IRS: Filers May Use 'Good Faith' and 'Reasonable Interpretations' When Calculating Tax on Large Nonprofit Salaries
The excise tax imposed on excess remuneration and excess parachute payments is determined based on remuneration paid and excess parachute payments made in the calendar year ending with or within the taxable year of the employer. The common-law employer, which is liable for the excise tax imposed under section 4960, may not avoid treating a payment as remuneration under section 4960 by reason of a third-party payor arrangement. A payment to the employer’s employee from a third-party payor (including a payroll agent, common paymaster, statutory employer under section 3401(d)(1), or certified professional employer organization) or from an unrelated management company, is considered a payment to the employee from the common-law employer. Similarly, a payment to the employee from a related entity, even if it is tax-exempt, for services rendered to the common-law employer, is considered a payment to the employee from the common-law employer for purposes of calculating remuneration and determining liability for the excise tax.
The IRS noted that the law concerns "covered employees" of tax-exempt organizations. It defined a covered employee as any employee who is one of an applicable tax-exempt organization's five highest-compensated employees for the current taxable year or who was a covered employee of the ATEO (or any predecessor) for any preceding taxable year beginning after Dec. 31, 2016. Therefore, once an employee is a covered employee, he or she continues to be a covered employee for all subsequent taxable years. There is no minimum dollar threshold for an employee to be a covered employee; thus, an employee need not be paid excess remuneration or an excess parachute payment nor be a highly compensated employee within the meaning of section 414(q) to be a covered employee for a taxable year and all future years. While an organization may not pay anyone enough to have to apply the excise tax, it is still advised to track who is a covered employee in case it needs to do so in the future.
The IRS noted that the law concerns "covered employees" of tax-exempt organizations. It defined a covered employee as any employee who is one of an applicable tax-exempt organization's five highest-compensated employees for the current taxable year or who was a covered employee of the ATEO (or any predecessor) for any preceding taxable year beginning after Dec. 31, 2016. Therefore, once an employee is a covered employee, he or she continues to be a covered employee for all subsequent taxable years. There is no minimum dollar threshold for an employee to be a covered employee; thus, an employee need not be paid excess remuneration or an excess parachute payment nor be a highly compensated employee within the meaning of section 414(q) to be a covered employee for a taxable year and all future years. While an organization may not pay anyone enough to have to apply the excise tax, it is still advised to track who is a covered employee in case it needs to do so in the future.
Whether an employee is one of the organization's five highest-compensated employees is based on remuneration paid in the calendar year ending with or within the employer’s taxable year (excluding medical services). To identify its five highest-compensated employees, the organization must include remuneration paid for the taxable year by any related organization, including remuneration paid by a related for-profit organization or governmental entity, for services performed as an employee of such related organization. This is determines separately for each organization, not for an entire group of related organizations.
The remuneration itself is generally defined to be wages, minus certain Roth IRA contributions and other retirement benefits, but plus parachute payments. Remuneration is treated as having been paid when there is no substantial risk of forfeiture.
The excise tax under section 4960 is reported on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, which is the form generally used for reporting and paying chapter 42 taxes. Each employer liable for section 4960 tax, whether an ATEO or a related organization described in section 4960(c)(4)(B), is responsible for separately reporting and paying its share of the tax. The proposed regulations provide that Form 4720 and payment are due when chapter 42 taxes ordinarily are due (the 15th day of the fifth month after the end of the taxpayer’s taxable year—May 15 for a calendar year employer), subject to an extension of time for filing that generally applies. An employer may elect to prepay the excise tax imposed under section 4960(a)(2) in the year of separation from employment.