Churches and other not-for-profit organizations must now report salaries and parachute payments over $1 million due to a new IRS rule aimed at discouraging excessive compensation, which was recently finalized.
In its February 16th Bulletin, the IRS announced an update to section 4960 of the Internal Tax Code taxing nonprofits and churches that pay “covered employees” more than $1 million in wages, or provide excessive parachute payments. (The IRS defines “covered employees” as the top five highest-compensated employees of the organization.)
When these employees receive more than $1 million in wages or excessive parachute payments, the nonprofit must file a Form 4720 Schedule N. The nonprofit must then pay a 21% tax on the excessive compensation.
The five top-paid employees of nonprofits are typically listed on a Form 990 filed with the IRS. In 2018, the IRS modified the Form 990, revealing if organizations have paid an excise tax on payments of more than $1 million. Excise payments are indicated on page 5, line 15 of the Form 990.
Churches are exempt from filing 990s. But they are not exempt from reporting excessive compensation, according to an IRS official in the executive compensation department who spoke with the Trinity Foundation.
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Trinity Foundation examined a list of highly paid compensated ministry leaders published by MinistryWatch, a Christian donor watchdog group, and determined that Inspirational Network, High Point University and Educational Media Foundation (K-Love) pay the excise tax.
Hillsdale College and Glory of Zion International (Chuck Pierce) so far do not report paying the excise tax, even though both feature an executive receiving more than $1 million in compensation. This is not proof of wrongdoing because some compensation is exempt from the excise tax, such as an organization carrying liability insurance on an employee.
This excise tax penalizes excessive wages, not fees. If a pastor is paid to perform a wedding, for example, the income is considered a fee and is not subject to an excise tax.
Besides excessive wages, the IRS also treats parachute payments as a form of excessive compensation.
An example of this would be the $10.5 million in parachute payments that Jerry Falwell Jr. is reportedly set to receive from Liberty University, following his resignation as president last year. According to The Wall Street Journal, “Mr. Falwell is due his $1.25 million salary for two years, followed by a lump-sum payment of about $8 million, because of a clause in his contract that allowed him to resign with full pay if his responsibilities were curtailed.”
Trinity Foundation estimates Liberty University will pay a tax penalty of $1,530,383 on golden parachute payments of $10.5 million.
Future Form 990 filings by Liberty will show whether or not an excise tax is paid on the parachute payments.