When your favorite time of year rolls around (completing your organization’s Form 990, of course!), it can be difficult to know what you should be providing to your tax return preparer when they ask for “compensation” to complete Form 990, Part VII as well as Schedule J, Part II, if applicable.
Form 990 requires an organization to report compensation paid to board members, trustees, officers, key employees, and the five highest compensated individuals. This is presented on Form 990, Part VII, as well as Schedule J, and includes compensation paid by the reporting organization, as well as its related entities. Organizations are required to complete the compensation tables using information from the calendar year ending with or within the taxable year covered by the form.
As the Form 990 is publicly disclosed, compensation is often under the spotlight, and sometimes looked at with a magnifying glass. Organizations often use the Form 990 of comparable exempt organizations in their industry when determining their own organization’s compensation and policies. Additionally, individuals interested in the operations of the nonprofit, sometimes potential donors, often turn to this section of the return. It is also, not surprisingly, an area of interest with the IRS.
Reportable Compensation
First, consider what is referred to as ‘reportable compensation’ (Form 990, Part VII, Column D/E & Schedule J, Part II, Column B). Organizations may not be aware that when entering an amount in this column, it is not as simple as entering Box 5 of an individual’s W-2. While breaking out any bonuses received by an individual is typically straightforward, the ‘other reportable compensation’ is often moved past without much thought as to what should be included.
Below are examples of ‘other reportable compensation’ that should be broken out:
- Severance or change of control payments
- Third-party sick pay
- Tax gross-ups paid
- Vacation/sick leave cashed out
- Loans—forgone interest or debt forgiveness
- Distributions from nongovernmental section 457(b) plan
- Amounts deferred by employer or employee (plus earnings) under section 457(b) plan (substantially vested)
- Amounts deferred under nonqualified defined contribution plans (substantially vested)
- Scholarships and fellowship grants (taxable)
- Health benefit plan premiums paid by the employee (taxable)
- Employer-provided automobile (taxable)
- Employer-subsidized parking (taxable)
- Travel (taxable)
- Social club dues (taxable)
- Meals and entertainment (taxable)
- Moving (taxable)
- Gift cards
Deferred Compensation
The next required component of the 990 compensation reporting is deferred compensation. The following are a few examples of deferred compensation that an organization is required to report on Form 990, Part VII Column F and Schedule J, Part II, Column C:
- Base salary/wages/fees deferred (nontaxable)
- Bonus deferred (not taxable in current year)
- Incentive compensation deferred (not taxable in current year) • Contributions (employer) to qualified retirement plan
- Amounts deferred by employer or employee under section 457(b) or 457(f) plan (not substantially vested)
- Amounts deferred under nonqualified defined contribution plans (not substantially vested)
Nontaxable Benefits
The last item to consider for compensation is nontaxable benefits. Nontaxable benefits are reported in Column F of Form 990, Part VII, and in column D of Schedule J, Part II. See below for several examples of nontaxable compensation that should be reported on the Form 990:
- Health benefit plan premiums (nontaxable) • Medical reimbursement and flexible spending programs (nontaxable)
- Adoption assistance (nontaxable) • Cafeteria plans (nontaxable health benefit)
We hope this has shed light on some of the intricacies of compensation reporting for exempt organizations. If you ever have questions on if/how certain compensation should be reported, your Blue & Co. tax advisor is always happy to help!
