Following the publication of this article, Trinity Foundation was informed that it included a factual error: An exemption existed in the tax code preventing ministers from being subject to the excise tax. After more research and visiting an IRS office, we have an update.
Before publication, we contacted an IRS spokesperson and were told the excise tax on excessive compensation applied to churches based on Section 3401. While asking follow-up questions, a misunderstanding emerged regarding the role of Section 3401.
Congress authored and adopted Section 3401 as part of the tax code. It defines terms such as wages and employer, while creating a list of exemptions from other tax rules and regulations for income earned from specific jobs. Definition number 9 exempts “services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry.”
A church will be subject to the excise tax only if it pays more than $1 million in wages to an employee that is NOT a minister and NOT an independent contractor. Trinity Foundation has investigated several churches that have paid attorneys more than $1 million. However, attorneys typically work as independent contractors and pay their own taxes directly rather than being paid as a payroll tax by the church.
The excise tax on parachute payments will not be applied to ministers either.
We are sorry for all confusion created by the original article. The updated version of the article features includes a strikethrough of two sentences and three additions in bold text.
The IRS has finalized its rules on an excise tax to discourage excessive compensation at non-profit organizations. In its February 16th Bulletin, the IRS announced an update to section 4960 of the Internal Tax Code taxing non-profit organizations and churches that pay “covered employees” who are not ministers more than $1 million in wages or provide excessive parachute payments.
The Bulletin explains that a covered employee “is one of the five highest-compensated employees of the organization…” These individuals are typically listed on a Form 990 filed with the IRS. Churches, synagogues and mosques are exempt from filing the financial disclosure document.
When covered employees (non-ministers), who are often executives, receive more than $1 million in wages or excessive parachute payments, the non-profit must file a Form 4720 Schedule N. Then the non-profit organization must pay a 21% tax on the excessive compensation.
In 2018, the IRS modified the Form 990, revealing if organizations have paid an excise tax on payments of more than $1 million. Excise payments are indicated on page 5, line 15 of the Form 990.
Trinity Foundation examined MinistryWatch’s list of highly paid compensated ministry leaders and determined that Inspirational Network, High Point University and Educational Media Foundation (K-Love) pay the excise tax.
Hillsdale College and Glory of Zion International (Chuck Pierce) so far do not report paying the excise tax even though both feature an executive receiving more than $1 million in compensation. This is not proof of wrongdoing because some compensation is exempt from the excise tax such as an organization carrying liability insurance on an employee. Pierce also serves as a minister and his compensation is not subject to the excise tax.
This excise tax penalizes excessive wages, not fees. If a pastor is paid to perform a wedding, the income is considered a fee and would not subject to an excise tax.
Besides excessive wages, the IRS also treats parachute payments as a form of excessive compensation.
After Jerry Falwell Jr. resigned from Liberty University last year, journalists reported the disgraced university administrator could receive $10.5 million in parachute payments.
According to The Wall Street Journal, “Mr. Falwell is due his $1.25 million salary for two years, followed by a lump-sum payment of about $8 million, because of a clause in his contract that allowed him to resign with full pay if his responsibilities were curtailed.”
Trinity Foundation estimates Liberty University will pay a tax penalty of $1,530,383 on golden parachute payments of $10.5 million.
Future Form 990 filings by Liberty University will show whether or not an excise tax is paid on the parachute payments.
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