Not-For-Profit Compensation

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imageAngela N. Crawford, CPA and Amanda Meko, CPA | Team Members of the Not-for-Profit Services Group

While compensation is usually considered a private matter, in the not-for-profit world, the Form 990 makes compensation of top officials open to public inspection.

Compensation for individuals is reported in Part VII of Form 990. The individuals to be listed include current officers and directors regardless of compensation amount, current key employees making at least $150,000, and the top five highest compensated employees making over $100,000. Other thresholds exist for payments made to individuals who formerly held these positions.

It’s important to note that officers include any individuals named as officers in the organization’s governing documents, as well as the top management official and top financial official, no matter their title. Also, if the not-for-profit (NFP) is related to another organization and that related organization pays any compensation to the NFP’s officers, directors, key employees, or highly compensated employees, the related organization compensation must be reported on the NFP’s 990.

The starting point for compensation is Form W-2 box 5 (Medicare wages) or Form 1099-MISC box 7 (nonemployee compensation). Keep in mind that some non-cash benefits are to be included in taxable income. Some common examples are group term life insurance in excess of $50,000, personal use of company automobile, country club memberships, and tickets to entertainment or sporting events. Under current law, there is no specific exception for personal use of cell phones from employee taxable compensation and it is questionable if the IRS would consider it to be a de minimus benefit. The conservative taxpayer should value personal use of the cell phone and add it to the employee’s compensation.

Also reported on the 990 are deferred compensation (including employer contributions to retirement plans) and health benefits paid by employer or paid by employee with pre-tax dollars. Other employee benefits may be included on the 990 if they exceed $10,000 per item (dependent care assistance, tuition reimbursement, etc).

Not included on the 990 are disregarded benefits under IRC Section 132. Section 132 covers no-additional costs services, qualified employee discounts, working condition fringe benefits, de minimus fringe benefits, qualified transportation fringe benefits (i.e. parking) and qualified moving expense reimbursements.

In addition to disclosing compensation on the 990, the form also asks for details surrounding the determination of compensation amounts. All organizations must indicate if officers and key employee compensation included review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision.

If any of the individuals disclosed on the 990 make over $150,000, additional compensation information is required on schedule J. The organization must indicate if it provided any of the following to the employee: first class or charter travel, travel for companions, tax indemnification and gross-up payments, discretionary spending accounts, housing allowance, payments for business use of a personal residence, health/social club dues or initiation fees, or personal services such as a maid or chauffer. The organization must also indicate which of the following methods were used to determine compensation: compensation committee, independent compensation consultant, form 990 of other organization, written employment contract, compensation study, and approval by the board or compensation committee. Further questions ask if compensation was paid based on revenues or net earnings of the organization and if any non-fixed payments were made to the individual.

As complicated as this may seem, this is just an overview. If you have questions about how you’re reporting compensation on Form 990, what benefits should be reported as compensation on Form W-2, or other compensation questions, we would be happy to help. Please contact Angela Crawford for more information.