Section 4960 of the Tax Cuts and Jobs Act added an excise tax on excess compensation paid to certain executives of nonprofit organizations. The tax is imposed at the corporate tax rate of 21 percent on remuneration paid to a covered employee that exceeds $1 million, as well as excess parachute payments to covered executives.
This makes it critical to closely monitor whether your organization employs any executives whose compensation may be subject to excise tax. Section 4960 defines covered employees as any nonprofit employees who:
- Are among the five highest-compensated employees in the organization for the tax year.
- Were covered employees for any preceding tax year beginning after December 31, 2016.
Remuneration and wages are considered interchangeable as defined in Sec. 3401(a). This includes any amount required to be included in gross income under Sec. 457(f), but it excludes designated Roth contributions. It also includes any remuneration paid with respect to employment by a related person or government entity.
Each common-law employer, whether this is the nonprofit organization or a related entity, must pay its share of excise tax based on its proportional share of remuneration paid to the covered employee.