same service
- Use of grant-funded staff or equipment for commercial activities
- How program income must be treated
Review funding agreements before launching fee-based services and establish systems that prevent double charging or inappropriate cost allocation.
Who might purchase your services?
Employers
Employers may purchase services that support employees or organizational operations.
Examples may include:
- Employee assistance or behavioral-health services
- Workplace health and safety training
- English-language learning
- Digital-skills or workplace education
- Leadership development
- Conflict-management training
- Organizational development
- Childcare or family-support services
Nonprofit organizations, agencies, and community institutions
Other organizations may purchase:
- Staff training
- Evaluation
- Facilitation
- Community engagement
- Career preparation
- Translation or interpretation
- Transportation
- Health or human services
- Technical assistance
Public agencies and criminal legal systems
Courts, probation departments, corrections agencies, or other public entities may contract for appropriately qualified services.
Depending on the organization and contract, services might include:
- Substance use disorder treatment
- Behavioral-health services
- Adult education
- Workforce development
- Family support
- Mediation
- Court-ordered intervention programs
Services involving mandatory participation require particular attention to informed communication, confidentiality, professional ethics, safety, participant rights, and contract requirements.
Schools and educational institutions
Schools may contract for:
- Professional development
- Student-support services
- Tutoring
- Arts programming
- Conflict-resolution or restorative-practice training
- Health or prevention education
- Family education
- Evaluation
Public-school contracts may involve procurement, background screening, data privacy, accessibility, insurance, and other requirements.
Individuals receiving services
An organization may charge participants directly when doing so is consistent with its mission and does not create unacceptable barriers.
Before introducing direct fees, examine:
- Participants' financial circumstances
- Current alternatives
- Likely effect on access
- Administrative cost
- Collection risk
- Whether subsidies are available
Consulting and training purchasers
Organizations with specialized expertise may provide paid consultation or training in areas such as:
- Community engagement
- Public health
- Education
- Organizational development
- Equity, inclusion, and accessibility
- Program evaluation
- Strategic planning
- Workplace health and safety
- Specialized staff development
Consulting can generate useful revenue, but pricing must cover preparation, staff expertise, travel, administration, follow-up, and other costs rather than focusing only on the hours spent in a meeting or training session.
How do you determine whether fee-for-service is viable?
1. Start with mission and community need
Identify the service you are considering and how it advances the organization's purpose.
Ask:
- Why should our organization provide this service?
- Who benefits?
- What community need or organizational need does it address?
- What would happen if we did not provide it?
2. Distinguish need from paying demand
A community may strongly need a service while having limited ability to pay for it.
That does not make the service unimportant. It may mean that direct fee-for-service is the wrong financing mechanism.
Ask separately:
- Is the service needed?
- Who is able and willing to purchase it?
- Could another payer subsidize it?
- Should grants, public funding, philanthropy, or cross-subsidy support access?
3. Research demand and alternatives
Speak with prospective purchasers, participants, partners, employers, agencies, and community members as appropriate.
Research:
- What services they need
- How they currently meet those needs
- Existing providers
- Typical purchasing processes
- Pricing
- Contract requirements
- Accessibility
- Barriers to purchasing or participation
Use the results honestly. Do not launch a service simply because organizational leadership already prefers the idea.
4. Analyze competitors and potential partners
Determine whether other organizations already provide the service effectively.
Consider whether collaboration, referral, or subcontracting would provide greater community benefit than creating a competing service.
5. Assess organizational capacity
Determine whether you have:
- Qualified staff
- Supervisory capacity
- Facilities
- Technology
- Insurance
- Financial systems
- Contract-management capacity
- Marketing or business-development capacity
- Working capital
How do you price services?
Do not begin only by asking what competitors charge.
Develop a full-cost estimate for the service.
