Demystifying nonprofit earned income: Generating revenue to drive mission

We often hear nonprofits should diversify their revenue sources and not rely solely on grants or donations. Bringing in revenue from a variety of sources, including earned income from products and services, creates more financial stability.

Yet, many people are still surprised that nonprofits, given what they’re called, can earn income at all; some assume a charity should rely entirely on charity. The misperception that nonprofits cannot generate income to support their mission-driven work can prevent organizations from sustaining and scaling their programs.

What types of earned income can nonprofits generate?

For nonprofits, “earned income” is revenue generated through the provision of goods or services that align with their mission, as opposed to donations or grants. The IRS permits tax-exempt organizations to generate revenue as long as those activities remain “substantially related” to their core mission or charitable purpose.

Nonprofits can raise revenue by selling products, collecting membership dues, or charging fees for charitable, educational, cultural, or other services—as long as these are directly tied to and “contribute importantly” to their mission-driven work.

Common examples of nonprofit earned income include:

• Sales of merchandise, publications, or other items—for example, a Goodwill store or a museum gift shop
• Ticket sales for theater productions, concerts, exhibitions, events, or educational programming by a performing arts company
• Registration fees for youth sports leagues
• Tuition fees for colleges and universities
• Reimbursements to hospitals for providing health care and patient services

What role does earned income play in funding nonprofits?

According to 2022 data, 71% of aggregate revenue reported by U.S. nonprofits is earned income. The rest of the funding mix includes government funding (18%) and contributions from funders and donors (11%). In other words, collectively, nonprofits generate far more in earned income to fund their programs and services than they receive in donations and grants.

How heavily do nonprofits rely on earned income? It varies by subsector: Universities and hospitals receive the vast majority of their revenue, 92%, from earned income. But even in other subsectors, two-thirds of total revenue comes from nonprofit earned income.

Not every nonprofit is able to tap into an earned income stream. But in a 2024 Candid survey of nearly 3,800 nonprofits, more than half (51.4%) listed earned income among their revenue sources. Those reporting earned income included 54.1% of large organizations with annual expenses of at least $10 million and 36.1% of small organizations with annual expenses of $50,000 and under.

How do misperceptions about nonprofit earned income harm missions?

The public needs to know nonprofits can and do earn income to fund their programs and services and don’t rely solely on grants and donations. The misperception that they’re supposed to run on contributions alone can make nonprofits reluctant to charge fees—even reasonable, 100% justifiable fees—for services, collect membership dues, or sell tickets and merchandise. Nonprofits need every revenue source they can get—especially now, given federal funding cuts—so this can harm not only individual organizations but the entire the sector.

Some people may not even realize that most hospitals and colleges are nonprofits that receive most of their revenue from earned income. Few would expect those institutions to run entirely on contributions.

But what if a community theater group couldn’t sell tickets for its performances, or Little League teams couldn’t charge registration fees, or museums couldn’t charge admission or run a gift shop? How would they pay for expenses?

How to educate the public about earned income

Here’s what nonprofits can do to educate donors, supporters, and the public:

• Explain why you charge fees, have memberships, or sell products, and show how it supports your work.
• Show where your nonprofit gets its funding. Which sources bring in how much of your revenue, and where does that money go?
• Share financial data, like Forms 990, on your website, and keep your Candid profile up to date.

You can help demystify earned income and correct the harmful misperception that nonprofits, by definition, cannot generate revenue. Nonprofits can and do bring in money to help fund their mission-driven work—and this revenue stream is as important as ever in the current funding climate.

This article is part of our “Mission over myth” series seeking to break down myths and misconceptions about the nonprofit sector.

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