Reporting Key Employee Compensation on Form 990: A Comprehensive Guide

Form 990 is a crucial document for tax-exempt organizations, providing transparency into their financial operations. See our Ultimate Guide to Non-profit Tax Filing. One of the critical sections of Form 990 involves reporting key employee compensation. Key employees play a vital role in the success of nonprofit organizations, and understanding how to accurately report their compensation is essential for compliance and maintaining public trust. In this comprehensive guide, we will delve into the intricacies of reporting key employee compensation on Form 990.

Understanding Key Employees:

Before delving into the reporting process, it’s essential to define who qualifies as a key employee. According to the IRS, a key employee is an individual who meets any of the following criteria:

  1. An organization’s president or CEO.
  2. An individual who performs the duties of a president or CEO during the tax year, regardless of their title.
  3. One of the top 20 highest-compensated employees (other than an officer, director, trustee, or key employee described in (1) or (2) above) with reportable compensation from the organization and related organizations.

Overview of Part VII, Section A:

Part VII, Section A of Form 990 is where organizations report compensation information for key employees. This section is divided into three parts:

  1. Reportable compensation from the organization: This includes salary, bonuses, and other taxable benefits paid directly by the organization.
  2. Reportable compensation from related organizations: If a key employee receives compensation from related organizations, it must be disclosed separately.
  3. Reportable compensation from unrelated organizations: Similar to related organizations, if a key employee receives compensation from an unrelated organization connected to the tax-exempt entity, it must be reported.

Elements of Compensation to Report:

  1. Salary and Wages: Include the base salary or hourly wages paid to the key employee.
  2. Bonuses and Incentives: Any additional compensation, such as performance bonuses or incentives, must be reported.
  3. Deferred Compensation: If the key employee has deferred compensation arrangements, report the amounts involved.
  4. Other Benefits: Non-monetary benefits like health insurance, retirement plan contributions, and other fringe benefits should be included.
  5. Expense Account and Allowances: Any reimbursements or allowances provided to key employees for expenses incurred in their role should be reported.

Detailed Reporting Instructions:

Gathering Information:

  1. Compile a comprehensive list of key employees: Start by identifying all individuals who qualify as key employees based on the IRS criteria.
  2. Obtain accurate compensation data: Collect detailed information on each key employee’s compensation, including salaries, bonuses, benefits, and any other forms of remuneration.

Completing Part VII, Section A:

  1. Use the correct format: Ensure that the information is presented in the format prescribed by the IRS. Follow the guidelines provided in the Form 990 instructions to avoid errors.
  2. Separate reporting for each key employee: Provide individualized reporting for each key employee, detailing compensation from the organization and any related or unrelated entities.
  3. Be thorough and transparent: The IRS places a premium on transparency. Provide a detailed breakdown of each key employee’s compensation to foster trust and accountability.

Reporting Compensation from Related Organizations:

Definition of Related Organizations:

  1. Affiliated entities: Identify organizations that are considered related due to common control or other relationships outlined in the IRS guidelines.
  2. Joint ventures and subsidiaries: Include compensation from entities that share a significant relationship with the tax-exempt organization.

Accurate Allocation of Compensation:

  1. Ensure proper allocation: If a key employee receives compensation from related organizations, accurately allocate the amounts attributable to each entity.
  2. Clearly identify the source: Clearly indicate the related organization providing the compensation to avoid confusion.

Reporting Compensation from Unrelated Organizations:

Definition of Unrelated Organizations:

  1. Entities without a significant relationship: Include compensation from organizations that are not considered related to the tax-exempt entity.
  2. Independent contractors and external partners: Report compensation received from third-party entities with no formal affiliation.

Accurate Identification and Reporting:

  1. Clearly identify unrelated sources: Clearly specify the names and details of unrelated organizations providing compensation to key employees.
  2. Avoid errors in reporting: Carefully cross-verify information to ensure accurate reporting of compensation from unrelated entities.

Best Practices for Compliance:

Regularly Review and Update Policies:

  1. Implement a compensation review process: Regularly review compensation policies to ensure they align with IRS guidelines and organizational objectives.
  2. Stay informed about IRS updates: Keep abreast of any changes in IRS regulations pertaining to key employee compensation reporting.

Maintain Detailed Records:

  1. Retain thorough documentation: Maintain detailed records supporting reported compensation figures, including employment contracts, board resolutions, and other relevant documents.
  2. Establish a documentation system: Implement a system for efficiently storing and retrieving compensation-related documents to facilitate the reporting process.

Accurate and transparent reporting of key employee compensation on Form 990 is fundamental to the integrity of tax-exempt organizations. By understanding the criteria for key employees, the elements of compensation to report, and the specific reporting requirements, organizations can ensure compliance with IRS regulations. Adhering to best practices, regularly reviewing policies, and maintaining meticulous records will contribute to the overall success and credibility of the tax-exempt entity. Contact us today for help with you 990 filing.

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