Excise Tax on Excess Tax-Exempt Organization Executive Compensation

InsightsClient Alert

For taxable years beginning after December 31, 2017 an excise tax of 21% is imposed on compensation exceeding $1 million paid to any of an organization’s covered employees and to any excess parachute payments paid to any covered employees.   The excise tax applies to any employee that was one of the 5 highest paid employees for any taxable year beginning after 2016 (thus, the tax can apply to more than 5 individuals in a taxable year).  The tax is imposed on the employer and applies to all compensation paid, including non-cash benefits, except for payments to tax-qualified retirement plans and to amounts that are properly excludible from gross income.  It also applies to deferred compensation when it is no longer subject to a substantial risk of forfeiture.

The tax applies on an entity by entity basis.  Thus, for multi-entity systems, tax planning may be able to reduce the number of individuals to whom the excise tax applies in future years.

The tax does not apply to a licensed medical professional to the extent that payment is for the performance of medical services.  We are awaiting Treasury guidance to understand how this exception will be interpreted and administered.

If you have any questions or would like further assistance, please contact our Albany office at (229) 883-7878 or our Atlanta office at (404) 220-8494.