Reminder for Tax-Exempt Organizations to Report and Pay Excise Tax on Excess Compensation

With the November 15, 2022 extended due date having arrived for Form 990 and 990-PF returns, nonprofits are reminded to report excess compensation.

Section 4960 was added to the Internal Revenue Code as part of the Tax Cuts and Jobs Act for tax years beginning in 2018. This recent provision imposes a 21% excise tax on any employee receiving over $1,000,000 of compensation. The tax applies to the amount of compensation exceeding the million-dollar floor. For example, if an organization pays an executive $1,100,000, $21,000 of excise tax would be due. An exception to the excise tax exists for compensation paid to licensed medical and veterinary professionals.

Any excess compensation must be reported on IRS Form 4720 and the excise tax is payable by the tax-exempt organization. It is important to note that compensation is not limited to ordinary wages. All items required to be included in the employee’s gross income, such as bonuses and taxable fringe benefits, count toward the $1,000,000 floor for the excise tax.

Compliance is of increased importance as the Tax Exempt & Government Entities division of the IRS announced that it has added 187 employees to its ranks in 2022 and expects to add an even greater number in 2023. In addition to increased enforcement staff, the division warned that it will be prioritizing excess compensation enforcement as part of its year 2023 compliance strategy, noting that “On-going review of filing data shows there continues to be a high volume” of unreported excess compensation excise tax. The IRS closed, noting, “The approved workstreams for this strategy are compliance checks and examinations of Form 4720.”

If you require assistance with excise tax not reported on Form 4720 or other tax-exempt entity compliance, please contact Matt Rak.

Leech Tishman’s Nonprofit & Tax-Exempt Organizations group focuses on helping organizations effectively achieve their charitable mission.

Matthew Rak is a Partner with Leech Tishman and leads the Nonprofits & Tax-Exempt Organizations Group, as well as the Business Succession Group. He is based in the Pittsburgh office and can be reached at 412.261.1600 or mrak@leechtishman.com. 

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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, construction, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, emerging cyber technologies, energy & natural resources, entertainment, healthcare, hospitality, and life sciences industries. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York, Philadelphia, Sarasota, Washington, D.C., and Wilmington, DE.