Five Things Nonprofits Should Know about Compensation
By Katie A. Ahern
Katie A. Ahern
The following guidelines should help. Please note that the term "nonprofit" as used here specifically means entities holding 501(c)(3) status under the Internal Revenue Code.
1) Deferred Compensation May Be Taxed Sooner
A for-profit organization, if it meets certain criteria, may generally establish a deferred compensation plan (such as a Supplemental Executive Retirement Plan or a Severance Plan) that gives an employee a right to compensation today without subjecting the employee to income tax until the employee actually receives payment under the plan, even if payment is certain to occur.
In addition to the above rule that applies specifically to nonprofit organizations, 501(c)(3)s are also subject to deferred compensation restrictions that govern all organizations. For example, Section 409A of the Internal Revenue Code affects employment, consulting, and severance agreements, as well as any other plan that gives an employee or independent contractor a right in Year One to a payment that will (or might)
occur in Year Two or later.
If a nonprofit organization officers salary is greater than what is reasonable for the services the officer performs, the officer receives an excess benefit.
Compensation based on percentages, such as a percentage of revenue, or a percentage of money raised during a fundraising campaign, may give rise to private inurement and private benefit issues. This type of compensation, whether paid to employees or independent contractors, is frequently the subject of scrutiny by the IRS and other stakeholders.
IRS Form 990 requires nonprofit organizations to disclose detailed compensation information with respect to certain employees and independent contractors, and the Form 990 is a public document.