June 11, 2020
Treasury and IRS Release NPRM on Executive Compensation
The U.S. Department of the Treasury and the IRS released a notice of proposed rulemaking to implement provisions in the 2017 Tax Cuts and Jobs Act (TCJA) that imposed a 21 percent excise tax on compensation in excess of $1 million and any excess parachute payments paid by nonprofit organizations to any covered employee. This tax only applies to nonprofit private and some 501(c)3 public employers. Most large public colleges and universities, which are classified as “state entities,” would not be subject to this tax.
The TJCA excise tax applies to nonprofits that pay their five highest-paid employees compensation above $1 million or that provide parachute payments of roughly three times an employee’s base salary.
The proposed rules offer several exemptions from the tax. An employee will not be subject to the tax if the tax-exempt organization or any related or controlled tax-exempt organizations don’t pay the employee for services performed. This would exclude volunteers who might earn income elsewhere from the tax.
To address concerns about employees who perform limited or temporary services for related organizations, the rules offer exceptions to the definition of “employee” and “covered employee.” The exceptions are meant to make sure those employees offering temporary services are not treated as one of the nonprofit’s five highest-compensated employees.
Treasury and IRS are asking for comments on whether taxable perks, such as an employer-provided parking spot, should be disregarded for the purposes of determining which employees fall under the scope of the tax.
The regulations were published in the Federal Register on June 11 with a 60 day deadline for submitting comments.
The TJCA excise tax applies to nonprofits that pay their five highest-paid employees compensation above $1 million or that provide parachute payments of roughly three times an employee’s base salary.
The proposed rules offer several exemptions from the tax. An employee will not be subject to the tax if the tax-exempt organization or any related or controlled tax-exempt organizations don’t pay the employee for services performed. This would exclude volunteers who might earn income elsewhere from the tax.
To address concerns about employees who perform limited or temporary services for related organizations, the rules offer exceptions to the definition of “employee” and “covered employee.” The exceptions are meant to make sure those employees offering temporary services are not treated as one of the nonprofit’s five highest-compensated employees.
Treasury and IRS are asking for comments on whether taxable perks, such as an employer-provided parking spot, should be disregarded for the purposes of determining which employees fall under the scope of the tax.
The regulations were published in the Federal Register on June 11 with a 60 day deadline for submitting comments.
For more information, please contact:
Karin Johns