Consider:
- Staff wages or salaries
- Benefits
- Preparation
- Supervision
- Travel
- Materials
- Facilities
- Technology
- Insurance
- Administrative support
- Billing
- Marketing
- Evaluation
- Indirect organizational costs
Then consider:
- Market conditions
- Comparable prices
- Purchaser budgets
- Mission and accessibility
- Contract requirements
- Desired operating margin or reserve contribution
Charging below full cost may be appropriate when the organization intentionally subsidizes a service with another funding source. Make the subsidy visible in the budget rather than assuming the service is financially self-supporting.
Direct participant fees and sliding-fee policies
When charging individuals, affordability should be addressed through a written policy rather than informal negotiation or assumptions about what people "should" be able to pay.
A policy may consider:
- Household income
- Household or family size
- Current Federal Poverty Guidelines or another appropriate benchmark
- Service cost
- Available subsidies
- Program-specific requirements
Do not require a symbolic minimum payment simply to make someone demonstrate commitment or dignity.
Depending on mission and program requirements, a full discount or waived fee may be appropriate.
Example from federally supported health centers
Certain federally supported health centers operate under specific sliding-fee requirements.
Current Health Resources and Services Administration requirements generally provide a full discount or only a nominal charge for eligible individuals and families at or below 100 percent of the current Federal Poverty Guidelines and partial discounts for those above 100 percent and at or below 200 percent.
Eligibility is based on income and family size under that program.
These particular requirements do not automatically apply to every nonprofit fee-for-service activity, but they illustrate the importance of using current, objective affordability criteria rather than outdated fixed-dollar tables.
Communicate fees before services are provided
Explain:
- Standard fees
- Available discounts
- Eligibility requirements
- Payment options
- Refund or cancellation policies
- What happens when someone cannot pay
Fee discussions should be respectful and private.
Avoid language suggesting that inability to pay reflects irresponsibility, lack of commitment, or lack of appreciation for the service.
Develop contracts and terms for organizational purchasers
When a business, school, nonprofit, or public agency is purchasing services, use a written agreement appropriate to the arrangement.
Clarify:
- Scope of work
- Deliverables
- Timeline
- Price
- Payment schedule
- Expenses
- Cancellation
- Intellectual property
- Confidentiality
- Data and privacy
- Insurance
- Performance expectations
- Termination
Public entities may also require procurement, vendor registration, competitive bidding, background checks, insurance, or other compliance.
Develop a communication and business-development strategy
Potential purchasers need to understand what the organization offers and how to obtain the service.
Depending on the audience, communication may include:
- An accessible website
- Professional email outreach
- Presentations
- Referrals
- Professional networks
- Community partnerships
- Procurement and contracting portals
- Search and online directories
- Social media
- Conferences
- Print materials when appropriate
Use targeted outreach rather than trying to reach as many people as possible through every available channel.
Communication should accurately explain:
- Services
- Qualifications
- Intended purchasers or participants
- Evidence or experience supporting the work
- Pricing or how to obtain a quote
- Accessibility
- Contact information
Communicating directly with prospective participants
Use plain, accessible language and communication channels that people actually use.
Depending on the community, these may include:
- Websites
- Phone
- Text
- Community organizations
- Social media
- Local media
- Printed materials
- Trusted community messengers
Provide information in preferred languages and accessible formats when appropriate.
Build the administrative structure
The complexity of the administrative system should match the scale and risk of the fee-based activity.
Systems may need to address:
- Revenue and expense tracking
- Cost allocation
- Contracts
- Billing and invoicing
- Accounts receivable
- Payment processing
- Cash handling
- Refunds
- Financial assistance
- Data and privacy
- Customer or participant records
- Reporting
- Tax and regulatory compliance
Separate costs appropriately
If staff, facilities, or technology support both grant-funded and fee-based work, use reasonable cost-allocation methods.
Do not charge the same cost to two different funding sources.
Review grant and contract rules concerning program income, shared resources, and staff time.
Establish payment controls
Use secure systems and appropriate separation of duties for:
- Receiving payments
- Recording payments
- Deposits
- Reconciliation
- Refunds
Provide receipts and maintain accurate payment records regardless of how much a participant pays or which payment method is used.
