I recently read through a collection of funny school test answers. One test question was from a history test that asked what ended in 1896. The student’s response: 1895. I find that answer quite funny, and probably would have awarded full credit had I been that student’s teacher. Points for validity, but it clearly wasn’t the answer the teacher was looking for.
Three Primary Areas of Compensation Misconceptions
When it comes to tax preparation, we can draw a parallel to 990 reporting. Unless we understand what is being asked and why, we may be providing answers that while accurate, are not necessarily correct. When I take on new work as a tax preparer, one of the areas where I see the most errors is 990 compensation reporting. Clearly this is a sensitive area for many not-for-profits. I can’t think of a single board member, no matter how irreproachable, that is thrilled to have everyone know their salary, bonus and benefits. However, with more pages of the IRS Form 990 instructions devoted to compensation reporting than any other section of the information return, this is clearly an important requirement that is unlikely to disappear anytime soon.
Read Also: Let’s Play Doctor With Your 990: How Your 990 Indicates Your Organization’s Overall Health
Here’s another funny test question for you. What is a fibula? A student answered: “A little lie.” Some instructions on Form 990 can be trickier than others because the terms are defined differently than our common knowledge and typical use. At the end of the IRS Form 990 instructions there’s an entire glossary to help clear things up. If I had to pick just three, below are the ones I think are most commonly misunderstood.
- Director/Trustee – These terms are used interchangeably on Form 990 and defined as a voting member of the governing body with one exception. This specifically excludes advisory members as long as they do not exercise any governance authority over the organization.
- Current and Former – Current refers to the status of a member who served at any time during the year being reported (even if they are no longer serving the organization at the end of the year). Former refers a member who served at any time within the five years after they ceased to be deemed “current.” After the five years are up, they can be counted as the general public.
- Key Employees – Chances are you share the common perception that this term refers to employees who are vital lynchpins within an organization; contributing countless hours and effort because they share a common vision and purpose. The IRS definition is a bit more structured and specific. Keep in mind the goal is transparency and accountability. By definition, neither a Director/Trustee, nor an Officer can be a Key Employee. This tells us that the IRS is seeking information for those who would otherwise be left out or missed on the information return. In order to be counted as a Key Employee by IRS terms, the employee must meet several tests.
Tests To Determine Key Employees
Compensation Test
According to the IRS, a Key Employee must receive “reportable compensation of more than $150,000 from the organization and all related organizations for the calendar year ending within the organization’s tax year.”
Responsibility Test
There are three circumstances to consider for this test. Only one of the three needs to apply for the responsibility test to be met.
- Does the employee have “responsibilities, power or influence over the organization as a whole similar to those of officers, directors, or trustees”?
- Does the employee manage a “segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization as compared to the organization as a whole”?
- Has or shares authority to control or determine 10% or more of the organization’s capital expenditures, operating budget, or compensation of employees.
Top 20 Test
They must also be one of the top 20 employees meeting both tests above.
Calendar Year vs. Fiscal Year Compensation Information
One more amusing exam answer to share with you from a drivers’ test. When should a motorist use his or her high beams? The reply: When he wants to be a jerk! Sometimes timing can be everything. Since fiscal year filers need to report both calendar year and fiscal year compensation information, it can be confusing about where to report what info. Generally speaking, calendar year info should only be used in the following three places:
- Part VII(A)
- VII(B)
- Schedule J
Fiscal year information should be used on the rest of the return and other supplemental schedules.
Need Form 990 Help?
If you have specific questions or a unique circumstance, consult with your accounting professional or email Rea & Associates. The items above may seem pretty simple, but sometimes knowing is half the battle. If you misunderstand the question, it’s much more difficult to arrive at the correct answer. So take about 10 minutes to reflect on who you’re including on your 990. Think about whether their roles align with IRS definitions and if calendar year info is being reported where it should be.
By: Katie Brown, CPA (Zanesville office)
Check out these articles for more Form 990 insight:
Your Form 990 Is More Than IRS Compliance
Setting The Bar Higher: Ongoing Organizational Excellence Stems From Great Nonprofit Governance