"SHOW ME THE MONEY!" ... it was over 20 years ago that this phrase became a huge part of society in the movie, Jerry Maguire, and people still say it today the same way Tom Cruise yelled it to Cuba Gooding.
Since we were little we are taught not to ask others about their weight, age and how much money they make so the concept of having your salary out there for everyone to read is a little taboo. Knowing how much a person makes can feel like we know some big secret. It is no surprise that after reading the name of the organization on the first page of the 990 most readers jump straight to page 7. Whether it is to satisfy a curiosity or to compare the salaries of another organization, this knowledge can lead us wondering how can the executives earn so much when at a “nonprofit.” No matter what the reason, you better believe that your donors, staff, and the IRS are highly focused on this part of the 990.
The IRS uses Form 990 to capture information about the compensation of your organization’s officers, directors, major employees, and highly-compensated employees. The IRS finds this information essential.
This information is open to the public.
Part VII of Form 990 discloses data for everyone to review.
Let’s look at whom the IRS considers key employees. “Officers” are the Chairman, President, and Treasurer. It is common for these individuals to be Board members, or as the IRS says “Directors.” Some organizations have officers who are not directors, and because of this the IRS lists both terms.
A person who is not an officer or director is a “key employee” with annual compensation of $150,000 or higher, meets certain requirements, and passes a responsibility test, and is one of the top 20 highest paid employees. The employee meets the responsibility if he or she has influence over the general organization as does an officer or director, or manages a segment of the operating budget, compensation, or employee compensation.
A key employee oversees 10 percent of the activities, assets, revenue or expenses, or controls 10 percent or more of the capital expenditures, or manages individuals who have influence over the organization. This person has the authority to control 10% or more of the organization’s capital expenditures, operating budget, or compensation for employees.
“Highly compensated employees” are the five top employees compensated more than $100,000 who have not already been listed as an officer, director or key employee.
Part VII holds a list of all officers and directors who served during the reporting period. The amount of compensation is taken from the employee’s W-2 and/or 1099 for the calendar year-end that happens during the fiscal year being reported on the Form 990.
An example of this is when you are completing Form 990 for the fiscal year ending June 30, 2019, it will enter compensation amounts from the December 31, 2018 W-2 and 1099 forms. It is a possibility that the IRS means to use the year-end compensation figures to ease the chore of reporting this information by thinking the W-2 details are more available than the amount paid over the 12-month period ending June 30th.
The IRS wants you to report the compensation in the following order: directors, officers, key employees, and highest compensated employees. Even individuals who fill more than one position are listed in this order. An officer with compensation above $100,000 is listed as an officer, and further in the list he or she is listed as one of the top 5 employees earning more than $100,000. Just because the officer is also highly paid does not lower the number of highly compensated employees you must list.
Form 990 also inquires about the total hours worked each week during the year for the individuals. In this section, you list the total number of hours worked. Do not use the statements “as needed” or “as required.” The IRS wants NUMBERS. For example, if the organization’s directors spend two hours preparing for a monthly meeting that takes 4 hours, this averages about 1.25 hours per week. This number goes on Part VII.
Employees hours should be exact. DO NOT ESTIMATE the number of hours an employee works each week. Do not provide an estimate of 40+ hours.
Column F requests the amount of “other compensation.” This usually refers to the amount not included on a W-2 form.
"Other compensation" usually means the following:
Deferred compensation
Employee health benefits paid with pre-tax dollars
Increases in the actuarial value of defined benefit plan amounts
Nonqualified deferred compensation
Organization contributions into a defined contribution retirement plan
Organization paid health benefits
At the end of this list, Part VII has more questions. One query asks about the total number of employees making more than $100,000. Another question inquired about the employees making more than $150,000. You include similar information on Schedule J of Form 990.
Some individuals think compensation above $100,000 is out-of-line for nonprofit organizations. Others believe the compensation needs to be competitive to encourage qualified capable manpower to join the efforts of a nonprofit organization. When you consider the amount of your staff compensation, think about all the complicated efforts and duties that the team does. Feel good about the fair compensation you pay your organization’s employees. Know the challenges of keeping your organization running smoothly, and be content and satisfied with the compensation.
Never leave a question blank.
Section B of Part VII asks for a list of the five highest compensated independent contractors earning more than $100,000. Enter “none” if you do not have any individuals who fit this category. Never leave a question blank. Even if you have nothing to report, enter “none.”
If you used an independent contractor who earned a substantial amount of compensation during the year, explain the circumstances behind the compensation. The compensation for one contractor may seem extremely high. When you explain that he or she worked on six projects, it can be reasonable to have a higher compensation. Explaining and providing details helps the IRS understand your organization’s actions and compensations.
The next 3 pages continue the numbers game from the perspective of the organization in Part VIII of Form 990. The next post in our 990-Back to Basics series will look closely into the information requested. To view all available posts in this series, click here and be sure to check back next week as we continue to add to this topic. Click here to access the IRS page for Form 990.
When you have questions about your IRS forms, contact TBFoster Accounting at trent@tbfosteraccounting.com to get your answers. We also invite you to keep in touch with the TBF Blog or join our nonprofit accounting group Nonprofit Accounting Spot.
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