New Tax on Nonprofits with $1 Million Plus Pay Packages

Thanks to the new tax law passed in December 2017, nonprofits that pay their top officials compensation in excess of $1 million a year must now pay a tax to the federal government. The 21% excise tax applies to the top five highest paid covered employees at a nonprofit and is calculated on the amount of each covered employee’s annual compensation over the $1 million threshold. As an example, if a nonprofit compensated each of its top five officials $1.5 million in 2018, that nonprofit would owe the IRS $525,000 (or $500,000 x 5 x 0.21).

CharityWatch rates a number of nonprofits that compensated at least one employee more than $1 million in 2016 or 2017. In fact, almost all of the charities identified on our current list of the top 25 employee compensation packages, which range from about $939,000 to $5,304,000, seem to be at risk for having to pay the new excise tax, assuming similar employee compensation was paid in 2018. (Medical and veterinary personnel at nonprofits are exempt from the excise tax, but only if they are directly involved in providing medical treatment.) Check out CharityWatch’s list of Top Compensation Packages.

According to an analysis by The Chronicle of Philanthropy (the Chronicle), an independent news organization that serves the philanthropic sector, there were 226 nonprofits that paid one or more employees compensation in excess of $1 million a year in 2016 or 2017. Most of those nonprofits are major hospitals, medical centers, and universities and their affiliated foundations, according the Chronicle, whose analysis drew from the electronically filed tax disclosures of nonprofits with annual support of $35 million or more. Several nonprofits “could be hit with a very big tax bill under the new law if they continue to pay people that much,” the Chronicle noted in the April 2019 summary of its analysis.