Compensation for nonprofit executives and board members is one of the IRS’s biggest areas of focus, particularly for 501(c)(3) organizations. One of the keys to your organization maintaining its tax exemption is ensuring the organization is run for the benefit of the public or, in the case of a membership organization, its members, and not just to benefit a particular person or persons. For that reason, among others, detailed compensation information must be reported each year in your organization’s form 990. Perhaps because it’s so important, compensation reporting shows up in number of different places, making it a little confusing when trying to figure out what to report and where.

Defining Compensation

First things first. We need to know conceptually what to report before it can be reported. The instructions in the form 990 define compensation as:
“…all forms of cash and noncash payments or benefits provided in exchange for services, including salary and wages, bonuses, severance payments, deferred payments, retirement benefits, fringe benefits, and other financial arrangements or transactions such as personal vehicles, meals, housing, personal and family educational benefits, below-market loans, payment of personal or family travel, entertainment, and personal use of the organization’s property…” including “…payments and other benefits provided to both employees and independent contractors in exchange for services.”
So, it encompasses basically anything of value given to employees or independent contractors. The most common examples are salaries and wages, health insurance benefits, and retirement plan contributions, but the definition is purposefully broad. Note that it goes beyond what is reportable on a W-2 or 1099-MISC (what the IRS refers to as “reportable compensation”, a subset of compensation) as many benefits that meet the IRS definition of “compensation” are not reportable on forms W-2 or 1099-MISC.

Where to Report Compensation in Your 990

Compensation is reported in several parts of the form. If you’re reading a 990 from front to back, the first place it shows up is in Part II, line 15, but that’s just pulling information forward from other parts of the return so I don’t really count that. The first time it shows up in any detail is in Part VII, which is where an organization is required to provide information about its Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, (we’ll call this group “ODTKHCE”s for short), and Independent Contractors. The information you provide in Part VII includes detailed compensation information that aligns with the calendar year. More on that later.
Depending on answers to the questions in Part VII, you may also need to answer some additional questions and provide more detailed compensation information for some individuals in the IRS Schedule J. Schedule J will apply if you’ve compensated any former ODTKHCEs above certain thresholds, or if you are reporting any current ODTKHCEs in Part VII with reportable compensation over $150,000. Schedule J asks some additional questions related to compensation and the organization’s compensation practices, as well as asking you to provide more detail about the components of the compensation reported in Part VII. For example, Schedule J requires that you to specifically disclose the amount of bonuses and retirement benefits for the persons listed, whereas in Part VII those types of compensation may well be combined with other types of compensation.
Compensation is then reported in Part IX, though not at an individual level, where your organization reports all its expenses. Line 5 is where you report all compensation for current officers, directors, trustees and key employees (not highest compensated employees). Lines 7 through 9 are where you report the bulk of the compensation and benefits for everyone else. Line 6 is rarely applicable and rather complicated, so we’re going to steer clear of addressing that in this article to keep things simple.

Common Issues When Reporting Compensation

Because of the different purposes of reporting the compensation in different areas of the forms and the complexity in determining who and what needs to be reported where, there are a number of common problems associated with reporting compensation. If you’re responsible for preparing a 990, providing this information to your tax preparer, or are responsible as an executive or board member for reviewing your organization’s form 990, watch out for these common problems:

