Total compensation packages for most executives and highly paid employees, including salary, bonuses, pension contributions, and benefits, are private and shared only on a need-to-know basis. But for those employed or compensated by nonprofit organizations, compensation details may be included in annual federal Form 990 filings, which are filed with the Internal Revenue Service (IRS) and subsequently made available to the public.
The Public Interest in Nonprofit Compensation
The Form 990 compliance mandates the inclusion of compensation paid by the filing entity, any related entity, or an unrelated entity for certain individuals providing services to the filing organization. The IRS clearly states that the compensation paid to top executives and highly compensated employees in nonprofit organizations must be disclosed.
Transparency in compensation reporting enables donors, potential employees, and the general public to assess the financial health and responsible management of a nonprofit organization. By providing access to compensation information, nonprofits allow stakeholders and the public to make informed decisions regarding donations, employment, and other forms of support.
Determining The Roles Affected
The Form 990 provides clear reporting guidelines, using the IRS’ strictly defined titles and responsibilities to determine who is subject to the disclosure of compensation. The categories of employees subject to compensation reporting include directors, trustees, officers, key employees, and the five highest compensated employees. Regardless of their standing within the organization, if an individual’s responsibilities fall under any of these categories, it is essential for the filing organization to capture and report compensation data. Former executives of nonprofits with pension plans must also report their compensation.
To understand the nuances of these reporting requirements, we must first define ‘former’ within the context of Form 990. The IRS aims to capture all compensation leaving the nonprofit, so a ‘former’ employee is someone who has been reported or should have been reported on at least one of the previous five tax return filings and who did not serve the filing organization during the current fiscal year. Each title requires a specific analysis that will determine whether or not compensation must be reported as benefitting a current or former employee.
Reporting Requirements by Role
Directors and Trustees: For former directors and trustees, compensation must be reported if the individual has received more than $10,000 in compensation during the calendar year falling within the fiscal year being reported. Directors are defined as members of the governing body with voting rights on governance matters. Their compensation may come in honoraria payments for speaking or reimbursable travel expenses. Some organizations may compensate board members for their time.
Officers: Some of the most stringent reporting requirements apply to officers, defined as top managerial or financial officials carrying out board-approved procedures or policies. Officers have ultimate authority over daily activities and the management of the organization’s finances. Considering the five-year look-back period, any former officer receiving more than $100,000 in compensation during the fiscal year subject to a filing must be included in the reporting making up Part VII of Form 990.
Key Employees: Former key employees share the same $100,000 threshold as officers, while current key employees are typically subject to reporting requirements at a compensation rate of $150,000. To qualify as a key employee, individuals must meet three tests:
- The compensation test outlined above
- A three-pronged responsibility test
- The “top twenty” test.
The responsibility test centers on influence and asks if the individual’s responsibilities (a) are similar to those of an officer or director, (b) include managing a discrete segment of revenues or expenses accounting for at least 10% of the organization’s total budget, or (c) sharing authority to control or determine a segment representing at least 10% of the total budget. Only the top twenty highest-paid key employees are reported. Anyone who should have been reported as a key employee in the previous five years, did not serve during the current fiscal year, and received over $100,000 in compensation is reportable as a former key employee.
Highest Compensated Employees: The highest compensated employees are those individuals who, according to their federal Form W-2, box 1 or box 5 (whichever is higher), received compensation exceeding $100,000 during the fiscal year. Former highest compensated employees are those who received $100,000 or more in compensation during the reporting year and were not employees of the organization at any time during the calendar year ending with or within the organization’s tax year.
Compensation Reporting: Beyond Compliance
The IRS is intent on capturing compensation paid by nonprofit organizations. Charitable organizations receive unique benefits and exist to serve the public. Their expenses, including compensation, are subject to transparency rules tied to compliance requirements. Charitable counterparts that also enjoy tax exemption benefits must publicly share compensation for their top executives and performers.
The transparency demanded by the IRS helps maintain public trust in nonprofit organizations that operate with openness and accountability, including with respect to the compensation of top executives and key performers. By adhering to the reporting guidelines outlined in Form 990, nonprofits demonstrate their commitment to ethical practices and responsible financial management.
Using Compliance to Your Advantage: Attracting and Retaining Talent
Nonprofits should also take advantage of the opportunity to benchmark their compensation packages against similar organizations filing public Form 990s. By reviewing these filings, nonprofits can compare their compensation strategies to other similarly positioned organizations and ensure they remain competitive in attracting and retaining top talent. This is particularly important given the challenges nonprofits can face in offering salaries and benefits comparable to those in the for-profit sector.
Of course, nonprofit executives and highly paid employees, in particular those new to the industry and unfamiliar with its reporting requirements, should be aware that their compensation details will be accessible to the public.
Nonprofit organizations need to strike a balance between offering competitive compensation packages that attract and retain top talent while also demonstrating responsible stewardship of donor funds. By being transparent and adhering to the guidelines outlined in Form 990, nonprofits can best demonstrate their commitment to both goals.
By fully understanding and complying with Form 990 requirements, nonprofit organizations can enhance their credibility, promote ethical practices, transparency, and accountability, and earn public trust, ultimately contributing to their long-term success and impact. Nonprofit leaders and employees can best navigate the complexities of compensation reporting by approaching the process with a dedication to accuracy, fairness, and alignment with their organization’s mission and values.
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Ariana N. Warren, CPA, is senior manager, Tax & Business Services at Marcum LLP. Her email is Ariana.Warren@marcumllp.com
