May 31, 2012
How to avoid costly penalties when setting pay
Editor’s Note: Today is part three of a multiple-part series reviewing church compensation planning that complies with IRS guidelines. Part one looked at why churches should carefully think through what qualifies as compensation and taxes on compensation. Part two described how to determine the compensation “umbrella”—the maximum amount that may be paid to an employee.
Nonprofit organizations, as a general rule, are prohibited from participating in transactions that are deemed to be excess benefit transactions. These are transactions that involve disqualified persons and the provision of benefits in excess of what the organization receives in return for the benefit.
An organization is not allowed to pay more compensation than is reasonable for the services provided by the employee. Any compensation paid above reasonable compensation or above the "umbrella" to a disqualified person is considered to be an excess benefit transaction.
Disqualified persons are generally officers, directors, trustees, and key employees of an organization. In addition, the term also includes the family members of any of these individuals. This group is generally the movers, shakers, and decision makers of the organization and their families.