IRS Issues Guidance on Nonprofit Executive Compensation, but Challenges Remain for Tax-Exempt Health Care Systems

    In their article Erika Mayshar and Ralph DeJong explain how the new tax on high earning nonprofit executives work and what employees the tax applies to. On December 31st, the IRS issued their guidance regarding the 21% excise tax on nonprofit executives. Their guidance explains that the 21% tax applies to executives who earn over $1 million and tax-exempt employers who pay excessive parachute payments to covered employees. "A parachute payment refers to any payment that is contingent on an employee’s separation from employment, where the aggregate payment is three times or more the employee’s average annual taxable compensation in the preceding five years.” The tax applies to the amount of the payment that exceeds the annual average amount. For example, if the employee’s annual salary is $500,00, and the employee gets a parachute payment of $1.5 million, the tax applies to the amount exceeding $500,000. To learn more about the how the executive compensation tax works and will be applied, click here.

 

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