  • Excluding components of compensation in Part VII and/or Schedule J. So many different things need to be reported that its easy to leave something out. The IRS has a great reference table in its instructions for the form 990 that lays out the different types of compensation and where they need to be reported. If you have a complicated compensation and/or benefits structure it may be worth looking at this.
  • Excluding highly compensated employees from Part VII because they are not officers. Regardless of title or responsibility, up to 5 employees with reportable compensation over $100,000 from the organization and any related organizations must be reported in Part VII.
  • Reporting information in Part IX on a cash basis when the organization reports on an accrual basis. Often the instinct is to take what is reported in Part VII and mirror it in line 5 of Part IX, but if you report your financial information on an accrual basis the two numbers won’t necessarily be the same.
  • Reporting information in Part IX on a calendar year basis when the organization reports on a fiscal year. Similar to the point directly above, it may be tempting to just drag and drop numbers from Part VII into line 5 of Part IX, but if you’re not reporting on a calendar year the amounts aren’t likely to be the same.
  • Reporting amounts on line 5 of Part IX that exclude benefits and other types of compensation the current officers, directors, trustees and key employees. Because there are separate line items in Part IX for insurance and other benefits, it seems logical that line 5 would only include other types of executive compensation. Not so fast, though. Line 5 is supposed to capture all the same types of compensation that are included in Part VII, which includes benefits. While the amounts in line 5 of Part IX may not match amounts reported in Part VII for the reasons mentioned above, the components of what is reported should be the same.
  • Reporting amounts for highly compensated employees on line 5 of Part IX. While you are required to report compensation information for highly compensated employees in Part VII, they are not reported on line 5 of Part IX. They’ll be reported on lines 7 through 9. Remember, highly compensated employees are a category of employees separate from officers, directors, trustees and key employees.
  • Improperty classifiying employees, directors, trustees, key employees and highest compensated employees as current or former incorrectly. This area is confusing because of the way the IRS defines “current”. To make it even more confusing, the definition of “current” for one class of compensated person may not be the same definition of “current” used for another class of compensated person. A “current” officer, director, or trustee is “…a person that was an officer, director, or trustee at any time during the organization’s tax year.“. So even if they weren’t with of the organization as of the end of the tax year, their compensation should still be reported with other current officer compensation in Part VII and Part IX, line 5. A “current” key employee or highest compensated employee is “…a person who was an employee at any time during the calendar year.ending with or within the organization’s tax year, and was a key employee or highest compensated employee for such calendar year.” So for fiscal year filers, what is considered “current” for officers, directors and trustees isn’t the same as “current” for key employees and highest compensated employees. Clear, right? Consider this example. Let’s say you’re a fiscal year filer with a June 30, 2018 year end, and you had an Executive Director, which is an officer position in the company, leave on November 30, 2017, and had a new Executive Director begin on December 1, 2017. Each of those Executive Directors are considered “current” for purposes of the 990 compensation reporting. In Part VII their compensation would be grouped with other current officers (as opposed to former officers which would be listed last), and the “current” box would be checked for both. While you shouldn’t check the “former” box for the Executive Director who left in April, you can list his/her title as “Immediate Past Executive Director” or something similar to differentiate the two. Conversely, lets say you have a new employee who started work on January 1, 2018 that had responsibilities such that she would meet the criteria of a “key employee” based solely on her responsibilities. She earned $165,000 between January 1, 2018 and June 30, 2018. That person could not be considered a key employee for purposes of the form 990 because she wasn’t an employee at any time during the calendar year ending within the organization’s tax year – the year ended December 31, 2017.
We’ve included some of the key definitions from the IRS 990 instructions below, as well as a table that can be used as a sort of a “cheat sheet” when determining whether and where to report compensation for a particular employee or board member. So there you have it, all wrapped up nice and tidy with a bow. If you have any more detailed questions or feedback on the article, or just want us to handle your 990 for you, feel free to contact us.

