Most tax-exempt organizations must file Form 990 with the IRS. This form, titled Return of Organization Exempt from Income Tax, has significant implications for not-for-profit organizations. The compensation of officers, directors, trustees, key employees and others in tax-exempt organizations has always been scrutinized by the IRS. That is why compensation reporting is so important on Form 990.
Relevant data is reported in three places:
"Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees;"
"Statement of Functional Expenses," lines 5, 7, 8, and 9; and
Schedule J, "Compensation Information for Certain Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees."
In each instance, there are significant differences in the amounts and details included. As a result, properly reporting compensation is one of the more difficult tasks in preparing Form 990.
Note: Determining exactly who should be listed in Part VII, Section A and Schedule J can be complex. This article only covers some compensation reporting issues for those listed. Consult with your not-for-profit adviser to help identify the individuals who should be listed.
Definition of a Related Organization
An organization, including a nonprofit organization, a stock corporation, a partnership or limited liability company, a trust, and a governmental unit or other government entity, that stands in one or more of the following relationships to the filing organization at any time during the tax year.
· Parent: an organization that controls the filing organization.
· Subsidiary: an organization controlled by the filing organization.
· Brother/Sister: an organization controlled by the same person or persons that control the filing organization. However, if the filing organization is a trust that has a bank or financial institution trustee that is also the trustee of another trust, the other trust is not a Brother/Sister related organization of the filing organization on the ground of common control by the bank or financial institution trustee.
· Supporting/Supported: an organization that claims to be at any time during the tax year, or that is classified by the IRS at any time during the tax year, as (i) a supporting organization of the filing organization within the meaning of section 509(a)(3), if the filing organization is a supported organization within the meaning of Section 509(f)(3); (ii) or a supported organization, if the filing organization is a supporting organization.
· Sponsoring Organization of a VEBA: an organization that establishes or maintains a section 501(c)(9) voluntary employees' beneficiary association (VEBA) during the tax year. A sponsoring organization of a VEBA also includes an employee organization, association, committee, joint board of trustees, or other similar group of representatives of the parties which establish or maintain a VEBA. Although a VEBA must report a sponsoring organization as a related organization, a sponsoring organization should not report a VEBA as a related organization, unless the VEBA is related to the sponsoring organization in some other capacity described in this definition.
· Contributing Employer of a VEBA: an employer that makes a contribution or contributions to the VEBA during the tax year. Although a VEBA must report a contributing employer as a related organization, a contributing employer should not report a VEBA as a related organization, unless the VEBA is related to the contributing employer in some other capacity described in this definition. The organization must determine its related organizations for purposes of completing Form 990, Parts VI (Governance), VII (Compensation), VIII (Statement of Revenue) and X (Balance Sheet), Schedule D (Form 990), Schedule J (Form 990), and Schedule R (Form 990). See instructions for those parts and schedules for related organization reporting requirements.
-- Source: IRS Instructions for Form 990
What Is the Period for Reporting Compensation?
The compensation reported in Part VII, Section A and in Schedule J should be for the calendar year ending with or within the organization's tax year. The amounts reported in Part IX are based on the organization's tax year. Therefore, fiscal year organizations must keep dual sets of compensation data.
What Compensation Must Be Reported?
Part VII and Schedule J both ask for the compensation reported on an employee's Form W-2, box 1 or 5 (whichever is greater), and an independent contractor's (i.e., director or trustee) Form 1099-MISC, box 7. This "reportable compensation" is shown by its source -- the filing organization or a related organization. (The IRS definition of a "related organization" is in the right-hand box.)
Schedule J further requires that reportable compensation be identified as base compensation, bonus/incentive compensation, or other reportable compensation. Examples of other reportable compensation included on Schedule J are current year payments earned in a prior year, severance payments, and longevity of service awards.
What about Retirement and Deferred Compensation?
Schedule J (but not Part VII) requires that all types of deferred compensation be reported in a separate column. This includes deferrals under both qualified and nonqualified retirement plans maintained by the filing organization or by a related organization, and the annual increase or decrease in actuarial value of a defined benefit plan (but not the earnings or losses accrued on deferred amounts in a defined contribution plan). Deferred compensation may be funded or unfunded, vested or subject to a substantial risk of forfeiture.
If a deferred comp arrangement requires an employee to perform services for a period of time, the amount is treated as accrued or earned ratably over the service period, even though the amount is not funded and may be subject to a substantial risk of forfeiture until the end of the service period.
Compensation paid within 2 1/2 months after the end of the tax year is treated as current compensation rather than deferred compensation.
Which Benefits Are Not Taxable?
Benefits specifically excluded from tax under the Internal Revenue Code must be reported on Schedule J. However, to make matters more confusing, certain benefits are considered disregarded under IRC Section 132 and are not reported.
Disregarded Benefits. Common disregarded benefits include reimbursements pursuant to an accountable plan, no-additional cost services, qualified employee discounts, de minimis benefits, and working condition benefits.
An accountable plan is a reimbursement or other expense allowance arrangement that satisfies these three requirements:
- The expenses covered under the plan must be reasonable employee business expenses.
- The employee must adequately account to the employer for the expenses within a reasonable period of time
- The employee must return any excess amount within a reasonable period of time.
A de minimis fringe is a property or service of which the value (taking into account the frequency with which similar fringes are provided by the employer) is so small as to make accounting for it unreasonable or administratively impractical.
A working condition fringe is any property or service provided to an employee to the extent that if the employee paid for it, the payment would be a deductible business expense. Common examples of a working condition fringe benefit are:
1. The value of an employee's business use of an employer-provided automobile; and
2. The business use of a cell phone provided for an employee primarily for business purposes. (The personal use of such cell phone is considered a de minimis fringe.)
Directors and trustees are treated as employees for purposes of the working condition fringe provisions.
What Are Reportable Nontaxable Benefits?
The following are examples of benefits that should be reported as nontaxable benefits in column D of Schedule J (unless they are reported as taxable compensation):
- Most types of insurance, including health, life, disability, medical reimbursement programs, long-term care, and job-related liability insurance.
- Various types of assistance payments, such as for dependent care, adoption, tuition, and other items.
The value of housing provided by the employer to an employee may be:
- Taxable (for example, a cash housing allowance);
- A nontaxable working condition fringe, statutorily nontaxable (for example, housing provided primarily for the convenience of the employer); or
- Partly taxable and partly excluded from tax (for example, the value of in-kind housing provided to certain school employees).
There are some compensation reporting exceptions for Part VII and Schedule J:
The $10,000 Exception. Reportable compensation from related organizations [Part VII, Section A, column (E)] generally doesn't include payments from a single related organization if such payments are less than $10,000 for the calendar year ending with or within the organization's taxable year. However, there is no de minimis exception for payments to a former director or former trustee.
Note: This exception doesn't apply to Schedule J reporting.
The Volunteer Exception. An organization isn't required to report in column (E) or (F) of Part VII, Section A, compensation paid to a volunteer trustee, director, or officer of the filing organization if the related organization is a for-profit entity, is not owned or controlled directly or indirectly by the filing organization or one or more related tax-exempt organizations, and doesn't provide management services for a fee to the organization.
Other Compensation - Part VII
Don't be confused by a similar term -- "other reportable compensation" in Part II, column (B)(iii) of Schedule J, discussed previously, is not the same as "other compensation" used in column (F) in Part VII, Section A. Here, other compensation includes deferred compensation and nontaxable benefits, as discussed previously with respect to Schedule J reporting.
Recommendation: Your organization should consider its compensation recordkeeping with these requirements in mind to determine the best way to capture the necessary information.