Moss Adams, LLP – Compensation guidelines in the tax-exempt sector

April Stith, CPA, Senior Manager
Moss Adams LLP

A recent focus in IRS examination of tax-exempt organization has been compensation practices, especially for board members and foundation managers earning over $100,000.

It is important to have documented and well-defined compensation setting practices at your organization to reduce exposure. Written compensation agreements need to be approved by an independent and authorized body of the organization in advance of any payments. Documentation of the approval should be maintained by the organization, such as within the written minutes to the committee’s meeting.

When determining compensation amounts, comparability data should be appropriate for the position, type of organization, and geographical location. Preferably, comparability data should come from other exempt organizations instead of for-profit organizations, when possible.
In addition to salary and wages, the IRS defines compensation to include:

Contributions to pension and profit-sharing plans
Unpaid deferred compensation
Payment for personal expenses, rents, royalties, and fee
Personal use of the organization’s property or facilities

When establishing that wages or salary are reasonable based on the comparability data being used, payments for other items should also be considered for economic benefit provided. The organization should also regularly review written compensation agreements to ensure that compensation remains consistent with the comparability data.

The organization’s compensation policies, as well as compensation for officers, directors, trustees, foundation managers, and the highest paid employees are reported on Form 990, which is available to public inspection. Disclosure requirements can vary based upon the amount of compensation and the type of organization.

Compensation can be a complex issue, and adequate planning and documentation are the key to staying transparent with compensation policies and remaining compliant.