Key Definitions from IRS Form 990 Instructions

Term Definition
Compensation Unless otherwise provided, all forms of cash and noncash payments or benefits provided in exchange for services, including salary and wages, bonuses, severance payments, deferred payments, retirement benefits, fringe benefits, and other financial arrangements or transactions such as personal vehicles, meals, housing, personal and family educational benefits, below-market loans, payment of personal or family travel, entertainment, and personal use of the organization’s property. Compensation includes payments and other benefits provided to both employees and independent contractors in exchange for services. See also deferred compensation, nonqualified deferred compensation, and reportable compensation.
Reportable compensation In general, the aggregate compensation that is reported (or required to be reported, if greater) on Form W-2, box 1 or 5 (whichever amount is greater); and/or Form 1099-MISC, box 7, for the calendar year ending with or within the organization’s tax year. For foreign persons who receive U.S. source income, reportable compensation includes the amount reportable on Form 1042-S, box 2. For persons for whom compensation reporting on Form W-2, 1099-MISC, or 1042-S isn’t required (certain foreign persons, institutional trustees, and persons whose compensation was below the $600 reporting threshold for Form 1099-MISC), reportable compensation includes the total value of the compensation paid in the form of cash or property during the calendar year ending with or within the organization’s tax year.
Officer Unless otherwise provided (for example, Signature Block, principal officer in Heading), a person elected or appointed to manage the organization’s daily operations at any time during the tax year, such as a president, vice-president, secretary, treasurer, and, in some cases, Board Chair. The officers of an organization are determined by reference to its organizing document, bylaws, or resolutions of its governing body, or as otherwise designated consistent with state law, but at a minimum include those officers required by applicable state law. For purposes of Form 990, treat the organization’s top management official and top financial official as officers.
Director or trustee Unless otherwise provided, a member of the organization’s governing body at any time during the tax year, but only if the member has any voting rights. A member of an advisory board that does not exercise any governance authority over the organization isn’t considered a director or trustee.
Highest compensated employee One of the five highest compensated employees of the organization (including employees of a disregarded entity of the organization), other than current officers, directors, trustees, or key employees, whose aggregate reportable compensation from the organization and related organizations is greater than $100,000 for the calendar year ending with or within the organization’s tax year. These employees should be reported in Part VII, Section A, of Form 990.
Key employee For purposes of Form 990, an employee of an organization (other than an officer, director, or trustee) who meets all three of the following tests applied in the following order:

  1. $150,000 Test. Receives reportable compensation from the organization and all related organizations in excess of $150,000 for the calendar year ending with or within the organization’s tax year.
  2. Responsibility Test. The employee:
    • has responsibilities, powers or influence over the organization as a whole similar to those of officers, directors, or trustees;
    • manages a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole; or
    • has or shares authority to control or determine 10% or more of the organization’s capital expenditures, operating budget, or compensation for employees.
  3. Top 20 Test. Is one of the 20 employees (that satisfy the $150,000 Test and Responsibility Test) with the highest reportable compensation from the organization and related organizations for the calendar year ending with or within the organization’s tax year.
Top management official A person who has ultimate responsibility for implementing the decisions of the organization’s governing body or for supervising the management, administration, or operation of the organization (for example, the organization’s president, CEO, or executive director).
Top financial official The person who has ultimate responsibility for managing the organization’s finances, for example, the treasurer or chief financial officer.

Compensation Reporting Cheat Sheet

Find the person’s status/compensation in the first column, and see where their compensation is reported. If a person is not an officer, director, trustee or key employee and they earn less than or equal to $100,000 in reportable compensation, their compensation details are not separately reported.
Status and Earnings Report in Part VII? Report in Schedule J?
CURRENT EMPLOYEES, DIRECTORS, TRUSTEES, KEY EMPLOYEES AND HIGHEST COMPENSATED EMPLOYEES
Officer, director, trustee or key employee (“ODTKE”s) earning less than or equal to $150,000 of reportable compensation
ODTKEs earning > $150,000 of reportable compensation
Top five compensated employees, excluding ODTKEs, with reportable compensation over $100,000 (“Highest Compensated Employees” or “HCE”s), but less than $150,000
HCEs with reportable compensation over $150,000/td>
FORMER EMPLOYEES, DIRECTORS, TRUSTEES, KEY EMPLOYEES AND HIGHEST COMPENSATED EMPLOYEES
Former directors or trustees with reportable compensation over $10,000
Former officers, key employees and highly compensated employees with reportable compensation over $100,000