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 Email 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. Resources Online Resources Questions and answers about legal issues relating to non-profit fee-for-service arrangements. Business Planning Tools for Nonprofits – a guide from SCORE (Service Corps of Retired Executives). “Can a nonprofit charge fees for its services?” Fiscal Issues and Geeky Stuff: Program Service Fees For Non-Profits - A blog explanation of non-profit fee for service. “Funding Your Future: Establishing Fee for Service Programs in Non-Profit EMS Agencies (PDF).” Guide from the Commonwealth of Virginia Office of Emergency Medical Services. Lawyers Alliance of New York: Charging Fees for Program Services (PDF). Social Signal: How non-profits can earn revenue with Web 2.0.
