Note: The following discussion is provided for informational purposes only and is not intended to serve as tax advice. For specific information about reporting nonprofit executive compensation on the new IRS Form 990, consult your attorney or tax adviser.
Just in case you have been so focused on your mission and fundraising in these tough times that you haven't noticed, the IRS Form 990 that most large charities will file has been dramatically revised. Review the changed form, instructions, and rationale for the changes >
This new Form 990 will be used for fiscal years beginning on or after January 1, 2008, typically to be filed in 2009. So the records you keep and processes you follow right now might need to be changed so that it will be easier for you to complete the new form.
The new form consists of an 11-page core form completed by all filers, with supporting schedules that will be completed only when an organization's answers trigger the need for more detail. The core form's Part VI (Governance, Management, and Disclosure)
requires answers about policies not required
by the Internal Revenue Code, but all filers still need to respond to the questions. The IRS thinks that if nonprofits have certain kinds of policies (think whistleblower protections, conflict of interest policies, etc.), they are more likely to end up in compliance with regulations.
New Reporting on the "Process" of Determining Compensation
Form 990 information on executive compensation has long been a focus of IRS compliance efforts, and the revisions reflect the continuing IRS interest. The IRS not only wants to know what salaries are paid but also the process you use to determine compensation levels.
The new question 15 in Part VI asks if the process for determining compensation includes:
- a review and approval by independent persons,
- comparability data, and
- contemporaneous substantiation of the deliberation and decision.
There is a yes/no checkbox for two groups—first, the process for the CEO, executive director, or top management official, and second, the process for other officers or key employees. And if you check "Yes," you must then describe the process in more detail in Schedule O, the schedule that is used for narrative explanations.
With this question, the IRS is again emphasizing what it wants you to do. As in the past, the IRS is looking for the following components in the process of setting compensation:
- Review/approval by the executive board
- No involvement of persons with conflicts of interest
- Collection and use of compensation data for similarly qualified persons in comparable positions at similarly situated organizations
- Contemporaneous documentation and recordkeeping
But now if you do have a process, you must describe it in Schedule O, identifying the positions covered and the year conducted. Obviously, checking the "No" box and saying that you do not have a process is just not the right answer. And describing a process that does not include the steps outlined above is also problematic. Both answers will clearly be red flags for IRS compliance staff.
Changes in Reporting Compensation: New Thresholds, New Definitions
All Form 990 filers (now including all tax-exempt
organizations, not just charities) must complete Part VII (Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors)
of the core form. The listing must include name, hours worked, and compensation (from IRS Form W-2 or Form 1099-MISC, so the totals are now for the calendar year, which may be different from the organization's fiscal year) for:
- All current officers, directors, and trustees (no minimum threshold!)
- All current key employees (only if earning more than $150,000)—with a new definition of key employee as a person who (1) has power over the organization as a whole similar to an officer, trustee, director or (2) manages or controls discrete segment or activity representing 10 percent or more of the organization, and (3) was part of the top 20 highest paid persons who satisfied both the $150,000 and the responsibility tests
- Five current highest compensated employees other than officers, directors, trustees, or listed key employees (only if earning more than $100,000)
on the core form also requires name and compensation in the same table for:
- Former officers, key employees, and highest compensated employees (only if earning more than $100,000)
- Former directors and trustees (only if earning more than $10,000 as former director or trustee)
The revisions in reporting reflect IRS concern about relationships with related and unrelated organizations that may affect the independence of compensation decisions and the accuracy of the salaries themselves (now required to match what organizations reported to the IRS for the individuals).
contain much detail on what to report and were finalized in August. They include a new glossary of terms and a table that shows precisely how and where to report the many types of "other compensation" that have been problems in the past.
Getting to Schedule J (Supplemental Compensation Information)
If there are individuals listed in Part VII that meet certain criteria, more detail on compensation must be provided on Schedule J. The criteria include:
- If former officers, directors, trustees, key employees, highest compensated employees are listed
- If any individual listed had more than $150,000 in reportable and other compensation
- If any individual listed received or accrued compensation from any unrelated organization for services rendered to the organization
Schedule J begins with "Yes-No" questions about certain practices (first-class travel, discretionary spending accounts, housing allowances, health club dues, chauffeur services, etc.), and if the answer is "Yes," supplemental information must be provided. The form also asks if there is a written policy on such expenses and whether or not it was followed. A "No" requires an explanation. If there was severance pay or compensation contingent on net earnings/revenues or equity-based compensation, again a detailed explanation is required.
What You Need to Do Now on Compensation Issues
Review the new Form 990 and instructions
. If you are concerned about requirements for reporting compensation, focus on Part VI, Part VII, and Schedule J.
Review (or establish) a process for setting compensation that meets IRS standards:
- Review and approval by the board
- No person with conflict of interest involved in compensation decisions
- Comparable data (salaries for like jobs in like enterprises under like circumstances) collected and used to make decisions
- Documentation of decisions when they are made
With a little preparation now, you can have the information that will ease the filing of the new Form 990. But even more important, you can find the salary levels that allow you to attract, motivate, and retain the people you need to fulfill your organization's mission. And when compensation questions arise, whether from the IRS, state charity officials, the media, or members of the public, the appropriate documentation about your decisions will be already there.
Linda M. Lampkin, ERI Economic Research Institute
© 2008, ERI Economic Research InstituteLinda M. Lampkin is research director of ERI Economic Research Institute (www.erieri.com), a company that provides Form 990 data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute.