IRS has published a series of frequently asked questions (FAQs) on the preparation of Form 990, Part VII and Form 990, Schedule J, which are the forms that exempt organizations file annually to report required information about compensation of their officers, directors, key employees, etc. Click here for the text of IRS’s “Exempt Organizations Annual Reporting Requirements – Form 990, Part VII and Schedule J – Compensation Information” (July 10, 2013).
Background. Form 990 is the return required to be filed with IRS by most organizations exempt from income tax under Code Sec. 501(a) and by certain political organizations and nonexempt charitable trusts. It includes 12 parts that must be completed by all Form 990 filers and numerous schedules that must be filed by Form 990 filers that conduct particular activities.
Form 990, Part VII (“Compensation of Officers, Directors, Trustees, Key Employees…”) must be completed by all Form 990 filers; it contains information about the organization’s current or former officers, directors, trustees, and certain employees, as well as current independent contractors, including information about their compensation. Form 990, Schedule J (“Compensation Information”) must also be filed if certain compensation thresholds are met. However, the payees whose information must be reported and what compensation is reported on Schedule J is different than on Part VII.
FAQs. Here are points made in IRS’s FAQs that clarify the Part VII and/or Schedule J instructions. The FAQs are in two sections. Part A includes “Questions for All Filers,” and part B is “Questions for Political Organizations.”
- $10,000 exceptions. The instructions to Part VII provide the following rules: 1) Compensation paid to an officer, etc. by an organization related to the reporting tax-exempt organization doesn’t have to be reported in Part VII if it is less than $10,000 for the calendar year that ends with or within the tax-exempt organization’s tax year. (2) With limited exceptions, there is no requirement that either the tax-exempt organization or any related organization report in Part VII “other compensation” for any officer, etc. if the value of that other compensation is less than $10,000 for the calendar year that ends with or within the tax-exempt organization’s tax year. (Other compensation is, generally, compensation that is not reportable on Form W-2.)
IRS points out that these exceptions don’t apply for purposes of Schedule J reporting. As a result, the compensation amounts required to be reported on Schedule J may exceed the amounts required to be reported in Part VII for the same person.
But, IRS also points out that organizations are not required to use the available reporting exclusions for Part VII. Organizations that prefer to report the same total reportable compensation and other compensation amounts in both Part VII and Schedule J for a person listed in Schedule J may do so by reporting otherwise excludible amounts in Part VII. (FAQ A2)
- Fiscal year taxpayers. Fiscal year filing organizations must report amounts in Form 990, Part VII, as well as any amounts reported in Schedule J, for the calendar year ending with or within their fiscal year. But, in contrast to this calendar year reporting, an organization filing Form 990 for a fiscal year must report compensation expense amounts in its Statement of Expenses (Part IX of Form 990) based on its fiscal year. (FAQ A4)
- Persons who are officers, etc. for only part of the tax year. The organization should list in Part VII any person who was a current officer or director at any time during the tax year, even if the person is not an officer or director at the end of the year. And, a current key employee or highest compensated employee is a person who was a key employee or highest compensated employee for the calendar year ending with or within the organization’s tax year, even if he or she is not an employee of the organization at the end of that year. A person should be listed as a former officer, director, trustee, key employee or highest compensated employee in Part VII only if he is not listed in Part VII in any other capacity. (FAQ A5)
- Officers, etc. of related organizations. As noted above, a tax-exempt organization must report certain compensation information with respect to payments made by related organizations.
An FAQ clarifies that an organization need not list individuals who are officers, etc. of a related organization unless such a person also serves in one or more of these capacities with the filing organization. (FAQ A6)
- Order in which officers, etc. are listed in Part VII. The Part VII instructions say to list persons in a particular order, beginning with trustees or directors, followed by officers, then key employees, then highest compensated employees, then former such persons.
An FAQ explains why IRS wants the information in that order: If a person is a director, trustee or officer of the organization, he or she cannot be listed as a key employee of that organization in Part VII of Form 990. Accordingly, officers, directors or trustees should be listed in Part VII before the organization determines which key employees to list. Likewise, in determining its five highest compensated employee, the organization is not to consider persons who are already listed in Part VII as officers, directors, trustees or key employees of the organization. (FAQ A8)
- Compensation amounts that are reportable on this year’s return and on prior year’s return. In certain cases, e.g., where there is deferred compensation, it is possible that compensation must be reported twice, i.e., on a prior year return and on the current year return.
An FAQ explains that Part VII does not permit amounts to be backed out if they were reported in a prior filing of Form 990, but that such double reporting may be explained in Form 990, Schedule O (“Supplemental Information to Form 990 or 990-EZ”). However, for persons listed in Schedule J, Column (F) of that schedule allows for a backing out of duplicate amounts that were included in the current year’s reportable compensation amount as well as in a prior year’s Form 990 filing. (FAQ A11)
- Reporting of 401(k) and 403(b) plan compensation on Schedule J, Part II. Schedule J, Part II, Columns B(i)�(B)(iii) are enttitled “Base compensation,” “Bonus and incentive compensation,” and “Other reportable compensation,” respectively.
The sum of the amounts reported by the organization for an individual in Columns (B)(i)�(iii) musst equal the total reportable compensation amount (generally, the Form W-2 Box 5 amount) for that person. The organization may report the 401(k) or 403(b) employee deferral in Column (B)(i) as base pay, or in Column (B)(iii) as other reportable compensation. For instance, if an employee has Box 5 compensation of $200,000, including $5,000 of 401(k) employee deferrals, the organization may report either a) $200,000 in base pay or b) $195,000 in base pay and $5,000 in other reportable compensation, in Column (B). (FAQ A12)
- Reporting of other pre-tax deductions on Schedule J, Part II. Certain pre-tax deductions from Form W-2, Box 5 compensation raise reporting issues not expressly addressed by the Schedule J instructions. These include pre-tax deductions for certain health insurance premiums, the value of which is not included in Box 5. For example, an employee with base pay of $200,000 before a pre-tax deduction of $5,000 for health insurance premiums might have $195,000 reported in Box 5 of the Form W-2. The organization should report $195,000 in Column (B)(i) of Schedule J, and $5,000 in Column (D) (“Nontaxable benefits”). (FAQ A12)
- Political organizations’ responsibilities regarding Part VII.Code Sec. 527 does not require political organizations to be organized with boards of directors, officers and trustees. However, if a political organization is so organized, it must complete Part VII with the names, addresses, title, average hours worked and compensation of those officers, directors and trustees, key employees, highest compensated employees and independent contractors. (FAQ B1)
- Definition of “related organization” for political organizations. An FAQ defines such a related organization as any organization that meets one of the following tests: a) 50% or more of the political organization’s officers, directors, trustees or key employees are also officers, directors, trustees or key employees of the other organization; b) The political organization appoints 50% or more of the other organization’s officers, directors, trustees or key employees; or c) 50% or more of the political organization’s officers, directors, trustees or key employees are appointed by the other organization. (FAQ B2)