Pilot before depending on the revenue
When practical, begin on a manageable scale.
A pilot can reveal:
- Actual demand
- Actual service cost
- Administrative workload
- Collection rates
- Participant response
- Staffing requirements
- Contract problems
Do not build an ongoing staffing structure around projected revenue before testing whether that revenue is realistic.
How do you sustain a fee-for-service activity?
Monitor financial performance
Track:
- Revenue
- Direct costs
- Indirect costs
- Net margin
- Accounts receivable
- Uncollectible balances
- Contract concentration
- Staff utilization
A growing service is not automatically financially successful.
Monitor quality and outcomes
Evaluate:
- Service quality
- Participant experience
- Outcomes
- Complaints
- Accessibility
- Equity
Use evaluation to improve the work. When communicating results to prospective purchasers, accurately represent what the evidence supports.
Monitor access and equity
Ask whether fee-based services are changing who receives services.
Examine:
- Who participates
- Who stops participating
- Who cannot afford fees
- Who receives subsidies
- Whether fee-paying purchasers are receiving priority over people with greater need
Adjust the financing model if earned-income incentives are undermining equitable access or mission priorities.
Monitor the purchaser mix
Dependence on one major contract can create the same concentration risk as dependence on one grant.
Review:
- Revenue by purchaser
- Contract renewal dates
- Payment performance
- Market changes
- Competing providers
Maintain organizational rather than purely personal relationships
Relationships with purchasers matter, but no contract should depend entirely on one personal contact.
Maintain:
- Clear agreements
- Multiple appropriate contacts
- Accurate records
- Regular performance communication
- Renewal calendars
Revisit pricing
Staff compensation, insurance, facilities, technology, inflation, market conditions, and indirect costs change.
Review pricing regularly rather than leaving rates unchanged simply because purchasers have become accustomed to them.
Continue evaluating mission alignment
Ask periodically:
- Is the activity still advancing our mission?
- Is it financially sustainable?
- Is it improving or reducing access?
- Is it consuming disproportionate staff capacity?
- Are we maintaining quality?
- Would another financing model work better?
Reduce, redesign, subsidize, or end a fee-for-service activity when evidence shows that it no longer provides sufficient mission or financial value.
In Summary
Fee-for-service can provide a useful source of earned revenue for community organizations by allowing individuals, employers, schools, agencies, nonprofit organizations, businesses, and other purchasers to pay for valuable services.
Earned revenue can diversify an organization's finances and may provide greater flexibility than some restricted grants. It is not automatically unrestricted, profitable, or permanent.
Begin with mission and community need. Then assess paying demand, competition, organizational capacity, tax implications, full cost, accessibility, and financial risk before launching a service.
For tax-exempt organizations, determine whether an earned-income activity is substantially related to the exempt purpose. A regularly carried-on business that is not substantially related may produce unrelated business taxable income, and substantial unrelated activity can create risks for section 501(c)(3) status.
Price services using full-cost information rather than simply copying competitors' rates. If the organization intentionally charges less than full cost to protect access, identify how that subsidy will be financed.
When charging participants directly, use clear, respectful affordability policies. Do not require everyone to pay a symbolic amount, and do not assume that ability or willingness to pay reflects commitment to the program. Sliding-fee policies should use current, objective criteria appropriate to the program.
Establish written contracts for substantial organizational purchases, build adequate billing and accounting systems, protect participant and purchaser information, prevent double charging, and understand how fee revenue interacts with grants and other funding.
Finally, evaluate the activity continuously. Monitor net revenue, full cost, accounts receivable, demand, service quality, participant access, equity, staff workload, purchaser concentration, and mission alignment.
Fee-for-service is most useful when it is treated as one financing tool within a broader sustainability strategy - not as a guarantee of unrestricted income or as a reason for a nonprofit organization to operate primarily like a commercial business.