26 U.S.C. § 4960: Tax on excess tax-exempt…

Summary

Tax-exempt organizations must pay a tax equal to the tax rate in section 11 times two amounts: pay to any covered employee over $1,000,000 for the year, and any “excess parachute” severance payments. Pay counts when the employee no longer risks losing it. The employer is the one who must pay this tax. The rule applies to groups that are tax-exempt under section 501(a), certain farmers’ co-ops, organizations with income excluded under section 115(1), and certain political organizations. A covered employee is anyone who worked for such a group (or its predecessor) in any tax year starting after December 31, 2016, including some former employees. “Remuneration” generally means wages (but not designated Roth contributions and it does include some deferred amounts) and does not include payments to doctors or veterinarians for medical or veterinary services. Pay from related groups or government entities is included, and if more than one employer paid the worker, each employer pays a share of the tax based on how much it paid. An “excess parachute” is a severance-style payment that is more than the allowed base amount and only applies when the total contingent payments on separation are at least three times the base amount; some retirement, annuity, and certain medical-service payments, and payments to non-highly compensated workers are excepted. Payments disallowed under section 162(m) aren’t counted. The Treasury must write rules to stop people from avoiding this tax by mislabeling work or routing pay through other entities.

Title 26, §4960

Internal Revenue Code, Source: USLM XML via OLRC

(a)Tax imposed

There is hereby imposed a tax equal to the product of the rate of tax under section 11 and the sum of— (1)

(2)any excess parachute payment paid by such an organization to any covered employee.

For purposes of the preceding sentence, remuneration shall be treated as paid when there is no substantial risk of forfeiture (within the meaning of section 457(f)(3)(B)) of the rights to such remuneration.

(b)Liability for tax

The employer shall be liable for the tax imposed under subsection (a).

(c)Definitions and special rules

For purposes of this section

(1) Applicable tax-exempt organization

(2)Covered employee

For purposes of this section, the term “covered employee” means any employee of an applicable tax-exempt organization (or any predecessor of such an organization) and any former employee of such an organization (or predecessor) who was such an employee during any taxable year beginning after December 31, 2016.

(3)Remuneration

For purposes of this section: (A) In general

(B)Exception for remuneration for medical services

The term “remuneration” shall not include the portion of any remuneration paid to a licensed medical professional (including a veterinarian) which is for the performance of medical or veterinary services by such professional.

(4)Remuneration from related organizations

(A)In general

Remuneration of a covered employee by an applicable tax-exempt organization shall include any remuneration paid with respect to employment of such employee by any related person or governmental entity.

(B)Related organizations

A person or governmental entity shall be treated as related to an applicable tax-exempt organization if such person or governmental entity—

(i)controls, or is controlled by, the organization,

(ii)is controlled by one or more persons which control the organization,

(iii)is a supported organization (as defined in section 509(f)(3)) during the taxable year with respect to the organization,

(iv)is a supporting organization described in section 509(a)(3) during the taxable year with respect to the organization, or

(v)in the case of an organization which is a voluntary employees’ beneficiary association described in section 501(c)(9), establishes, maintains, or makes contributions to such voluntary employees’ beneficiary association.

(C)Liability for tax

In any case in which remuneration from more than one employer is taken into account under this paragraph in determining the tax imposed by subsection (a), each such employer shall be liable for such tax in an amount which bears the same ratio to the total tax determined under subsection (a) with respect to such remuneration as—

(i)the amount of remuneration paid by such employer with respect to such employee, bears to

(ii)the amount of remuneration paid by all such employers to such employee.

(5)Excess parachute payment

For purposes of determining the tax imposed by subsection (a)(2)—

(A)In general

The term “excess parachute payment” means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment.

(B)Parachute payment

The term “parachute payment” means any payment in the nature of compensation to (or for the benefit of) a covered employee if—

(i)such payment is contingent on such employee’s separation from employment with the employer, and

(ii)the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such separation equals or exceeds an amount equal to 3 times the base amount.

(C)Exception

Such term does not include any payment—

(i)described in section 280G(b)(6) (relating to exemption for payments under qualified plans),

(ii)made under or to an annuity contract described in section 403(b) or a plan described in section 457(b),

(iii)to a licensed medical professional (including a veterinarian) to the extent that such payment is for the performance of medical or veterinary services by such professional, or

(iv)to an individual who is not a highly compensated employee as defined in section 414(q).

(D)Base amount

Rules similar to the rules of 280G(b)(3) shall apply for purposes of determining the base amount.

(E)Property transfers; present value

Rules similar to the rules of paragraphs (3) and (4) of section 280G(d) shall apply.

(6)Coordination with deduction limitation

Remuneration the deduction for which is not allowed by reason of section 162(m) shall not be taken into account for purposes of this section.

(d)Regulations

The Secretary shall prescribe such regulations as may be necessary to prevent avoidance of the tax under this section, including regulations to prevent avoidance of such tax through the performance of services other than as an employee or by providing compensation through a pass-through or other entity to avoid such tax.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2025—Subsec. (c)(2). Pub. L. 119–21 amended par. (2) generally. Prior to amendment, text read as follows: “For purposes of this section, the term ‘covered employee’ means any employee (including any former employee) of an applicable tax-exempt organization if the employee— “(A) is one of the 5 highest compensated employees of the organization for the taxable year, or “(B) was a covered employee of the organization (or any predecessor) for any preceding taxable year beginning after December 31, 2016.”

Statutory Notes and Related Subsidiaries

Effective Date

of 2025 Amendment Pub. L. 119–21, title VII, § 70416(b),

July 4, 2025, 139 Stat. 223, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after

December 31, 2025.”

Effective Date

Pub. L. 115–97, title I, § 13602(c), Dec. 22, 2017, 131 Stat. 2159, provided that: “The

Amendments

made by this section [enacting this section] shall apply to taxable years beginning after December 31, 2017.”

§4960 Tax on Excess Tax-exempt Organization Executive Compensation

Summary

Title 26, §4960

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Amendments

Citations & Metadata